|UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549                                                                                                                                                                                                                                                                           
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FORM 10-Q/A
Amendment No. 3                                                                                                                                                                                                                                                                                                                       
|Quarterly Report Pursuant to Section 13 or 15 (d) of 
the Securities Exchange Act of 1934                                                                                                                                                                                                                                                         
|For quarter ended
June 30, 2004                                                                                                                                                                                                                                                                                                                   
|Alpharma Inc.
(Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                                                              
|Delaware
(State of Incorporation)                                                                                                                                                                                                                                                                                                                 
|One Executive Drive, Fort Lee, New Jersey  07024
(Address of principal executive offices)     Zip Code                                                                                                                                                                                                                                            
|(201) 947-7774
(Registrant's Telephone Number Including Area Code)                                                                                                                                                                                                                                                                                
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
|YES    X                                                                                                                                                                                                                                                                                                                                          
|Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                                                                                             
|YES    X                                                                                                                                                                                                                                                                                                                                          
|Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of July 22, 2004:                                                                                                                                                                                                                                
|Class A Common Stock, $.20 par value -- 40,602,332 shares
Class B Common Stock, $.20 par value -- 11,872,897 shares                                                                                                                                                                                                                               





This Amendment No. 3 to the Form 10-Q/A (Amendment No. 2) for the quarter ended June 30, 2004 (this "Form 10-Q/A") of Alpharma Inc. (the "Company") is being filed to amend certain information contained in Item 1 of Part I; Consolidated Condensed Balance Sheet and Notes to Consolidated Condensed Financial Statements, Notes 1A, 2, 4 and 16, Item 2 of Part I - Management's Discussion and Analysis of Financial Conditions and Results of Operations and Item 4 of Part 1, Controls and Procedures, to reflect the restatement of the balance sheet and certain notes to the June 30, 2004 consolidated condensed financial statements.  Except as otherwise specified herein, this amendment presents information as of the end of the period covered hereby.  Items not being amended are presented for the convenience of the reader only and remain as presented in Amendment No. 2 to the Form 10-Q/A for the quarter ended June 30, 2004.







ALPHARMA INC.

INDEX





|                     |                                                                                                         | Page No.
|-------------------- | ------------------------------------------------------------------------------------------------------- | --------
|PART I               | FINANCIAL INFORMATION                                                                                   |         
|Item 1               | Financial Statements (unaudited)                                                                        |         
|                     | Consolidated Condensed Balance Sheet as of June 30,
      2004 and December 31, 2003                    | 4       
|                     | Consolidated Statement of Operations for the Three and          Six Months Ended June 30, 2004 and 2003 | 5       
|                     | Consolidated Condensed Statement of Cash Flows for the
      Six Months Ended June 30, 2004 and 2003    | 6       
|                     | Notes to Consolidated Condensed Financial Statements                                                    | 7 - 32  
|Item 2               | Management's Discussion and Analysis of Financial
      Condition and Results of Operations             | 33 - 44 
|Item 3               | Quantitative and Qualitative Disclosures about
      Market Risk                                        | 44      
|Item 4               | Controls and Procedures                                                                                 | 44 - 47 
|PART II.
     Item 1 | OTHER INFORMATION
Legal Proceedings                                                                     | 48      
|Item 2               | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                        | 48      
|Item 4               | Submission of Matters to a Vote of Security Holders                                                     | 48      
|Item 6               | Exhibits and Reports on Form 8-K                                                                        | 48 - 49 
|                     | Signatures                                                                                              | 50      





ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands) 
(Unaudited)

|                                            | June 30,
2004(Restated) | December 31,2003
|------------------------------------------- | ----------------------- | ----------------
|ASSETS                                      |                         |                 
|Current assets:                             |                         |                 
|Cash and cash equivalents                   | $31,114                 | $  58,623       
|Accounts receivable, net                    | 249,534                 | 258,471         
|Inventories                                 | 327,694                 | 309,277         
|Prepaid expenses and other current assets   | 69,574                  | 66,620          
|Assets held for sale                        | 6,562                   | --              
|Total current assets                        | 684,478                 | 692,991         
|                                            |                         |                 
|Property, plant and equipment, net          | 457,639                 | 481,554         
|Goodwill                                    | 705,725                 | 710,979         
|Intangible assets, net                      | 323,157                 | 347,670         
|Other assets and deferred charges           | 85,682                  | 96,074          
|                                            |                         |                 
|Total assets                                | $2,256,681              | $2,329,268      
|                                            |                         |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY        |                         |                 
|Current liabilities:                        |                         |                 
|Current portion of long-term debt           | $556,307                | $593,316        
|Short-term debt                             | 20,114                  | 9,500           
|Accounts payable                            | 152,290                 | 122,780         
|Accrued expenses                            | 172,827                 | 170,108         
|Accrued and deferred income taxes           | 26,007                  | 30,476          
|Liabilities held for sale                   | 1,902                   | --              
|Total current liabilities                   | 929,447                 | 926,180         
|                                            |                         |                 
|Long-term debt:                             |                         |                 
|Senior                                      | --                      | 32,787          
|Convertible subordinated notes              | 160,328                 | 181,553         
|Deferred income taxes                       | 27,999                  | 24,508          
|Other non-current liabilities               | 30,672                  | 32,251          
|Commitments and contingencies (see Note 13) |                         |                 
|                                            |                         |                 
|Stockholders' equity:                       |                         |                 
|Class A Common Stock                        | 8,207                   | 8,092           
|Class B Common Stock                        | 2,375                   | 2,375           
|Additional paid-in capital                  | 1,068,708               | 1,059,104       
|Unearned compensation                       | (7,535)                 | (2,667)         
|Accumulated deficit                         | (30,548)                | (23,284)        
|Accumulated other comprehensive income      | 74,483                  | 95,784          
|Treasury stock, at cost                     | (7,455)                 | (7,415)         
|Total stockholders' equity                  | 1,108,235               | 1,131,989       
|Total liabilities and stockholders' equity  | $2,256,681              | $2,329,268      





See notes to the consolidated condensed financial statements.

ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars, except per share data)
(Unaudited)





|                                                                  | Three Months EndedJune 30, | Six Months EndedJune 30,
|----------------------------------------------------------------- | -------------------------- | ------------------------
|                                                                  | 2004                       | 2003                    
|                                                                  |                            |                         
|Total revenue                                                     | $315,975                   | $333,018                
|Cost of sales                                                     | 187,702                    | 194,173                 
|Gross profit                                                      | 128,273                    | 138,845                 
|Selling, general and administrative expenses                      | 91,619                     | 90,467                  
|Research and development                                          | 22,769                     | 15,670                  
|Asset impairments and other - Aquatics                            | 9,474                      | --                      
|Operating income                                                  | 4,411                      | 32,708                  
|Interest expense and amortization of
  debt issuance costs        | (14,632)                   | (15,875)                
|Loss on extinguishment of debt                                    | (1,934)                    | (28,408)                
|Other income (expense), net                                       | 13,009                     | 1,193                   
|Income (loss) from continuing operations 
    before income taxes | 854                        | (10,382)                
|Provision (benefit) for income taxes                              | 260                        | (6,032)                 
|Income (loss) from continuing operations                          | 594                        | (4,350)                 
|                                                                  |                            |                         
|Loss on discontinued operations, net                              | --                         | (475)                   
|                                                                  |                            |                         
|Net income (loss)                                                 | $594                       | $(4,825)                
|                                                                  |                            |                         
|Earnings per common share:                                        |                            |                         
|Basic                                                             |                            |                         
|Income (loss) from continuing operations                          | $0.01                      | $(0.08)                 
|Loss from discontinued operations                                 | $--                        | $(0.01)                 
|Net income (loss)                                                 | $0.01                      | $(0.09)                 
|Diluted                                                           |                            |                         
|Income (loss) from continuing operations                          | $ 0.01                     | $(0.08)                 
|Loss from discontinued operations                                 | $--                        | $(0.01)                 
|Net income (loss)                                                 | $0.01                      | $(0.09)                 
|                                                                  |                            |                         
|Dividends per common share                                        | $0.045                     | $0.045                  





See notes to the consolidated condensed financial statements.

ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

|                                                                                      | Six Months EndedJune 30,
|------------------------------------------------------------------------------------- | ------------------------
|                                                                                      | 2004                    
|Operating Activities:                                                                 |                         
|Net income (loss)                                                                     | $(2,547)                
|Adjustments to reconcile net income to net cash provided
    by operating activities: |                         
|Depreciation and amortization                                                         | 47,847                  
|Amortization of loan costs                                                            | 1,401                   
|Interest accretion on convertible debt                                                | 3,230                   
|Other non-cash items                                                                  | 16,713                  
|Changes in assets and liabilities:                                                    |                         
|Decrease (increase) in accounts receivable                                            | 3,741                   
|(Increase) in inventory                                                               | (26,901)                
|(Decrease) increase in accounts payable, accrued        expenses and taxes payable    | 32,315                  
|(Increase) decrease in prepaid expenses                                               | (3,418)                 
|Other, net                                                                            | 945                     
|Net cash provided by operating activities                                             | 73,326                  
|                                                                                      |                         
|Investing Activities:                                                                 |                         
|Capital expenditures                                                                  | (18,717)                
|Purchase of intangible assets                                                         | (549)                   
|Purchase of Wynco                                                                     | (12,857)                
|Proceeds from sale of property                                                        | 17,000                  
|Net cash used in investing activities                                                 | (15,123)                
|                                                                                      |                         
|Financing Activities:                                                                 |                         
|Dividends paid                                                                        | (4,717)                 
|Reduction of long-term debt                                                           | (144,246)               
|Net advances under lines of credit                                                    | 60,614                  
|Proceeds from issuance of common stock                                                | 3,493                   
|Purchase of treasury stock                                                            | (40)                    
|Net capital contribution of parent                                                    | --                      
|Net cash used in financing activities                                                 | (84,896)                
|                                                                                      |                         
|Net cash flows from exchange rate changes                                             | (816)                   
|                                                                                      |                         
|Increase (decrease) in cash                                                           | (27,509)                
|Cash and cash equivalents at beginning of year                                        | 58,623                  
|Cash and cash equivalents at end of period                                            | $31,114                 

*Includes $91 of cash included in discontinued operations.

See notes to the consolidated condensed financial statements.



Restatement of Financial Statements

The Company has restated its consolidated financial statements for the quarter ended June 30, 2004 and the year ended December 31, 2003, to correct the classification of certain of its outstanding debt as current liabilities and to amend disclosures related to the Company's compliance with certain of its debt covenants.  Balances at June 30, 2004 and December 31, 2003 are restated to classify certain long-term debt as current, due to violations of certain debt covenants at June 30, 2004 and December 31, 2003, that serve to make the associated debt obligations callable.  In April and May 2005, the Company has cured all such violations and accordingly, the debt obligations are no longer callable.  The June 30, 2004 proforma balances (see Note 4) are presented to classify the associated debt as long-term, as if the covenant violations had been cured as of June 30, 2004.  See Note 1A, Financial Statement Restatement.

1.    General





At June 30, 2004, the Company has stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income for incentive stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Compensation cost for restricted stock is recorded based on the market value on the date of grant. The fair value of restricted stock is charged to unearned compensation in Stockholders' Equity and amortized to expense over the requisite vesting periods. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", as amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", to stock-based employee compensation.



|                                                                                                                                                     | Three Months Ended 
June 30, | Six Months Ended
June 30,
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | -------------------------
|                                                                                                                                                     | 2004                         | 2003                     
|                                                                                                                                                     |                              |                          
|Net income (loss), as reported                                                                                                                       | $594                         | $ (4,825)                
|Add: Stock-based employee compensation
   expense included in reported net income,
   net of related tax effects                                     | 511                          | --                       
|Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for all awards,
   net of related tax effects | 1,415                        | 1,260                    
|                                                                                                                                                     |                              |                          
|Pro forma net income (loss)                                                                                                                          | $(310)                       | $(6,085)                 
|                                                                                                                                                     |                              |                          
|Earnings (loss) per share:                                                                                                                           |                              |                          
|Basic-as reported                                                                                                                                    | $0.01                        | $(0.09)                  
|Basic-pro forma                                                                                                                                      | $(0.01)                      | $(0.12)                  
|                                                                                                                                                     |                              |                          
|Diluted-as reported                                                                                                                                  | $0.01                        | $(0.09)                  
|Diluted-pro forma                                                                                                                                    | $(0.01)                      | $(0.12)                  

The Company estimated the fair value, as of the date of grant, of options outstanding in the plan using the Black-Scholes option pricing model with the following assumptions:

|                                         | Three Months EndedJune 30, | Six Months Ended
June 30,
|---------------------------------------- | -------------------------- | -------------------------
|                                         | 2004                       | 2003                     
|                                         |                            |                          
|Expected life (years)                    | 3.63                       | 4.00                     
|Expected future dividend yield (average) | 0.90%                      | 0.94%                    
|Expected volatility                      | 0.55                       | 0.60                     

The risk-free interest rates for 2004 and 2003 were based upon U.S. Treasury instrument rates with maturity approximating the expected term. The weighted average interest rates for the three months ended June 30, 2004 and 2003 amounted to 3.7% and 2.6%, respectively. The weighted average interest rates for the six months ended June 30, 2004 and 2003 amounted to 3.4% and 2.7%, respectively. The weighted average fair value of options granted during the three months ended June 30, 2004 and 2003 with exercise prices equal to fair market value on the date of grant was $9.25 and $9.22, respectively. The weighted average fair value of options granted during the six months ended June 30, 2004 and 2003 with exercise prices equal to fair market value on the date of grant was $9.36 and $8.82, respectively.



1A.   Financial Statement Restatement

Subsequent to the issuance of its June 30, 2004 consolidated financial statements, the Company discovered that it was not in compliance, with certain of its debt covenants at June 30, 2004 and December 31, 2003.  Consequently, the Company has restated its consolidated financial statements for the quarter ended June 30, 2004 and the year ended December 31, 2003, to correct the classification of $537,631 and $567,909, respectively of its outstanding debt as current liabilities and to amend disclosures related to the Company's compliance with certain of its debt covenants.  The covenant violations were, as follows:



8 5/8% Senior Notes due 2011 (the "Senior Notes"):



- The Company had not made timely payment of liquidated damages due to its Senior Note holders at June 30, 2004 and December 31, 2003. These liquidated damages have been incurred as a result of the registration of the Senior Notes with the Securities and Exchange Commission not yet being effective.  At June 30, 2004, the Company had accrued $1,448 of liquidated damages, of which $923 was to have been paid by June 30, 2004, in accordance with the terms of the Senior Notes.  In April 2005, the Company remitted to the Trustee for the Senior Notes, payment of the amount due for liquidated damages.



- The Company had not made timely filing of certain certificates required in the covenants to the Senior Notes at December 31, 2003.  Subsequently, in April and May 2005, the Company has made all required filings.



Certain of the violations of the debt covenants related to the Senior Notes served to make the associated debt obligations callable at June 30, 2004 and December 31, 2003.  Accordingly, debt balances at June 30, 2004 and December 31, 2003 have been restated to classify the amounts due under the Senior Notes as current liabilities at June 30, 2004 and December 31, 2003.  In April and May 2005, the Company has cured all such violations and accordingly, the debt obligations are no longer callable.  As a result, June 30, 2004 proforma balances (see Note 4) are presented to classify the associated debt as long-term, as if the covenant violations had been cured as of June 30, 2004.



2001 Credit Facility:



- The Company's failure to make timely payment of liquidated damages due on its Senior Notes, constituted an event of default under the terms of the 2001 Credit Facility.  As a result, the associated debt was callable at June 30, 2004 and December 31, 2003 until such time as the underlying default was cured.  Accordingly, the amounts due under the 2001 Credit Facility have been reclassified as current liabilities at June 30, 2004 and December 31, 2003.



The underlying default was cured via the payment of the liquidated damages due on the Senior Notes in April 2005.  As a result, June 30, 2004 proforma balances (see Note 4) are presented to classify the amounts due under the 2001 Credit Facility as long-term, as if the covenant violation had been cured as of June 30, 2004.



3.0% Convertible Senior Subordinated Notes due 2006 (the "06 Notes"):



- The Company had not made timely filing of a compliance certificate required in the covenants to the 06 Notes at December 31, 2003.  The Company never received a notice of default related to this matter and was it to have received such notice, it would have had a grace period in which to cure the default.  As a result, this instance of default does not require a change to the long-term debt balance sheet classification of the 06 Notes.  In April 2005, the Company made the required filing of the December 31, 2003 compliance certificate.



See Footnote 4 Long-term Debt for further details.

2.

In the fourth quarter of 2001 the Company completed the acquisition of the Faulding Oral Pharmaceuticals Business ("OPB") and entered into a $900,000 credit facility ("2001 Credit Facility") to finance the acquisition and replace its previous credit agreement.  The 2001 Credit Facility includes covenants that require it to maintain specified financial ratios and satisfy financial conditions consisting of a maximum total leverage ratio test, a maximum senior secured leverage ratio test, a minimum fixed charge coverage ratio test, a minimum interest coverage ratio test and a minimum net worth test.  A breach of any of these covenants, if not cured or waived, could result in a default under the 2001 Credit Facility.  If an event of default under the 2001 Credit facility occurs, the lenders under these facilities could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable.  The calculation of earnings before interest, taxes, depreciation and amortization ("EBITDA") on a rolling four quarter basis is important to many of these tests. These covenants have been amended from time to time, including an amendment made in August 2004.

Compliance with these financial covenants in 2004 is dependent on the Company's EBITDA as defined by the credit agreement, and therefore the Company's ability to generate increasing amounts of operating income, or on the Company's ability to reduce the amount of its outstanding debt. Since December 2001, the Company has reduced the amount of its outstanding debt and the size of the original facility by prepaying term debt by $260,000 and by lowering the revolving line of credit by $150,000.  On an overall basis, senior debt and total debt at June 30, 2004 were $576,421 and $736,749, respectively, compared to $635,603 and $817,156, respectively, at December 31, 2003.

The Company's EBITDA, as defined, is affected most directly by changes in operating income.  Operating income in 2004 has been negatively affected by corrective actions related to the Company's response to FDA Form 483s issued for the Company's U.S. Human Pharmaceuticals plants in Baltimore (liquids) and Elizabeth (solid dose).  The corrective action plans have included consulting and other costs and have resulted in lower production and significant rationalization of the liquids product line at the Baltimore plant, production delays and interruptions at the Elizabeth plant, and no new product introductions during 2003 or through June 30, 2004, from either plant.

The FDA completed an inspection of the Company's Elizabeth solid dose site in December 2003 and advised the Company that, as a result of this inspection, product approvals relating to the Elizabeth site will be withheld pending a successful follow-up inspection.  The Company has no control over the timing of this follow-up inspection.  Major elements of the FDA compliance enhancement plan have been completed and the Company expects an FDA re-inspection in the upcoming months. The Company expects to complete substantially all of the FDA compliance enhancement plan in Baltimore by the end of 2004, subject to the FDA's final review and satisfaction with the actions taken.  While the Company has received no indications from the FDA, the total cost and timing of both the Elizabeth and Baltimore corrective action plans are subject to change based upon results of future inspections performed by the respective Baltimore and New Jersey Districts of the FDA.  (See Note 13 for further details.)

Except as noted in Note 1A, Financial Statement Restatement and Note 4, Long-term Debt, the Company remained in compliance with its debt covenants at June 30, 2004, with approximately $25,000 of EBITDA flexibility on its tightest covenant at quarter end, the Interest Coverage Ratio.  See Note 1A, Financial Statement Restatement and Note 4, Long-term Debt, for a discussion of violations of certain debt covenants at June 30, 2004 and December 31, 2003.  In April and May 2005, the Company has cured all of the violations of its debt covenants.

The Company developed its business and financial plan for 2004 and has continued to evaluate its flexibility in complying with each of the financial covenants as part of this process.  The Company's most recent operating income forecast indicates that by the fourth quarter 2004, without the launch of new products by USHP, the Company would have minimal flexibility in regard to the interest coverage ratio and the total leverage ratio covenant. To increase flexibility, the Company has requested and received an amendment which reduces the interest coverage ratio from 3.50:1.00 to 3.00:1.00 through and including December 31, 2004.  At March 31, 2005, the interest coverage ratio will increase from 3.00:1.00 to 3.25:1.00 and at June 30, 2005, the interest coverage ratio will increase from 3.25:1.00 to 3.50:1.00 and remain thereafter.  The amendment also increases the permitted leverage ratio from 4.00:1:00 to 4.25:1.00 through and including December 31, 2004.  At March 31, 2005, the permitted leverage ratio will decrease from 4.25:1.00 to 4.00:1.00 and at June 30, 2005, the permitted leverage ratio will decrease from 4.00:1.00 to 3.50:1.00 and remain thereafter. In addition, the amendment allows $30,000 of cash restructuring expenses to be excluded from the calculation of EBITDA. The Company believes it has a number of options available to provide it with increased financial flexibility, thereby ensuring continued compliance with its covenants.  Certain of these options are entirely within the Company's control and others require actions of the bank group and/or a third party.  Options include:



·
	Aggressive asset management, including both working capital reduction programs and controls over capital expenditures, to generate free cash flow to enable the Company to continue to repay outstanding debt.  However, during 2004, the Company is making significant investments in inventory related to gabapentin that is subject to final regulatory approval and litigation.  Capital expenditures were $19,266 for the six months ended June 30, 2004 compared to $20,642 for the six months ended June 30, 2003.

·
	Reduce operating costs.  The Company continues to evaluate actions to reduce its cost base throughout 2004 and beyond.



·
	Continue to sell certain assets. In the first quarter of 2004, the Company bought the outstanding 50% of its Wynco joint venture and resold it within the first quarter generating approximately $4,000 of incremental cash. In July 2004, the Company completed the sale of the Aquatic Animal Health operations to an employee group for approximately $3,900 and possible future contingent proceeds. The Company has engaged investment bankers to explore the possible sale of certain other assets.



It is possible that, if completed, certain of the divestitures could result in losses of up to $100,000. In addition, the potential divestitures could be dilutive to the Company's continuing earnings per share. There is no guarantee any divestiture will be completed.



·
	Reduce subordinated convertible debt by issuing common stock. At June 30, 2004, the Company has $160,328 of convertible Subordinated Notes outstanding that can be retired with the agreement of the holders by the exchange of common stock. In the second quarter, the Company repurchased a portion of its 5.75% convertible debt to the level required to maintain compliance with its loan covenants.



·
	Obtaining amendments to the 2001 Credit Facility bank covenants to allow for certain of the actions noted above and to provide additional flexibility in the timing and application of the financial ratio tests.  In October 2001, the Company borrowed $622,000 from the bank group and at June 30, 2004 the amount outstanding was $356,421 (a reduction of $265,579). The Company has obtained amendments as follows:



·
	In the fourth quarter of 2003, the bank group agreed to an amendment which allowed for specified asset sales, permitted exclusions of restructuring and refinancing charges of up to $10,000 from EBITDA and the minimum net worth definitions, and amended the leverage ratios to delay the timing of further covenant restrictions.



·
	In May 2004, the 2001 Credit Facility was amended to allow for certain actions associated with the Company's ability to achieve increased financial flexibility. The amendment includes provisions enabling the Company to issue up to $200,000 of senior subordinated notes to refinance the existing convertible notes, to prepay a local currency mortgage secured loan of approximately $32,000, modify the requirements to prepay debt facilities with proceeds from the potential sale of certain assets/businesses, allow for certain covenant add-backs associated with gabapentin inventory and other minor items.



·
	In August 2004, the 2001 Credit Facility was amended to reduce interest coverage from 3.50:1.00 to 3.00:1.00 and increase the permitted leverage ratio from 4.00:1.00 to 4.25:1.00 through and including December 31, 2004.  At March 31, 2005, the interest coverage ratio will increase from 3.00:1.00 to 3.25:1.00 and at June 30, 2005, the interest coverage ratio will increase from 3.25:1.00 to 3.50:1.00 and remain thereafter.  At March 31, 2005, the permitted leverage ratio will decrease from 4.25:1.00 to 4.00:1.00 and at June 30, 2005, the permitted leverage ratio will decrease from 4.00:1.00 to 3.50:1.00 and remain thereafter.  In addition, the amendment allows $30,000 of cash restructuring expenses to be excluded from the calculation of EBITDA.



The Company believes that its performance in the reduction of the 2001 Credit Facility, and its previous experience in working with the bank group would assist it in obtaining future amendments, if necessary.

While the Company cannot assure its success in executing any of the above-noted actions, it will endeavor to take the actions necessary to maintain sufficient financial flexibility with its debt covenants and remain in compliance.



Inventories consist of the following:



|                 | June 30,2004 | December 31,2003
|---------------- | ------------ | ----------------
|                 |              |                 
|Finished product | $154,972     | $163,141        
|Work-in-process  | 56,780       | 64,503          
|Raw materials    | 115,942      | 81,633          
|                 | $327,694     | $309,277        

Excluded in the June 30, 2004 amounts is inventory of the Aquatic Animal Health Group of $3,084 that is classified as assets held for sale.

Also included in the June 30, 2004 amounts are raw materials and finished product totaling approximately $21,099 and $12,638, respectively, related to one product, gabapentin, that is subject to final regulatory approval and litigation.  The raw material for gabapentin has a shelf life of approximately 4 years and finished goods when produced have a 2 year dating.  At June 30, 2004, and December 31, 2003, $15,500 and $12,498, respectively, of raw materials previously included in inventories have been reclassified to prepaid expenses and other, as the cost of the raw materials will be recoverable upon receipt of replacement inventory. Upon receipt, the raw materials will be reclassified as inventory.  (See Note 13 for additional information.)

4.      Long-Term Debt

The Company has restated its consolidated financial statements for the quarter ended June 30, 2004 and the year ended December 31, 2003, to correct the classification of $537,631 and $567,909, respectively of its outstanding debt as current liabilities and to amend disclosures related to the Company's compliance with certain of its debt covenants.  Balances at June 30, 2004 and December 31, 2003 are restated to classify certain long-term debt as current, due to violations of certain debt covenants at June 30, 2004 and December 31, 2003, that serve to make the associated debt obligations callable.  In April and May 2005, the Company has cured all such violations and accordingly, the debt obligations are no longer callable.  The June 30, 2004 proforma balances are presented to classify the associated debt as long-term, as if the covenant violations had been cured as of June 30, 2004.   See Note 1A, Financial Statement Restatement.

Long-term debt consists of the following:

|                                                                                                                                | June 30,
2004(Proforma) | June 30,
2004(Restated) | December 31,
2003
|------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----------------------- | -----------------
|Senior debt:                                                                                                                    |                         |                         |                  
|U.S. Dollar Denominated:                                                                                                        |                         |                         |                  
|2001 Credit Facility                                                                                                            |                         |                         |                  
|Term A                                                                                                                          | $  59,970               | $  59,970               | $ 85,603         
|Term B                                                                                                                          | 226,337                 | 226,337                 | 285,766          
|Revolving credit                                                                                                                | 50,000                  | 50,000                  | --               
|                                                                                                                                | 336,307                 | 336,307                 | 371,369          
|                                                                                                                                |                         |                         |                  
|8.625% Senior Notes due 2011                                                                                                    | 220,000                 | 220,000                 | 220,000          
|Industrial Development Revenue Bonds                                                                                            | --                      | --                      | 1,200            
|                                                                                                                                |                         |                         |                  
|Denominated in Other Currencies                                                                                                 | --                      | --                      | 33,534           
|Total senior long-term debt                                                                                                     | 556,307                 | 556,307                 | 626,103          
|                                                                                                                                |                         |                         |                  
|Subordinated debt:                                                                                                              |                         |                         |                  
|3%  Convertible Senior Subordinated
       Notes due 2006 (6.875% yield), 
       including interest accretion (the "06 Notes") | 150,576                 | 150,576                 | 147,346          
|5.75% Convertible Subordinated Notes due 2005                                                                                   | 9,752                   | 9,752                   | 34,207           
|Total subordinated debt                                                                                                         | 160,328                 | 160,328                 | 181,553          
|                                                                                                                                |                         |                         |                  
|Total long-term debt                                                                                                            | 716,635                 | 716,635                 | 807,656          
|Less, current maturities                                                                                                        | 18,676                  | 556,307                 | 593,316          
|                                                                                                                                | $697,959                | $160,328                | $214,340         

The Company prepaid $50 million and $25 million of the Term A and Term B loans in the first and second quarters of 2004.  In the first quarter of 2003, the Company paid $35 million of the Term A and Term B loans by drawing on the revolving credit facility.  As a result, the Company recognized pre-tax charges of $861, $376 and $692 in the first and second quarters of 2004 and the first quarter of 2003, respectively, as a loss on extinguishment of debt.

In May 2004, the Company's Norwegian subsidiary prepaid approximately $32,000 of mortgage notes payable in Norwegian Kroner and recorded a loss of $885 on extinguishment of debt.

On June 15, 2004, the Company repurchased and retired $24,455 of 5.75% Convertible Subordinated Notes due April 1, 2005 (the "05 Notes"). As a result of the purchase, the Company recognized pre-tax charges of $673 as a loss on extinguishment of debt.

On April 24, 2003, the Company sold $220,000 aggregate principal amount of 8 5/8% Senior Notes due 2011. The proceeds of the offering, after deducting fees and expenses, were $197,000. These proceeds, together with funds available from other sources, were used to repay existing 12.5% Senior Subordinated Notes of a wholly-owned subsidiary of the Company. The fees paid to the initial purchases of the Senior Subordinated Notes of $22,191 were made pursuant to arrangements originally entered into in December 2001. The transaction was accounted for as an extinguishment of the existing Senior Subordinated Notes. As a result, both the fees of $22,191 paid in April 2003 and the unamortized loan costs of $6,217 associated with the Senor Subordinated Notes, were expensed in the second quarter 2003.

The 2001 Credit Facility has several financial covenants including a total debt to EBITDA ratio, senior debt to EBITDA ratio, fixed charge coverage ratio and an interest coverage ratio.  In August 2004, an amendment was approved which permitted exclusions of cash restructuring charges of up to $30,000 from EBITDA and amended and relaxed the interest coverage ratio and leverage ratio requirements through to and including December 31, 2004. (See Note 2.)

5.   Earnings Per Share

Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of stock options and convertible debt, when appropriate.

A reconciliation of weighted average shares outstanding from basic to diluted weighted average shares outstanding is as follows:



|(Shares in thousands)                 | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------------------------- | -------------------------- | ------------------------
|                                      | 2004                       | 2003                    
|Average shares outstanding -- basic   | 52,005                     | 51,568                  
|Stock options                         | 513                        | --                      
|Average shares outstanding -- diluted | 52,518                     | 51,568                  

The amount of dilution attributable to stock options, determined by the treasury stock method, depends on the average market price of the Company's common stock for each period.  For the three months ended June 30, 2004, stock options to purchase approximately 1,646,000 shares were not included in the computation of diluted EPS because the option price was greater than the average market price of the Class A Common shares. For the six months ended June 30, 2004, stock options had an anti-dilutive effect and therefore stock options to purchase approximately 3,925,000 shares were not included in the diluted EPS calculation.  For the three months ended June 30, 2003, stock options had an anti-dilutive effect and therefore stock options to purchase approximately 4,480,000 shares were not included in the diluted EPS calculation. For the six months ended June 30, 2003, stock options to purchase approximately 2,045,000 shares were not included in the computation of diluted EPS because the option price was greater than the average market price of the Class A Common shares.

The following table summarizes stock options not included in the computation of diluted EPS:



|                                                            | Three Months EndedJune 30, | Six Months EndedJune 30,
|----------------------------------------------------------- | -------------------------- | ------------------------
|                                                            | 2004                       | 2003                    
|Excluded due to option price greater
     than market value | 1,646                      | 1,874                   
|Excluded due to anti-dilution                               | --                         | 2,606                   
|                                                            |                            |                         

The numerator for the calculation of diluted EPS includes an add back for interest expense and debt cost amortization, net of income tax effects, related to the 05 and 06 Notes when applicable. For the three and six months ended June 30, 2004, the effects of the 05 and 06 Notes (convertible into 341,054 and 3,809,343 shares, respectively) were not included in the calculation of diluted EPS because the result was anti-dilutive.  For the three and six months ended June 30, 2003, the effects of the 05 and 06 Notes (convertible into 1,196,310 and 3,809,343 shares, respectively) were not included in the calculation of diluted EPS because the result was anti-dilutive.  The numerator for the calculation of basic and diluted EPS is net income (loss) for all periods.

6.   Goodwill and Intangible Assets



Intangible assets consist principally of products rights, including regulatory and/or marketing approvals by relevant government authorities. All intangible assets are subject to amortization, which is included in Selling, general and administrative expenses. Annual amortization expense for the years 2004 through 2008 is currently estimated to be approximately $35,600, $35,100, $32,300, $30,500 and $29,500, respectively.

Identifiable intangible assets are required to be tested for impairment whenever changes in events or circumstances indicate that its carrying amount may not be recoverable. In Germany, in 2003, one product important to the Company's German operations, Pentalong, was required to submit proof of safety and efficacy by the fourth quarter of 2004.  If the Company cannot complete the study satisfactorily, the Company will be required to re-evaluate the carrying value of intangible assets totaling approximately $16,000. The Company believes, but cannot assure, it will be successful.

Intangible assets and accumulated amortization are summarized as follows:





|(Intangible assets, primarily products rights) |         
|---------------------------------------------- | --------
|                                               |         
|Balance, December 31, 2003                     | $347,670
|                                               |         
|Additions                                      | 549     
|Amortization                                   | (17,776)
|Translation adjustment                         | (2,258) 
|Write-off of intangibles on sale               | (3,278) 
|Impairments                                    | (1,750) 
|                                               |         
|Balance, June 30, 2004                         | $323,157
|                                               |         
|Accumulated amortization, June 30, 2004        | $163,431



The changes in the carrying amount of goodwill attributable to the Company's reportable segments for the quarter ended June 30, 2004, are as follows:



|                                 | IG       | API    | USHP      | USG          | BP            | Total   
|-------------------------------- | -------- | ------ | --------- | ------------ | ------------- | --------
|Balance December 31, 2003        | $298,450 | $5,906 | $406,623  | $         -- | $          -- | $710,979
|Foreign exchange translation     | (5,012)  | (242)  | --        | --           | --            | (5,254) 
|Allocation of USHP to USG and BP | --       | --     | (406,623) | 291,404      | 115,219       | --      
|                                 |          |        |           |              |               |         
|Balance June 30, 2004            | $293,438 | $5,664 | $ --      | $291,404     | $115,219      | $705,725



In the first quarter of 2004, the Company reorganized USHP into two reportable segments, US Generic Pharmaceuticals ("USG") and Branded Pharmeceuticals ("BP"). The goodwill of USHP was allocated between the new segments based on the relative fair values at the time of disaggregation.

The Company, with the assistance of an independent valuation firm, performed a Step 1 impairment test in accordance with FAS 142, as of January 1, 2004, and no impairment was indicated. The Company will perform its required annual test for impairment in the fourth quarter of 2004 or if interim events or circumstances warrant.

7.    Reorganization, Refocus and other Actions

The Company has only included severance related to specific programs as management actions. Other severance charges not related to specific programs are not segregated from normal operations. The following table presents cash activity in the severance and other closure and exit costs related accruals:



|                           | Severance |  | Other Closure and Exit Costs
|-------------------------- | --------- |  | ----------------------------
|Balance, December 31, 2003 | $10,371   |  | $13,637                     
|Charges                    | --        |  | --                          
|Adjustments                | (112)     |  | (270)                       
|                           | 10,259    |  | 13,367                      
|Payments                   | (5,732)   |  | (1,857)                     
|Translation adjustments    | (167)     |  | 45                          
|Balance, June 30, 2004     | $4,360    |  | $11,555                     

The liabilities for accrued severance as of June 30, 2004 are reflected in accrued expenses. The Company expects to settle these liabilities, the majority of which related to 2003 charges, over the next twelve months, in cash.

The liabilities for other closure and exit costs as of June 30, 2004 primarily relate to demolition costs, payment related to a discontinued product, lease obligations and other contractually committed costs associated with Animal Health facility closures announced in 2002. The Company expects to settle these liabilities over the next twelve months.

8.    Pension Plans and Postretirement Benefits:

U.S.:



The net periodic benefit costs for the Company's pension plans and other postretirement plans are as follows:



|                                           | Pension BenefitsFor the Three Months 
Ended June 30, | PostretirementBenefits
For the Three Months
Ended June 30,
|------------------------------------------ | ---------------------------------------------------- | ----------------------------------------------------------
|                                           | 2004                                                 | 2003                                                      
|Service cost                               | $1,136                                               | $996                                                      
|Interest cost                              | 758                                                  | 652                                                       
|Expected return on plan assets             | (652)                                                | (440)                                                     
|Net amortization of transition obligations | 2                                                    | 8                                                         
|Amortization of prior service cost         | (17)                                                 | (20)                                                      
|Recognized net actuarial (gain) loss       | 147                                                  | 142                                                       
|Net periodic benefit cost                  | $1,374                                               | $1,338                                                    



|                                           | Pension BenefitsFor the Six Months 
Ended June 30, | PostretirementBenefits
For the Six Months
Ended June 30,
|------------------------------------------ | -------------------------------------------------- | --------------------------------------------------------
|                                           | 2004                                               | 2003                                                    
|Service cost                               | $2,272                                             | $1,992                                                  
|Interest cost                              | 1,516                                              | 1,304                                                   
|Expected return on plan assets             | (1,304)                                            | (880)                                                   
|Net amortization of transition obligations | 4                                                  | 16                                                      
|Amortization of prior service cost         | (34)                                               | (40)                                                    
|Recognized net actuarial (gain) loss       | 294                                                | 284                                                     
|Net periodic benefit cost                  | $2,748                                             | $2,676                                                  



Employer contributions primarily include those amounts contributed directly to, or paid directly from, plan assets. The Company expects to contribute approximately $4,300 to the U.S. pension plans in 2004. Through the second quarter, the Company has contributed $1,000 in 2004.

Europe:

The net periodic benefit costs for the Company's pension plans are as follows:



|                                      | For the Three Months
Ended June 30, | For the Six Months
Ended June 30
|------------------------------------- | ----------------------------------- | --------------------------------
|                                      | 2004                                | 2003                            
|Service cost                          | $1,327                              | $1,241                          
|Interest cost                         | 1,027                               | 1,012                           
|Expected return on plan assets        | (798)                               | (695)                           
|Amortization of transition obligation | 144                                 | 2                               
|Amortization of prior service cost    | 27                                  | 67                              
|Recognized net actuarial loss         | 61                                  | 106                             
|Net periodic benefit cost             | $1,788                              | $1,733                          

The Company expects to contribute approximately $5,000 to the European pension plans in 2004.  Through the second quarter, the Company has contributed $3,361 in 2004.



9.     Aquatic Animal Health Group - Assets Held For Sale

The Aquatic Animal Health Group ("Aquatic") is included in the Animal Health Segment and manufactures and markets vaccines primarily for use in immunizing farmed fish (principally salmon) worldwide. During the second quarter of 2004, the Company reached agreement for the sale of Aquatic to the senior management of Aquatic.  As of June 30, 2004, the pending sale was approved and was probable. Accordingly, the Aquatic assets and liabilities to be sold are classified as "Held for Sale". A final purchase agreement was signed and the closing took place in July of 2004.

In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company has recorded a loss as of June 30, 2004 to write down the carrying value of Aquatic to its fair value, less selling costs. Aquatic's fair value equals the agreed purchase price (approximately $3,860) and does not include an earn out of up to $2,900, contingently payable in three years dependent on Aquatic's future profitability. The following summarizes the impairment and other loss on the Aquatic group:

| | Aquatic carrying value and loss:                         |        
| | -------------------------------------------------------- | -------
| | Approximate carrying value of net working                |        
| | capital to be transferred                                | $3,860 
| |                                                          |        
| | Property, plant and equipment, net                       | 9,285  
| | Intangible assets, net                                   | 689    
| |                                                          | 13,834 
| | Less cash purchase price                                 |        
| | (equals net working capital)                             | (3,860)
| | Fair value of additional liabilities assumed
   by buyer | (800)  
| |                                                          |        
| | Impairment of Aquatic long lived assets                  | 9,174  
| |                                                          |        
| | Estimated selling costs                                  | 300    
| |                                                          |        
| | Impairment and other loss on Aquatic                     | 9,474  
| |                                                          |        
| | Approximate tax benefit                                  | 2,529  
| |                                                          |        
| | Net Aquatic loss                                         | $6,945 
| |                                                          |        
| | (Loss) per common share                                  | $(0.13)

The operations of Aquatic will not be classified as discontinued operations as the Company and Aquatic will have significant continuing involvement. The Company and Aquatic will continue to manufacture certain products for each other for at least 3 years and the potential earn out is significant to the cash flows of Aquatic.

The results of Aquatic operations included in the Animal Health segment for the three and six months ended June 30, 2004 and 2003, are summarized as follows:

|                                       | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------- | --------------------------- | -------------------------
|                                       | 2004                        | 2003                     
|                                       |                             |                          
|Revenues                               | $3,006                      | $3,280                   
|Operating (loss)                       | $(1,412)                    | $(814)                   
|Operating (loss) including impairments | $(10,886)                   | $(814)                   

10.     Sale of Subsidiary

On January 7, 2004, the Company purchased the outstanding 50% interest in its joint venture, Wynco, LLC ("Wynco"), an Animal Health distribution company. The purchase price was $4,331, approximately $900 of which is payable over three years, beginning on December 31, 2004. In connection with the acquisition, the Company assumed debt of approximately $6,677. The investment was previously recorded in accordance with the equity method, with the original 50% interest included in the Company's Consolidated Statement of Operations. As of the date of purchase, the Company consolidated the results of Wynco in the Consolidated Statement of Operations and included all related assets and liabilities in the Consolidated Balance Sheet. Wynco first quarter 2004 revenues and operating losses were $19,169 and ($111), respectively.  The Company considered this an immaterial acquisition.

On March 30, 2004, the Company sold its 100% interest in this distribution company for $17,000. In connection with the sale, the Company recognized a charge of $1,090 related to an intangible asset previously held. Excluding this charge, the Company has recognized a loss on the sale of $433.  As part of the transaction, the Company entered into an Agency and Distribution Agreement and Logistics Services Agreement with the buyer.

11.      Supplemental Data

|                                                               | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------------------------------- | --------------------------- | -------------------------
|                                                               | 2004                        | 2003                     
|Other income (expense), net:                                   |                             |                          
|Profit-sharing income                                          | $8,789                      | $     --                 
|Sale of product license                                        | 4,000                       | --                       
|Sale of ANDA                                                   | 2,000                       | --                       
|Sale of Wynco                                                  | (223)                       | --                       
|Interest income                                                | 777                         | 209                      
|Foreign exchange gains (losses), net                           | (1,420)                     | 1,590                    
|Litigation/Insurance settlements                               | --                          | ---                      
|Income from Wynco, carried at equity                           | --                          | 168                      
|Other, net                                                     | (914)                       | (774)                    
|                                                               | $13,009                     | $1,193                   
|Interest expense and amortization of debt costs:               |                             |                          
|                                                               |                             |                          
|Interest expense                                               | $(13,986)                   | $(14,735)                
|Amortization of debt issuance costs                            | (646)                       | (1,140)                  
|                                                               | $(14,632)                   | $(15,875)                
|Supplemental cash flow information:                            |                             |                          
|                                                               |                             |                          
|Other non-cash operating activities:                           |                             |                          
|                                                               |                             |                          
|Asset impairments on sale of Aquatics 
  business              |                             |                          
|Non-cash asset write-downs                                     |                             |                          
|Gain on sale of property                                       |                             |                          
|Write-off of intangibles on sale of Wynco                      |                             |                          
|Amortization of unearned compensation
    on restricted shares |                             |                          
|                                                               |                             |                          
|                                                               |                             |                          
|Cash paid for interest                                         |                             |                          
|Cash paid (refunded) for income taxes,
    net                 |                             |                          

12.      Reporting Comprehensive Income

SFAS 130, "Reporting Comprehensive Income", requires foreign currency translation adjustments and certain other items to be included in other comprehensive income (loss). Total comprehensive income (loss) amounted to approximately $(11,302) and $33,675 for the three months ended June 30, 2004 and 2003, respectively and $(23,849) and $45,736 for the six months ended June 30, 2004 and 2003, respectively.

The components of accumulated other comprehensive income for the Company include:

|                                               | Period Ended
|---------------------------------------------- | ------------
|                                               | June 30,2004
|                                               |             
|Cumulative translation adjustment              | $75,618     
|Minimum pension liability, net                 | (283)       
|Unrealized losses on derivative contracts, net | (852)       
|                                               | $74,483     

13.      Contingent Liabilities and Litigation

A class action lawsuit was filed in the United States District Court for the District of New Jersey.  This class action was brought on behalf of all persons who acquired the Company's securities between April 28, 1999 and October 30, 2000.  The Company was named as a defendant along with two of its board members, one of whom is an officer, and two of its former officers.  The class action complaint alleged that, among other things, the plaintiffs were damaged when they acquired the Company's securities because, as a result of (1) alleged irregularities in the Company's Animal Health business in Brazil, (2) allegedly improper revenue recognition practices and (3) the October 2000 revision of its financial results for 1999 and 2000, the Company's previously issued financial statements were materially false and misleading, thereby artificially inflating the price of the Company's securities.  The complaint alleged violations of Sections 10(b), 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934.  The plaintiffs sought damages in unspecified amounts.  The District Court granted the Company's motion to dismiss with prejudice as to all defendants and the Third Circuit Court of Appeals has affirmed this ruling.   This ruling terminates this lawsuit subject to the plaintiff's right to request a hearing before the United Sates Supreme Court.

In June 2002, the SEC notified the Company that it had commenced a formal investigation of the circumstances surrounding the 2000 and 2001 restatements of its financial statements. Deposition and document discovery is underway.

During 2001, 2002, 2003 and 2004, the Company received substantial notices of inspection observations ("483 Reports") from the FDA at its USHP facilities in Baltimore and Elizabeth.  The 483 Reports recorded observed deviations from cGMPs.

The 2001 inspection at Baltimore resulted in an assertion by the FDA that the Company was not in compliance with a 1992 Consent Decree requiring general compliance with cGMPs.  In July 2002, the FDA conducted a follow-up inspection to the 2001 inspection of the Baltimore facility and in August 2002 issued a re-inspection report.  In response to the 2002 FDA report, the Company submitted a comprehensive corrective action plan to the FDA in October 2002.  The FDA has received monthly updates on the plant's progress against its corrective action plan and has continued to monitor the program. The FDA performed another inspection of the Baltimore facility in February of 2004 and issued a 483 Report.  While the number and scope of the comments has declined significantly from the Report received in August 2002, the FDA continues to focus on the facility's need to complete its corrective action plan.  The Company expects to continue upgrading plant procedures at the Baltimore facility in accordance with the October 2002 corrective action plan and will continue to provide written monthly updates to the FDA.  The plan anticipates substantial completion of the corrective actions by the end of 2004, subject to the FDA's final review and satisfaction with the actions taken.  The Company anticipates it will be the subject of another inspection in early 2005.  As part of the corrective action plan, product recalls were conducted in 2002 and production at the Baltimore facility was substantially reduced in several increments during 2002 and 2003 to nineteen products.  This lower production level remains in effect and has been incorporated into the Company's 2004 outlook.

Between November 2002 and January 2003, the FDA conducted a routine general inspection at the Company's Elizabeth plant.  As a result of this inspection, the Company received an FDA 483 Report in January 2003.  The Company submitted a comprehensive response in February 2003 and is currently taking actions to address the observations made by the FDA, in accordance with the response.  The FDA performed a follow-up inspection in late 2003 and issued another 483 Report in December 2003 alleging continued deficiencies in compliance with FDA regulations. The Company now anticipates completion of a significant portion of its corrective actions in the third quarter of 2004, with the remainder estimated for completion by March 2005, subject to FDA's final review and satisfaction with the actions taken. The Company expects an FDA re-inspection of the Elizabeth facility in the upcoming months.  Certain product recalls were included in the original corrective action plan and were completed in 2002 and 2003. As a result of this most recent FDA inspection, the Company's pending requests for new product approvals involving manufacturing at the Elizabeth plant have been withheld.  To assist with the implementation of corrective actions at the Baltimore and Elizabeth facilities, the Company has added significant internal personnel (largely quality and laboratory personnel) at both sites.



While the Company has received no indications from FDA, the total cost and timing of both the Baltimore and Elizabeth corrective action plans are subject to change based upon results of future inspections performed by the respective Baltimore and New Jersey Districts of the FDA.

In response to the Company's submission to the FDA of its ANDAs filed under paragraph IV for gabapentin capsules and tablets, the Company was sued on June 11, 1998 with respect to capsules and on December 12, 1999 with respect to tablets, by Warner-Lambert Company, which is now owned by Pfizer Inc., in the U.S. District Court for the District of New Jersey for alleged patent infringement under two U.S. patents.  The ANDAs submitted seek FDA approval to market the Company's gabapentin capsules and tablets prior to the expiration of Pfizer's patents.  In the Company's ANDAs, the Company certified to Pfizer and the FDA that its proposed generic gabapentin capsules and tablets will not infringe the patents and that the patents are believed to be invalid or unenforceable. The Company filed a motion for summary judgment in both the tablet and capsule litigations claiming, non-infringement with respect to both Pfizer's patents.  These motions have been decided in the Company's favor by the District Court.

During the initial lawsuits regarding gabapentin tablets and capsules, Pfizer received a third patent covering a gabapentin formulation with low chloride levels.  After learning of this patent, the Company certified to the FDA under paragraph IV that the Company's proposed gabapentin capsule and tablet, as disclosed in its previously filed ANDAs, do not infringe this patent and this patent is invalid or unenforceable.  In June 2000, Pfizer sued the Company in the U.S. District Court for the District of New Jersey for patent infringement under this third patent.  The Company submitted to the court a motion for summary judgment that neither the capsule nor tablet product infringes this patent.  This motion is under consideration by the Court and has not yet been ruled on.  No trial date has been set for the gabapentin cases relating to the third patent.

In 2003, the Company received confirmation from the FDA that it has secured eligibility for 180 day market exclusivity on gabapentin 100 mg, 300 mg and 400 mg capsules.  Exclusivity for this product will be triggered by the earlier of either the Company's commercial marketing of gabapentin or a court decision that finds the relevant Pfizer patent invalid, unenforceable or not infringed.  On February 14, 2003, Torpharm, a competitor that has filed an ANDA for gabapentin capsules, filed a lawsuit against the FDA in the U.S. District Court for the District of Columbia seeking final approval for its gabapentin capsules ANDA.  Both this District Court and a federal appellate court upheld the FDA award to the Company.



On April 14, 2004, Apotex (formerly known as Torpharm) filed another lawsuit against the FDA in the U.S. District Court for the District of Columbia seeking final approval for its gabapentin capsules ANDA and again challenging the Company's eligibility to exclusivity.  On June 3, 2004, the District Court ruled in favor of the Company and again affirmed the Company's entitlement to exclusivity on gabapentin capsules.  The case has been appealed.  On July 27, 2004, the Company was notified that the United States Court of Appeals for the District of Columbia has ordered that the FDA's final approval for the Company's gabapentin capsule ANDA be stayed pending resolution of the appeal.

The Company can give no assurance that it will ultimately benefit from the FDA's award of an exclusivity period. With respect to the Pfizer allegations of patent infringement, unless and until the Company decides to utilize the FDA's marketing authorization to sell its gabapentin product, the Company would, in the event of an adverse decision, at most, only be liable to Pfizer for its legal costs and not any monetary damages.  There is the possibility that as a result of the Pfizer litigation, the Company could be prevented from marketing the Company's gabapentin capsules or tablets until the Pfizer patents expire.

In anticipation of the launch of gabapentin, in 1999 the Company entered into a supply agreement with Plantex USA Inc. (a subsidiary of Teva Pharmaceutical Industries, Ltd ("Teva")), the manufacturer of the gabapentin active pharmaceutical ingredient (the "GAPI") under which the Company has acquired GAPI inventory.  Subsequently, in April 2004, the Company entered into agreements with Teva which provide for Teva to share a portion of the Company's potential patent litigation risks regarding the launch of gabapentin and permit Teva to launch gabapentin (in addition to Alpharma's ability to launch), within the Company's exclusivity period. Additionally, the agreements provide for certain payments to the Company based on Teva's net sales during the exclusivity period and include certain obligations for the supply and purchase of GAPI. In return, the Company will make certain payments to Teva based on the Company's net sales from gabapentin.  The Company cannot predict the outcome of the gabapentin litigation; however, in the event of an unfavorable outcome, or other factors preventing the Company from selling the finished product, the Company will reassess the net realizable value of the GAPI, and may incur a charge to write-down GAPI to its net realizable value and record any required payments under the supply agreement.  The maximum charge could be approximately $75,000 based on the supply agreement.

On May 11, 2004, Pfizer filed a citizen's petition with the FDA requesting that the FDA refrain from granting final marketing approval to Teva until the Company's exclusivity has expired. Assuming the Company enjoys a period of market exclusivity, the petition sought to prevent the Company form permitting Teva to launch gabapentin during the time in which the Company has exclusivity. On July 2, 2004, the FDA denied Pfizer's petition.  This means that the FDA will not prevent the Company from permitting Teva to launch gabapentin during the time in which the Company has exclusivity.  The Company can give no assurance that Pfizer will not take further legal action with respect to the actions addressed in the citizen's petition.

In June 2003, the Company received a request for certain information from the United Kingdom Office of Serious Fraud.  The Serious Fraud Office ("SFO") requested documents related to the Company's dealings with several of its competitors with respect to activities in certain specified antibiotic drugs during the late 1990s.  The Company has responded to this request.  The Company has been informed by the SFO that it has initiated a criminal investigation of possible violation of laws by the Company and two of its former UK executives.  If the Company is found guilty it could be subject to a fine in an amount not limited by statute.

The Company has, along with twelve other pharmaceutical manufacturers, been named in a lawsuit being brought by the Attorney General of Massachusetts in the District Court of Massachusetts. The litigation alleges improprieties in the various companies' practices of reporting average wholesale prices to certain third party reporting entities from 1994 through 2003 with regard to certain of their respective drugs for which the Massachusetts Medicaid program provided reimbursement. The litigation alleges, fraud, unjust enrichment, violation of the Massachusetts Medicaid False Claims Act, breach of contract, breach of duty of good faith and fair dealing and violations of certain federal drug rebate laws.  Massachusetts is seeking statutory and civil penalties including disgorgement of profits and treble damages as may be determined at trial.  The defendants have jointly filed a motion for dismissal of the claims which is currently pending before the court. The Company also received in the third quarter, an informational subpoena from the Attorney General of the State of Florida seeking documents and information regarding four of the Company's products reimbursed by Florida Medicaid.  The Company is in the process of responding to this request.  Additionally, the Attorney's General for Illinois, Kentucky and Nevada have given the Company notice that said agencies intend to investigate Medicaid pricing issues within their jurisdiction.



The Federal Trade Commission, in conjunction with various State Attorney's General are  undertaking a formal investigation of the facts and circumstances surrounding a 1998 agreement with Perrigo Inc. under which the Company inter alia (i) renounced its 180 day Waxman-Hatch marketing exclusivity for a certain product and (ii) granted a license under a patent related to the product in return for royalty payments from Perrigo.  Deposition and document discovery was completed in the first quarter of 2004.  The FTC staff has indicated that it is prepared to recommend that the FTC and the States seek damages from the parties to the transaction in question.  The Company is in negotiations with the FTC and the States on an appropriate settlement and has reserved $3,000 in connection with this matter.



The Company has been named in a lawsuit which alleges that one of its AH products causes chickens to produce litter that contains arsenic.  The suit further alleges that this litter, when used as agricultural fertilizer by the chicken farmer, causes a variety of diseases in the plaintiffs (who allegedly live in close proximity to such farm fields).  In addition to the potential for personal injury damages to the plaintiffs, there is the possibility of an adverse customer reaction to the allegations in the lawsuit.  The plaintiffs are also requesting that the Company be enjoined from the future sale of the product at issue.  The Company is in the initial stages of discovery and therefore has not had the opportunity to form a view on the plaintiff's allegations. Worldwide sales of this product were approximately $24,000 in 2003 and $11,800 in the aggregate for the first two quarters of 2004.

The Company is engaged in disputes with several suppliers, customers and distributors regarding certain obligations with respect to contracts under which the Company obtains raw materials and under which the Company supplies finished products.  Given the fact that these disputes will most probably be resolved over more than one year, management does not believe that the disputes in the aggregate will be material to the Company's financial position. However, they could be material to the Company's results of operations or cash flows in the period in which resolution occurs.



In July 2004, the Company settled outstanding litigation with a contract manufacturer who had supplied product to the Company in prior years and received a $5,250 settlement payment. This settlement will be recorded in the third quarter of 2004.

The Company and its subsidiaries are, from time to time, involved in other litigation arising out of the ordinary course of business.  It is the view of management, after consultation with counsel, that the ultimate resolution of all other pending suits should not have a material adverse effect on the consolidated financial position or results of operations of the Company.



14.     Transactions with A.L. Industrier ASA

A.L. Industrier ASA ("ALI") is the beneficial owner of 100% of the outstanding shares of the Company's Class B Stock.  The Class B Stock represents 23% of the total outstanding common stock as of June 30, 2004.  ALI, a Norwegian company, is able to control the Company through its ability to elect more than a majority of the Board of Directors and to cast a majority of the votes in any non-class vote of the Company's stockholders.

Effective January 1, 2004, the Company and ALI entered into a new administrative service agreement whereby the Company provides management services and rents space to ALI. The agreement provides for payment of a fixed yearly fee of approximately $146.  This agreement was approved by the Company's Audit and Corporate Governance Committee.

15.     Business Segment Information

Prior to 2004, the Company's businesses were organized in four reportable segments as follows; International Generics ("IG"), Active Pharmaceutical Ingredients ("API"), U.S. Human Pharmaceuticals ("USHP"), and Animal Health ("AH"). During the first quarter of 2004, the former U.S. Human Pharmaceuticals ("USHP") segment was reorganized into two segments as the CEO and Board were provided with disaggregated operating results of USG and BP. USG's principal products are generic liquid and topical pharmaceuticals and solid dose oral pharmaceuticals. BP has one branded solid dose product, Kadian. USG and BP sell primarily to wholesalers, distributors, and merchandising chains. Accordingly, beginning in the first quarter of 2004, the Company has five reportable segments and prior period information of USHP has been disaggregated into USG and BP for comparative purposes. The disaggregation of USHP is based on the manner in which results have been reported internally and does not, in certain instances, reflect arm's length transactions between USG and BP (e.g. BP product is manufactured by USG and transferred at cost). Each business has a segment manager who reports to the CEO. The 2003 information has been revised to conform with the 2004 presentation.





|                                   | Three Months Ended June 30,
|---------------------------------- | ---------------------------
|                                   | 2004                       
|                                   | Revenues                   
|                                   |                            
|IG                                 | $97,075                    
|API                                | 40,287                     
|USG(1) (2)                         | 100,846                    
|BP (2)                             | 17,991                     
|Total Human Pharmaceuticals        | 256,199                    
|                                   |                            
|Animal Health                      | 71,496                     
|Elimination of income(2)           | (8,789)                    
|Unallocated and other eliminations | (2,931)                    
|                                   | $315,975                   



|                                   | Six Months Ended June 30,
|---------------------------------- | -------------------------
|                                   | 2004                     
|                                   | Revenues                 
|                                   |                          
|IG                                 | $187,843                 
|API                                | 73,993                   
|USG(1) (*2)                        | 202,966                  
|BP (2)                             | 29,512                   
|Total Human Pharmaceuticals        | 494,314                  
|                                   |                          
|Animal Health                      | 155,988                  
|Elimination of income(1)           | (16,926)                 
|Unallocated and other eliminations | (5,740)                  
|                                   | $627,636                 



(1)  Profit-sharing income of $8,789 and $16,926 for the three and six months ended June 30, 2004, respectively, is included in USG and is classified as Other income in the Consolidated Statement of Operations.

2.  As noted above, the USG and BP segments were previously combined into one reportable segment.



Included in accrued expenses at December 31, 2003 was a $6,337 price reduction related to a product purchased under a vendor supply contract. The recognition of the reduced pricing was subject to the negotiation and execution of a final agreement, which was to be determined by either the completion of negotiations for a new supply contract or when the Company had ceased doing business with the vendor. In May of 2004, the Company entered into a new supply agreement with the vendor and as a result, $715 of the price reduction has been recognized in income for the three months ended June 30, 2004. The Company will recognize the remaining price reduction in income over the remaining term of the new agreement.



16.     Guarantor and Financial Information

The following financial information is presented to segregate the parent and certain of its wholly-owned subsidiaries which are guarantors under the Senior Unsecured Notes due 2011 from non-guarantor subsidiaries. The guarantors will jointly and severally, and fully and unconditionally, guarantee the Company's obligation under the Notes. The consolidating financial information presents the Consolidating Balance Sheet as of June 30, 2004 and December 31, 2003 and the related Statements of Operations and Cash Flows for the six months ended June 30, 2004 and 2003 for:



|· | Alpharma Inc., the parent;          
|- | ------------------------------------
|· | The guarantor subsidiaries;         
|· | The nonguarantor subsidiaries; and  
|· | The Company on a consolidated basis.

The information includes elimination entries necessary to consolidate Alpharma Inc., the parent, with guarantor and nonguarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor and nonguarantor subsidiaries are presented on a combined basis. The nonguarantor subsidiaries include the discontinued operations and assets and liabilities held for sale.  The parent and guarantor subsidiaries balance sheets as of June 30, 2004 and December 31, 2003 have been restated.  (See Note 1A). The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.



Separate financial statements for the guarantor subsidiaries and the nonguarantor subsidiaries are not presented because management believes that such financial statements would not be meaningful to investors.



ALPHARMA INC.
Consolidating Balance Sheet
As of June 30, 2004
(in thousands)



|                                                 | Parent      | GuarantorSubsidiaries | Nonguarantor Subsidiaries | Eliminations | Consolidated Total
|------------------------------------------------ | ----------- | --------------------- | ------------------------- | ------------ | ------------------
|Current assets:                                  |             |                       |                           |              |                   
|Cash and cash equivalents                        | $  1,552    | $  1,224              | $ 28,338                  | $        --  | $ 31,114          
|Accounts receivable, net                         | 39,893      | 113,440               | 98,670                    | --           | 252,003           
|Inventories                                      | 65,620      | 145,173               | 131,715                   | (11,730)     | 330,778           
|Prepaid expenses and other                       | 4,117       | 51,932                | 10,234                    | 4,300        | 70,583            
|Assets of discontinued operations                | --          | --                    | --                        | --           | --                
|Intercompany receivables                         | 1,363,237   | 681,073               | 1,291,536                 | (3,335,846)  | --                
|Total current assets                             | 1,474,419   | 992,842               | 1,560,493                 | (3,343,276)  | 684,478           
|                                                 |             |                       |                           |              |                   
|Property, plant & equipment, net                 | 114,030     | 160,835               | 182,774                   | --           | 457,639           
|Goodwill                                         | 4,694       | 405,619               | 297,851                   | (2,439)      | 705,725           
|Intangible assets, net                           | 45,824      | 168,179               | 109,154                   | --           | 323,157           
|Investment in subsidiaries                       | 322,912     | 502,255               | --                        | (825,167)    | --                
|Assets of discontinued operations                | --          | --                    | --                        | --           | --                
|Other assets and deferred charges                | 31,584      | 6,228                 | 47,870                    | --           | 85,682            
|Total assets                                     | $1,993,463  | $2,235,958            | $2,198,142                | $(4,170,882) | $2,256,681        
|                                                 |             |                       |                           |              |                   
|Current liabilities:                             |             |                       |                           |              |                   
|Short term debt                                  | $        -- | $  20,000             | $     114                 | $        --  | $  20,114         
|Long term debt, current portion                  | 220,000     | 336,307               | --                        | --           | 556,307           
|Accounts payable and accrued expenses            | 55,314      | 175,416               | 96,289                    | --           | 327,019           
|Accrued and deferred income taxes                | 11,694      | (6,867)               | 21,180                    | --           | 26,007            
|Liabilities of discontinued operations           | --          | --                    | --                        | --           | --                
|Intercompany payables                            | 470,131     | 1,583,042             | 1,282,673                 | (3,335,846)  | --                
|Total current liabilities                        | 757,139     | 2,107,898             | 1,400,256                 | (3,335,846)  | 929,447           
|                                                 |             |                       |                           |              |                   
|Long term debt:                                  |             |                       |                           |              |                   
|Senior                                           | --          | --                    | --                        | --           | --                
|Convertible subordinated notes                   | 160,328     | --                    | --                        | --           | 160,328           
|Liabilities of discontinued operations           | --          | --                    | --                        | --           | --                
|Deferred income taxes                            | (37,406)    | 51,325                | 14,080                    | --           | 27,999            
|Other non-current liabilities                    | 5,167       | 895                   | 24,610                    | --           | 30,672            
|                                                 |             |                       |                           |              |                   
|Stockholders' equity:                            |             |                       |                           |              |                   
|Preferred stock                                  | --          | --                    | --                        | --           | --                
|Class A Common Stock                             | 8,207       | --                    | --                        | --           | 8,207             
|Class B Common Stock                             | 2,375       | --                    | --                        | --           | 2,375             
|Additional paid-in-capital                       | 1,068,708   | 12,716                | 490,473                   | (503,189)    | 1,068,708         
|Retained earnings                                | (30,548)    | 63,124                | 213,090                   | (276,214)    | (30,548)          
|Accumulated other comprehensive loss             | 66,948      | --                    | 55,633                    | (55,633)     | 66,948            
|Treasury stock, at cost                          | (7,455)     | --                    | --                        | --           | (7,455)           
|                                                 |             |                       |                           |              |                   
|Total stockholders' equity                       | 1,108,235   | 75,840                | 759,196                   | (835,036)    | 1,108,235         
|Total liabilities & stockholders' 
       equity | $1,993,463  | $2,235,958            | $2,198,142                | $(4,170,882) | $2,256,681        









ALPHARMA INC.
Consolidating Balance Sheet
As of December 31, 2003
(in thousands)



|                                         | Parent     | GuarantorSubsidiaries | Nonguarantor Subsidiaries | Eliminations | ConsolidatedTotal
|---------------------------------------- | ---------- | --------------------- | ------------------------- | ------------ | -----------------
|Current assets:                          |            |                       |                           |              |                  
|Cash and cash equivalents                | $(3,372)   | $5,105                | $56,890                   | $--          | $58,623          
|Accounts receivable, net                 | 44,293     | 114,798               | 99,380                    | --           | 258,471          
|Inventories                              | 75,732     | 114,707               | 127,405                   | (8,567)      | 309,277          
|Prepaid expenses and other               | 14,284     | 40,408                | 8,645                     | 3,283        | 66,620           
|Assets of discontinued operations        | --         | --                    | --                        | --           | --               
|Intercompany receivables                 | 2,002,901  | 940,145               | 1,142,180                 | (4,085,226)  | --               
|Total current assets                     | 2,133,838  | 1,215,163             | 1,434,500                 | (4,090,510)  | 692,991          
|                                         |            |                       |                           |              |                  
|Property, plant & equipment, net         | 117,751    | 165,404               | 198,399                   | --           | 481,554          
|Goodwill                                 | 4,912      | 405,619               | 303,105                   | (2,657)      | 710,979          
|Intangible assets, net                   | 49,318     | 179,714               | 118,638                   | --           | 347,670          
|Investment in subsidiaries               | 328,659    | 515,779               | --                        | (844,438)    | --               
|Assets of discontinued operations        | --         | --                    | --                        | --           | --               
|Other assets and deferred charges        | 35,708     | 12,231                | 48,135                    | --           | 96,074           
|Total assets                             | $2,670,186 | $2,493,910            | $2,102,777                | $(4,937,605) | $2,329,268       
|                                         |            |                       |                           |              |                  
|Current liabilities:                     |            |                       |                           |              |                  
|Short term debt                          | $--        | $9,500                | $---                      | $--          | $9,500           
|Long term debt, current portion          | 220,000    | 371,569               | 1,747                     | --           | 593,316          
|Accounts payable and accrued expenses    | 66,139     | 120,551               | 106,198                   | --           | 292,888          
|Accrued and deferred income taxes        | 16,108     | 163                   | 14,205                    | --           | 30,476           
|Liabilities of discontinued operations   | --         | --                    | --                        | --           | --               
|Intercompany payables                    | 1,086,637  | 1,846,492             | 1,152,097                 | (4,085,226)  | --               
|Total current liabilities                | 1,388,884  | 2,348,275             | 1,274,247                 | (4,085,226)  | 926,180          
|                                         |            |                       |                           |              |                  
|Long term debt:                          |            |                       |                           |              |                  
|Senior                                   | --         | 1,000                 | 31,787                    | --           | 32,787           
|Convertible subordinated notes           | 181,553    | --                    | --                        | --           | 181,553          
|Liabilities of discontinued operations   | --         | --                    | --                        | --           | --               
|Deferred income taxes                    | (37,406)   | 47,739                | 14,175                    | --           | 24,508           
|Other non-current liabilities            | 5,166      | 1,481                 | 25,604                    | --           | 32,251           
|                                         |            |                       |                           |              |                  
|Stockholders' equity:                    |            |                       |                           |              |                  
|Preferred stock                          | --         | --                    | --                        | --           | --               
|Class A Common Stock                     | 8,092      | --                    | --                        | --           | 8,092            
|Class B Common Stock                     | 2,375      | --                    | --                        | --           | 2,375            
|Additional paid-in-capital               | 1,059,104  | 12,605                | 491,137                   | (503,742)    | 1,059,104        
|Deferred stock cost                      | (2,667)    | --                    | --                        | --           | (2,667)          
|Retained earnings                        | (23,284)   | 82,810                | 187,792                   | (270,602)    | (23,284)         
|Accumulated other comprehensive loss     | 95,784     | --                    | 78,035                    | (78,035)     | 95,784           
|Treasury stock, at cost                  | (7,415)    | --                    | --                        | --           | (7,415)          
|                                         |            |                       |                           |              |                  
|Total stockholders' equity               | 1,131,989  | 95,415                | 756,964                   | (852,379)    | 1,131,989        
|Total liabilities & stockholders' equity | $2,670,186 | $2,493,910            | $2,102,777                | $(4,937,605) | $2,329,268       
|                                         |            |                       |                           |              |                  







ALPHARMA INC.
Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(in thousands)



|                                                  | Parent   | GuarantorSubsidiaries | Nonguarantor Subsidiaries | Eliminations | Consolidated Total
|------------------------------------------------- | -------- | --------------------- | ------------------------- | ------------ | ------------------
|                                                  |          |                       |                           |              |                   
|Total revenue                                     | $162,984 | $230,377              | $307,387                  | $(73,112)    | $627,636          
|Cost of sales                                     | 113,793  | 169,447               | 171,241                   | (73,112)     | 381,369           
|Gross profit                                      | 49,191   | 60,930                | 136,146                   | --           | 246,267           
|Operating expenses                                | 46,962   | 86,976                | 104,577                   | --           | 238,515           
|Operating income (loss)                           | 2,229    | (26,046)              | 31,569                    | --           | 7,752             
|Interest expense - 3rd parties                    | (18,073) | (9,724)               | (1,330)                   | --           | (29,127)          
|Other income (expense), net                       | (2,472)  | 20,405                | (8)                       | --           | 17,925            
|Equity in earnings of subsidiaries                | 15,868   | 22,882                | --                        | (38,750)     | --                
|Income (loss) before taxes                        | (2,448)  | 7,517                 | 30,231                    | (38,750)     | (3,450)           
|Provision (benefit) for income taxes              | 99       | (8,351)               | 7,349                     | --           | (  903)           
|Net income (loss) from continuing
     operations | (2,547)  | 15,868                | 22,882                    | (38,750)     | (2,547)           
|Net discontinued operations                       | --       | --                    | --                        | --           | --                
|Net income (loss)                                 | $(2,547) | $15,868               | $22,882                   | $(38,750)    | $(2,547)          









ALPHARMA INC.
Consolidating Statement of Income
For the Six Months Ended June 30, 2003
(in thousands)



|                                                  | Parent     | GuarantorSubsidiaries | Nonguarantor Subsidiaries | Eliminations | Consolidated Total
|------------------------------------------------- | ---------- | --------------------- | ------------------------- | ------------ | ------------------
|                                                  |            |                       |                           |              |                   
|Total revenue                                     | $  156,391 | $ 251,037             | $295,826                  | $(67,999)    | $635,255          
|Cost of sales                                     | 103,547    | 165,479               | 168,862                   | (67,999)     | 369,889           
|Gross profit                                      | 52,844     | 85,558                | 126,964                   | --           | 265,366           
|Operating expenses                                | 46,995     | 71,536                | 86,499                    | --           | 205,030           
|Operating income                                  | 5,849      | 14,022                | 40,465                    | --           | 60,336            
|Interest expense - 3rd parties                    | (31,514)   | 57                    | (1,380)                   | --           | (32,837)          
|Other income (expense), net                       | (28,307)   | 282                   | 807                       | --           | (27,218)          
|Equity in earnings of subsidiaries                | 45,481     | 29,004                | --                        | (74,485)     | --                
|Income (loss) before taxes                        | (8,491)    | 43,365                | 39,892                    | (74,485)     | 281               
|Provision  (benefit) for income taxes             | (10,899)   | (2,116)               | 9,903                     | --           | (3,112)           
|Net income (loss) from continuing
     operations | $    2,408 | $   45,481            | $29,989                   | $(74,485)    | $3,393            
|Net discontinued operations                       | --         | --                    | (985)                     | --           | (985)             
|Net Income (loss)                                 | $2,408     | $45,481               | $29,004                   | $(74,485)    | $2,408            







Alpharma Inc.
Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004



|                                                                              | Parent   | Guarantor | Non-Guarantor | Eliminations | Consolidated
|----------------------------------------------------------------------------- | -------- | --------- | ------------- | ------------ | ------------
|                                                                              |         
|Net cash provided by (used in) operating
   activities                        | $28,777  | $27,795   | $16,754       | $--          | $73,326     
|Investing Activities                                                          |          |           |               |              |             
|Capital expenditures                                                          | (1,230)  | (5,996)   | (11,491)      | --           | (18,717)    
|Purchase of businesses & 
          intangibles, net of cash required         | --       | (12,857)  | (549)         | --           | (13,406)    
|Proceeds from sale of Wynco                                                   | --       | 17,000    | --            | --           | 17,000      
|Net cash used in investing activities                                         | (1,230)  | (1,853)   | (12,040)      | --           | (15,123)    
|Financing Activities:                                                         |          |           |               |              |             
|Increase (decrease) in short-term debt                                        | --       | 10,500    | 114           | --           | 10,614      
|Reduction of senior long-term debt                                            | --       | (86,262)  | (32,520)      | --           | (118,782)   
|Proceeds from senior long-term debt                                           | --       | 50,000    | --            | --           | 50,000      
|Proceeds from employee stock option
        and stock purchase plan and other | 3,342    | 111       | --            | --           | 3,453       
|Reduction of convertible debt                                                 | (24,455) | --        | --            | --           | (24,455)    
|Payment of debt issuance costs                                                | (1,009)  | --        | --            | --           | (1,009)     
|Change in intercompany dividends & 
        investment in subsidiaries        | 4,216    | (4,216)   | --            | --           | --          
|Dividends paid                                                                | (4,717)  | --        | --            | --           | (4,717)     
|Net cash provided by (used in) 
          financing activities                | (22,623) | (29,867)  | (32,406)      | --           | (84,896)    
|Net cash flows from exchange rate
          changes                           | --       | 44        | (860)         | --           | (816)       
|Increase (decrease) in cash                                                   | 4,924    | (3,881)   | (28,552)      | --           | (27,509)    
|Cash and cash equivalents at beginning of
   year                             | (3,372)  | 5,105     | 56,890        | --           | 58,623      
|Cash and cash equivalents at end of period                                    | 1,552    | 1,224     | 28,338        | --           | 31,114      







Alpharma Inc.
Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2003



|                                                                              | Parent    | Guarantor | Non-Guarantor | Eliminations | Consolidated
|----------------------------------------------------------------------------- | --------- | --------- | ------------- | ------------ | ------------
|                                                                              |          
|Net cash provided by (used in) operating
   activities                        | $(13,162) | $33,093   | $(512)        | $--          | $19,419     
|Investing Activities                                                          |           |           |               |              |             
|Capital expenditures                                                          | (2,629)   | (7,257)   | (9,959)       | --           | (19,845)    
|Purchase of businesses & intangibles, 
        net of cash required           | --        | --        | (797)         | --           | (797)       
|Proceeds from sale of property                                                | 2,355     | --        | --            | --           | 2,355       
|Net cash used in investing activities                                         | (274)     | (7,257)   | (10,756)      | --           | (18,287)    
|Financing Activities:                                                         |           |           |               |              |             
|Reduction of long-term debt                                                   | (246,921) | (839)     | (827)         | --           | (248,587)   
|Issuance of senior unsecured debt                                             | 220,000   | --        | --            | --           | 220,000     
|Net advances under lines of credit                                            | 37,000    | (20,000)  | 6,145         | --           | 23,145      
|Proceeds from employee stock option
        and stock purchase plan and other | 5,023     | --        | --            | --           | 5,023       
|Reduction of convertible debt                                                 | --        | --        | --            | --           | --          
|Payment of debt issuance costs                                                | --        | --        | --            | --           | --          
|Change in intercompany dividends & 
        investment in subsidiaries        | 4,193     | (4,193)   | --            | --           | --          
|Dividends paid                                                                | (4,642)   | --        | --            | --           | (4,642)     
|Net cash provided by (used in) 
          financing activities                | 14,653    | (25,032)  | 5,318         | --           | (5,061)     
|Net cash flows from exchange rate
          changes                           | --        | --        | (1,177)       | --           | (1,177)     
|Increase (decrease) in cash                                                   | 1,217     | 804       | (7,127)       | --           | (5,106)     
|Cash and cash equivalents at beginning of 
    year                           | 1,560     | 2,621     | 19,782        | --           | 23,963      
|Cash and cash equivalents at end of period                                    | $2,777    | $3,425    | $12,655       | --           | $18,857     



17.     Recent Accounting Pronouncements



In December 2003, the FASB issued Staff Position FAS 106-1, "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("the Act") ("FSB FAS 106-1").  FSP FAS 106-1 allows for current recognition or a one-time deferral of the effects of the Act.  The deferral suspends the application of SFAS No. 106's "Employers' Accounting for Postretirement Benefits Other Than Pensions," measurement requirements, and it revised SFAS 132's disclosure requirements for pension and other postretirement plans for the effects of the Act.  The Company has elected to take the one-time deferral and, therefore, any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act.  In May 2004, the FASB issued Staff Position No. 106-2 (FSP 160-2), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP 106-2 discusses the effect of the Medicare Act and supersedes FSP 106-1. FSP 106-2 requires companies to account for the reduction in accumulated postretirement benefit obligation (APBO) as an actuarial gain to be amortized into income over the average remaining service period of plan participants. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Companies may adopt the FSP retroactively or prospectively. The Company has chosen to defer the accounting for the adjustment to benefit costs and the benefit obligation and intends on implementing the new accounting standard in the third quarter of fiscal 2004, as permitted by the FSP. The Company's APBO and net periodic postretirement benefit costs as of and for the three and six months ended June 30, 2004 do not reflect the effect of the Medicare Act. While still preliminary, the Company does not expect the effect of the Medicare Act to be material to the overall results of operations.



Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations(In millions, except per share data)





The Company has restated its consolidated financial statements for the quarter ended June 30, 2004 and the year ended December 31, 2003, to correct the classification of certain of its outstanding debt as current liabilities and to amend disclosures related to the Company's compliance with certain of its debt covenants.  Balances at June 30, 2004 and December 31, 2003 are restated to classify certain long-term debt as current, due to violations of certain debt covenants at June 30, 2004 and December 31, 2003, that serve to make the associated debt obligations callable.  In April and May 2005, the Company has cured all such violations and accordingly, the debt obligations are no longer callable.  The June 30, 2004 and December 31, 2003 proforma balances (see Note 4) and ratios are presented to classify the associated debt as long-term, as if the covenant violations had been cured.  See Note 1A, Financial Statement Restatement.

Overview
     In the third quarter of 2003, the Company closed the sale of its French subsidiary, Alpharma SAS ("SAS") for approximately $6.0 million.  The operations of SAS for the six months ended June 30, 2003 have been removed from the continuing operations of the Company and are classified as a discontinued operation. All comparisons of results of operations refer to continuing operations and reflect the elimination of SAS.







|($ in millions)                        | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------- | --------------------------- | -------------------------
|                                       | 2004                        | 2003                     
|                                       |                             |                          
|Revenues                               | $3.0                        | $3.3                     
|Operating (loss)                       | $(1.4)                      | $(0.8)                   
|Operating (loss), including impairment | $(10.9)                     | $(0.8)                   

Results of Continuing Operations - Six months ended June 30, 2004







|Six Months Ended June 30,                     | Revenues |        | Operating Income (Loss)
|--------------------------------------------- | -------- | ------ | -----------------------
|                                              | 2004     | 2003   |                        
|International Generics  ("IG")                | $187.8   | $180.6 |                        
|Active Pharmaceutical Ingredients ("API")     | 74.0     | 66.5   |                        
|US Generics ("USG")                           | 203.0    | 217.4  |                        
|Branded Pharmaceuticals ("BP")                | 29.5     | 39.1   |                        
|Total Human Pharmaceuticals                   | 494.3    | 503.6  |                        
|Animal Health ("AH") - base                   | 131.0    | 129.5  |                        
|Aquatic Animal Health                         | 5.8      | 6.3    |                        
|Wynco Acquisition                             | 19.2     | --     |                        
|Total AH                                      | 156.0    | 135.8  |                        
|Metformin ER Profit Sharing    Agreement  (1) | (16.9)   | --     |                        
|Unallocated and Eliminations                  | (5.8)    | (4.1)  |                        
|Total                                         | $627.6   | $635.3 |                        



Revenues

Revenues in IG increased $7.2 million (4%) due primarily to translation of sales made in foreign currencies into the U.S. dollar. Excluding currency impacts, revenues declined 5.5% reflecting lower revenues in Germany due to volume and the Nordic region and United Kingdom due primarily to price.

API revenues increased $7.5 million (11%) mainly as a result of increased volume of vancomycin and price increases on other selected products in certain markets partially offset by decreased volumes of these products. Translation of revenues into the U.S. dollar increased API revenues by 1.5%.

Branded sales of Kadian were approximately $9.6 million lower relative to 2003.  In the second quarter of 2003, sales of Kadian were higher due to increased production and sales to wholesalers who had experienced product shortages in the first quarter of 2003. Scripts for Kadian in the first half of 2004 increased approximately 11% compared to the second half of 2003.



Revenues of USG products declined $14.4 million and include approximately $16.9 million earned as a result of an agreement (the "Metformin ER agreement") on the launch of Metformin ER in the fourth quarter of 2003. Such income is recorded as revenues for USHP segment reporting purposes but is reclassified as other income in the Consolidated Statement of Operations. Under the Metformin ER agreement, Alpharma and Ivax agreed to share profits during the 180 day exclusivity period. In return, Alpharma withdrew a lawsuit which challenged Ivax's first to file status on Metformin ER. Revenues of U.S. generic products, excluding the profit sharing revenues, declined by $31.3 million reflecting significant price and volume declines in both liquids, semi-solids and solid oral dose product lines. The lack of new products, production inefficiencies related to remediation activities and continued competition have continued to negatively impact the generic business.



As is customary in the industry, USG shipments to wholesale customers include price incentives. These incentives have generally been increasing, reflective of the competitive nature of the markets and the Company's inability to supply new products to its wholesale customers as its resolves its FDA issues. The Company monitors its sales to wholesale customers to ensure that wholesale inventory levels are maintained at consistent levels appropriate to satisfy market demand.

Inventories of generic and branded products at certain wholesale customers generally range from 2 to 6 months for all products, with most at the mid-point of the range, although a few products exceed the range. One major wholesale customer typically holds up to 5 months of inventory for certain products. These inventory levels have remained consistent. In the event that wholesale customer inventory levels are reduced in the future, the Company's revenues could be adversely impacted.  In this regard, the Company presently expects third quarter revenues to be lower as wholesalers lower inventories. The information regarding inventory levels within the channel is derived from inventory management reports obtained at a cost from major wholesalers. This information is critical to estimates of deductions from gross revenues to reported net revenues.



Animal Health revenues, excluding Wynco revenues, increased $1.0 million (1%) due to the positive impact of foreign exchange (3%) and higher volumes in the poultry market, which were partially offset by price declines due to continued competition (2%) and lower volumes in the livestock market.

On a Company-wide basis gross profit decreased $19.1 million in 2004 compared to 2003. As a percentage of sales, overall gross profit was 39.2% as reported in 2004, versus 41.8% in 2003.  The overall gross profit percent in 2004, excluding Wynco was 40.0%.

The decrease in gross margin dollars results primarily from price declines in USG and IG, volume declines in BP, offset partially by positive currency effects in IG and AH.

Operating Expenses



Research and development expenses increased $8.1 million (27%) in 2004 due primarily to planned increases in Human Pharmaceutical spending. This spending is expected to increase by approximately 25% in 2004 in order to support an increase in regulatory filings.



Asset impairments and other was $9.5 million, and consists of the loss to write down the carrying value of Aquatic assets to fair value, less selling costs. During the second quarter of 2004, the Company reached agreement to sell the business. The sale closed in July 2004.

O

Operating income decreased by $52.5 million. The Company believes the change in operating income can be approximated as follows:

|                                                                                                    | IG    | API   | USG    | BP     | AH    | Unallocated | Total 
|--------------------------------------------------------------------------------------------------- | ----- | ----- | ------ | ------ | ----- | ----------- | ------
|2003 as reported                                                                                    | $17.7 | $39.1 | $  .9  | $16.6  | $5.6  | $(19.6)     | $60.3 
|2003 severance                                                                                      | --    | --    | --     | --     | 0.7   | 2.0         | 2.7   
|2004 severance                                                                                      | (1.8) | (0.1) | ( .5)  | (1.3)  | (0.1) | (2.0)       | (5.8) 
|Metformin ER Profit Sharing    Agreement                                                            | --    | --    | 16.9   |        | --    | (16.9)      | --    
|Aquatic impairment                                                                                  | --    | --    | --     |        | (9.5) | --          | (9.5) 
|Litigation accrual                                                                                  | --    | --    | --     |        | --    | (3.0)       | (3.0) 
|Net margin improvement (decrease) due to volume, price, new products, foreign exchange and expenses | (4.3) | 1.9   | (25.1) | (13.5) | 3.3   | 0.8         | (36.9)
|2004 as reported                                                                                    | $11.6 | $40.9 | $(7.8) | $1.8   | $--   | $(38.7)     | $7.8  





Interest expense and amortization of debt issuance costs decreased $3.7 million to $29.1 million in 2004 due to decreased debt levels, lower amortization of debt issuance costs and lower interest rates versus a year ago.



The six months ended June 30, 2004 results include $2.8 million of expense associated with the write-off of deferred loan costs compared with $29.1 million of expense in first half 2003 results. In 2004, the Company prepaid $75 million of bank term debt and $32 million of mortgage notes payable and repaid $24.5 million of the 5.75% convertibles.

The 2003 loss resulted primarily from the extinguishment of $200 million 12 1/2% notes and the related issuance of $220 million of 8 5/8% notes. The extinguishment resulted in the expensing of $22.2 million in placement fees and the write-off of $6.2 million of deferred debt expense.

Other Income (Expense), Net

Other income (expense) netted to $20.7 million in 2004 compared to $1.9 million in 2003. First half 2004 results include $16.9 million of income from a USHP Metformin ER agreement. In 2004, the Company's USHP sold a product license and an ANDA for income totaling $6.0 million. A detail of Other income (expense) follows:



|                                              | Six Months Ended
|--------------------------------------------- | ----------------
|                                              | June 30,2004    
|Other income (expense), net:                  |                 
|Interest income                               | $   0.9         
|Foreign exchange gains (losses), net          | (0.5)           
|Litigation/Insurance settlements and accruals | --              
|Loss on sale of Wynco                         | (1.5)           
|Metformin ER Profit Sharing Agreement         | 16.9            
|Sale of product license and ANDA              | 6.0             
|Other, net                                    | (1.1)           
|                                              | $20.7           



The Company currently estimates its 2004 effective tax rate for continuing operations at approximately 27%. The estimate is subject to change primarily dependent on which legal entity actually incurs income or losses compared to the current forecast.  The tax provision for the six months ended June 30, 2004 was 26%.  Included in the provision for the six months ended June 30, 2004 is the result of the loss on Aquatics being benefited at a discrete rate of 27%.

The tax provision in 2003 was a benefit of $3.1 million compared to pre-tax income of $0.3 million. The abnormal tax relationship results from the tax benefit on the $28.4 million expense from debt extinguishment at the incremental federal and state rate of approximately 39% while using an approximate 29% effective rate for all other income.

The Company has recorded certain U.S. deferred tax assets for which it has provided no valuation allowances. These U.S. deferred tax assets, as well as any newly generated deferred tax assets, are evaluated quarterly to assess the likelihood of realization, which is ultimately dependent upon generating future U.S. taxable income prior to the expiration of the net operating loss carryforwards. If it were considered to be more likely than not that the U.S. deferred tax assets would not be realized, a valuation allowance would be established against some or all of the deferred tax assets.

As a result of the Company's assessment of its net U.S. deferred tax assets of approximately $26 million at June 30, 2004, based upon certain available tax planning strategies, the Company considers it more likely than not that these net U.S. deferred tax assets will be realized in the future and therefore, no valuation allowance was required at June 30, 2004. Should it be determined in the future that it is no longer more likely than not that these assets will be realized, a valuation allowance would be required and the Company's operating results would be adversely affected during the period in which such determination would be made.

Results of Continuing Operations - Three months ended June 30, 2004







|Three Months Ended June 30,                  | Revenues |        | Operating Income (Loss)
|-------------------------------------------- | -------- | ------ | -----------------------
|                                             | 2004     | 2003   |                        
|International Generics  ("IG")               | $97.1    | $97.0  |                        
|Active Pharmaceutical Ingredients ("API")    | 40.3     | 35.7   |                        
|US Generics                                  | 100.8    | 102.8  |                        
|Branded Pharmaceuticals                      | 18.0     | 29.6   |                        
|Total Human Pharmaceuticals                  | 256.2    | 265.1  |                        
|Animal Health (AH) - base                    | 68.5     | 65.5   |                        
|Aquatics                                     | 3.0      | 3.3    |                        
|Total AH                                     | 71.5     | 68.8   |                        
|Metformin ER Profit Sharing    Agreement (1) | (8.8)    | --     |                        
|Unallocated and Eliminations                 | (2.9)    | (0.9)  |                        
|Total                                        | $316.0   | $333.0 |                        



Revenues

Revenues in IG were approximately the same in the second quarters of 2004 and 2003. Excluding currency impacts, revenues declined 6% reflecting lower revenues in Germany and the United Kingdom due to volume and the Nordic region due primarily to price.

API revenues increased $4.6 million (13%) mainly as a result of increased volumes of vancomycin and price increases on selected products in certain markets offset by decreased volumes of these products. Translation of revenues into the U.S. dollar increased API revenues by 1%.

Branded sales of Kadian were approximately $11.6 million lower relative to 2003.  In the second quarter of 2003 sales of Kadian were higher due to increased production and sales to wholesalers who had experienced product shortages in the first quarter of 2003. Second quarter 2004 scripts for Kadian increased approximately 9% compared to the first quarter 2004.

Revenues of USG products declined by $2.0 million and include approximately $8.8 million earned as a result of the Metformin ER agreement on the launch of Metformin ER in the fourth quarter of 2003. Such profit sharing income is recorded as revenues for USHP segment reporting purposes but is reclassified as other income in the Consolidated Statement of Operations. Under the Metformin ER agreement, Alpharma and Ivax agreed to share profits during the 180 day exclusivity period. In return, Alpharma withdrew a lawsuit which challenged Ivax's first to file status on Metformin ER. Revenues of generic products, excluding the profit sharing, declined by $10.8 million reflecting significant price declines in both liquids, semi-solids and solid oral dose product lines. The lack of new products, production inefficiencies related to remediation activities and continued competition has continued to negatively impact the generic business.

Animal Health revenues, increased $2.7 million (4%) due to higher volumes in the poultry market (4%), which was partially offset by price declines due to continued competition (1%), and the impact of foreign exchange, 1%.



On a Company-wide basis gross profit decreased $10.6 million in 2004 compared to 2003. As a percentage of sales, overall gross profit was 40.6% as reported in 2004, versus 41.7% as reported in 2003.

The decrease in gross margin dollars results primarily from price declines in USHP and IG, offset partially by positive currency effects in IG and AH.

Operating Expenses



Research and development expenses increased $7.1 million (45%) in 2004 due primarily to planned increases in USHP and API. Human Pharmaceutical spending is expected to increase by approximately 25% in 2004 in order to support an increase in regulatory filings.

Asset Impairments and Other

Asset impairments and other is $9.5 million, and includes the loss to write down the carrying value of Aquatic assets to its fair value, less selling costs. During the second quarter of 2004, the Company reached agreement to sell the business. The sale closed in July 2004.



Operating income decreased by $28.3 million. The Company believes the change in operating income can be approximated as follows:

|                                                                                                    | IG    | API   | USG    | BP     | AH     | Unallocated | Total 
|--------------------------------------------------------------------------------------------------- | ----- | ----- | ------ | ------ | ------ | ----------- | ------
|2003 as reported                                                                                    | $9.9  | $22.2 | $(9.5) | $16.7  | $3.0   | $(9.6)      | $32.7 
|Aquatic impairment                                                                                  | --    | --    | --     | --     | (9.5)  | --          | (9.5) 
|Metformin ER Profit Sharing    Agreement                                                            | --    | --    | 8.8    |        | --     | (8.8)       | --    
|Litigation accrual                                                                                  | --    | --    | --     |        | --     | (3.0)       | (3.0) 
|Net margin improvement (decrease) due to volume, price, new products, foreign exchange and expenses | (1.7) | 0.4   | (3.6)  | (13.9) | 2.3    | 0.7         | (15.8)
|2004 as reported                                                                                    | $8.2  | $22.6 | $(4.3) | $2.8   | $(4.2) | $(20.7)     | $4.4  





Interest expense and amortization of debt issuance costs decreased $1.2 million to $14.6 million in 2004 due to decreased debt levels, lower amortization of debt issuance costs and lower interest rates versus a year ago.



The three months ended June 30, 2004 results include $1.9 million of expense associated with the write-off of deferred loan costs compared with $28.4 million of expense in 2003 results. In the second quarter of 2004, the Company prepaid $25 million of bank term debt and $32.0 million of mortgage notes payable and repaid $24.5 million in 5.75% convertibles.

The 2003 loss resulted from the extinguishment of $200 million 12 1/2% notes and the related issuance of $220 million of 8 5/8% notes. The extinguishment resulted in the expensing of $22.2 million in placement fees and the write-off of $6.2 million of deferred debt expense.

Other, Net

Other income (expense) netted to $13.0 million in 2004 compared to $1.2 million in 2003. Second quarter 2004 includes $14.8 million of income from a USHP Metformin ER agreement and sales of a product license and ANDA. A detail of Other income (expense) follows:



|                                      | Three Months Ended
|------------------------------------- | ------------------
|                                      | June 30,2004      
|Other income (expense), net:          |                   
|Interest income                       | $   0.8           
|Foreign exchange gains (losses), net  | (1.4)             
|Sale of license and ANDA              | 6.0               
|Metformin ER Profit Sharing Agreement | 8.8               
|Other, net                            | (1.2)             
|                                      | $13.0             



2003 Discontinued Operations

On September 30, 2003, the Company sold its French subsidiary for approximately $6.0 million. The net loss for this subsidiary of $0.5 million for the three months ended June 30, 2003 and $1.0 million for the six months ended June 30, 2003, is reflected in the Company's Consolidated Statement of Operations as loss from discontinued operations.

The following table details selected financial information for the French subsidiary included within discontinued operations:

|                                  | Three Months
Ended
June 30, | Six Months
Ended
June 30,
|--------------------------------- | --------------------------- | -------------------------
|($ in millions)                   | 2003                        | 2003                     
|                                  |                             |                          
|Revenues                          | $  1.5                      | $  2.8                   
|Loss from operations              | $(0.6)                      | $(1.1)                   
|Pretax loss                       | $(0.6)                      | $(1.2)                   
|Provision (benefit) for taxes     | $(0.1)                      | $(0.2)                   
|Loss from discontinued operations | $(0.5)                      | $(1.0)                   

Financial Condition

At June 30, 2004, stockholders' equity was $1,108.2 million compared to $1,132.0 million at December 31, 2003.  On a proforma basis, the ratio of long-term debt to equity was 0.63:1 at June 30, 2004 and 0.69:1 at December 31, 2003.



Cash flow from operations for the first six months of 2004 was $73.3 million compared to $19.4 million in 2003.  2004 cash flow increased relative to 2003 primarily due to the payment in 2003 of $22.2 million in placement fees associated with the extinguishment of the $200 million 12 1/2% Notes, and due to better accounts receivable collections in 2004. In 2004, accounts receivable balances were reduced by $3.7 million from December 31, 2003, net of foreign exchange, compared to an increase of $18.0 in 2003 from December 31, 2002.  Cash flow from operations also includes an increase in inventory of $26.9 million due primarily to the purchase of raw materials and production of finished product to prepare for the launch of gabapentin.   The increase in inventory is partially offset by a corresponding increase in accounts payable related to the build up of inventory.

At June 30, 2004, the Company had $31.1 million in cash and available short-term lines of credit of $14 million.  Under its 2001 Credit Facility, the Company had $78 million available.



Compliance with these financial covenants in 2004 is dependent on the Company's EBITDA as defined by the credit agreement, and therefore the Company's ability to generate increasing amounts of operating income, or on the Company's ability to reduce the amount of its outstanding debt. Since December 2001, the Company has reduced the amount of its outstanding debt and the size of the original facility by prepaying term debt by $260 million and by lowering the revolving line of credit by $150 million.  On an overall basis, senior debt and total debt at June 30, 2004 were $576.4 million and $736.7 million, respectively, compared to $635.6 million and $817.2 million, respectively, at December 31, 2003.

The Company's EBITDA, as defined, is affected most directly by changes in operating income.  Operating income in 2004 has been negatively affected by corrective actions related to the Company's response to FDA Form 483's issued for the Company's U.S. Human Pharmaceuticals plants in Baltimore (liquids) and Elizabeth (solid dose). The corrective action plans have included consulting and other costs and have resulted in lower production and significant rationalization of the liquids product line at the Baltimore plant, production delays and interruptions at the Elizabeth plant, and no new product introductions during 2003 or through June 30, 2004, from either plant.

The FDA completed an inspection of the Company's Elizabeth solid dose site in December 2003 and advised the Company that, as a result of this inspection, product approvals relating to the Elizabeth site will be withheld pending a successful follow-up inspection.  The Company has no control over the timing of this follow-up inspection.  Major elements of the FDA compliance enhancement plan have been completed and the Company expects an FDA re-inspection in the upcoming months.  The Company expects to complete substantially all of the FDA compliance enhancement plan in Baltimore by the end of 2004, subject to the FDA's final review and satisfaction with the actions taken.  While the Company has received no indications from FDA, the total cost and timing of both the Elizabeth and Baltimore corrective action plans are subject to change based upon ongoing discussions with the respective Baltimore and New Jersey Districts of the FDA.

Except as noted in Note 1A, Financial Statement Restatement and Note 4, Long-term Debt, the Company remained in compliance with its debt covenants at June 30, 2004, with approximately $25,000 of EBITDA flexibility on its tightest covenant at quarter end, the Interest Coverage Ratio.  See Note 1A, Financial Statement Restatement and Note 4, Long-term Debt, for a discussion of violations of certain debt covenants at June 30, 2004 and December 31, 2003.  In April and May 2005, the Company has cured all of the violations of its debt covenants.

The Company developed its business and financial plan for 2004 and has continued to evaluate its flexibility in complying with each of the financial covenants as part of this process.  The Company's most recent operating income forecast indicates that by the fourth quarter 2004 without the launch of new products by USHP, the Company would have minimal flexibility in regard to the interest coverage ratio and/or the total debt to EBITDA covenant. To increase flexibility, the Company has requested and received an amendment which reduces the interest coverage ratio from 3:50:1.00 to 3:00:1.00 through and including December 31, 2004.  At March 31, 2005, the interest coverage ratio will increase from 3.00:1.00 to 3.25:1.00 and at June 30, 2005, the interest coverage ratio will increase from 3.25:1.00 to 3.50:1.00 and remain thereafter.  The amendment also increases the permitted leverage ratio from 4:00:1:00 to 4:25:1.00 through and including December 31, 2004.  At March 31, 2005, the permitted leverage ratio will decrease from 4.25:1.00 to 4.00:1.00 and at June 30, 2005, the permitted leverage ratio will decrease from 4.00:1.00 to 3.50:1.00 and remain thereafter. In addition, the amendment allows $30.0 million of cash restructuring expenses to be excluded from the calculation of EBITDA. The Company believes it has a number of options available to provide it with increased financial flexibility, thereby ensuring continued compliance with its covenants.  Certain of these options are entirely within the Company's control and others require actions of the bank group and/or a third party.  Options include:



·
	Aggressive asset management, including both working capital reduction programs and controls over capital expenditures, to generate free cash flow to enable the Company to continue to repay outstanding debt.  However, during 2004, the Company is making significant investments in inventory related to gabapentin that is subject to final regulatory approval and litigation.  Capital expenditures were $19.3 million for the six months ended June 30, 2004 compared to $20.7 million for the quarter ended June 30, 2003.

·
	Reduce operating costs. The Company continues to evaluate actions to reduce its cost base throughout 2004 and beyond.



·
	Continue to sell certain assets. In the first quarter of 2004, the Company bought the outstanding 50% of its Wynco joint venture and resold it within the first quarter generating approximately $4.0 million of incremental cash. In July of 2004, the Company completed the sale of the Aquatic Animal Health operations to an employee group for approximately $3.9 million and possible future contingent proceeds. The Company has engaged investment bankers to explore the possible sale of certain other assets.



It is possible that, if completed, certain of the divestitures could result in losses of up to $100 million. In addition, the potential divestitures could be dilutive to the Company's continuing earnings per share. There is no guarantee any divestiture will be completed.



·
	Reduce subordinated convertible debt by issuing common stock. At June 30, 2004, the Company has $160.3 million of convertible Subordinated Notes outstanding that can be retired with the agreement of the holders by the exchange of common stock. In the second quarter, the Company repurchased a portion of its 5.75% convertible debt to the level required to maintain compliance with the loan covenants.



·
	Obtaining amendments to the bank covenants to allow for certain of the actions noted above and to provide additional flexibility in the timing and application of the financial ratio tests.  In October 2001, the Company borrowed $622.0 million from the bank group and at June 30, 2004 the amount outstanding was $356.4 million (a reduction of $265.6 million). The Company has obtained amendments as follows:



·
	In the fourth quarter of 2003, the bank group agreed to an amendment which allowed for specified asset sales, permitted exclusions of restructuring and refinancing charges of up to $10.0 million from EBITDA and the minimum net worth definitions, and amended the leverage ratios to delay the timing of further covenant restrictions.



·
	In May 2004, the 2001 Credit Facility was amended to allow for certain actions associated with the Company's ability to achieve increased financial flexibility. The amendment includes provisions enabling the Company to issue up to $200.0 million of senior subordinated notes to refinance the existing convertible notes, to prepay a local currency mortgage secured loan of approximately $32.0 million, modify the requirements to prepay debt facilities with proceeds from the potential sale of certain assets/businesses, allow for certain covenant add-backs associated with gabapentin inventory and other minor items.



·
	In August 2004, the credit facility was amended to reduce interest coverage from 3.50:1.00 to 3.00:1.00 and increase the permitted leverage ratio for 4.00:1.00 to 4.25:1.00 through and including December 31, 2004.  At March 31, 2005, the interest coverage ratio will increase from 3.00:1.00 to 3.25:1.00 and at June 30, 2005, the interest coverage ratio will increase from 3.25:1.00 to 3.50:1.00 and remain thereafter.  At March 31, 2005, the permitted leverage ratio will decrease from 4.25:1.00 to 4.00:1.00 and at June 30, 2005, the permitted leverage ratio will decrease from 4.00:1.00 to 3.50:1.00 and remain thereafter.  In addition, the amendment allows $30.0 million of cash restructuring expenses to be excluded from the calculation of EBITDA.

The Company believes that its performance in the reduction of the loan, and its previous experience in working with the bank group would assist it in obtaining future amendments, if necessary.

While the Company cannot assure its success in executing any of the above-noted actions, it will endeavor to take the actions necessary to maintain sufficient financial flexibility with its debt covenants and remain in compliance.

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed in Footnote 17.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosure - This information is set forth under the caption "Derivative Financial Instruments" included in Item 7 of the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003.



Item 4. Controls and Procedures



Disclosure Controls and Procedures







Based upon a current assessment, the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2004, based upon the material weaknesses in internal control over financial reporting described below.  The Company's CEO and CFO had originally concluded, at the time the company first filed its Form 10-Q for the quarter ended June 30, 2004, that the Company's disclosure controls and procedures were effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries), which is required to be included in the Company's  Exchange Act filings.  However, subsequent to the initial conclusion reached by these officers, new information relating to the Company's disclosure controls and procedures came to such officers' attention.  Although the Company's CEO and CFO believe that when the Form 10-Q relating to the quarter ended June 30, 2004 was originally filed, that they had reasonable grounds to conclude that the disclosure controls and procedures were effective as of the end of such quarter, they have determined that their original conclusions needed to be revised as reflected above.



Management is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company's internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company,
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the board of directors of the Company, and
- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.



Management performed an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, utilizing the criteria described in  "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").  The objective of this assessment is to determine whether the Company's internal control over financial reporting was effective as of December 31, 2004.



A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  In our assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, we identified the following internal control deficiencies that management concluded were material weaknesses.



(A) Effective controls to ensure the completeness and accuracy or the review and monitoring of customer discount reserves and certain accrual accounts affecting a number of accounts at our USG business, including revenues, accounts receivables and accrued expenses, were not maintained at December 31, 2004.  This control deficiency resulted in audit adjustments to the year end 2004 financial statements.  (B) In addition, effective controls to ensure the completeness and accuracy of income tax account balances, including the determination of deferred income tax assets and liabilities, income taxes payable, and income tax expense, were not maintained at December 31, 2004 and we did not have effective controls in place to ensure that the Company's income tax accounts were periodically reconciled to supporting documentation.  This control deficiency resulted in audit adjustments to the year end 2004 financial statements.  (C) Further, the Company did not have effective controls over the determination of segment disclosures in conformity with generally accepted accounting principles at December 31, 2004.  Specifically, as a result of a first quarter 2004 change in its internal reporting of financial information, the Company should have provided disaggregated segment disclosures for U.S. Generics and U.S. Branded Pharmaceuticals in its financial statements beginning in the first quarter of 2004.  This control deficiency resulted in the Company restating its interim financial statements for each quarter in 2004 to correct its segment disclosures.  This control deficiency also resulted in an audit adjustment to the Company's year end 2004 financial statement segment disclosures and impacted the amount of the goodwill impairment charge recorded in the fourth quarter of 2004.  (D) Also, the Company did not maintain effective controls to ensure the appropriate review and monitoring of compliance with certain debt covenants and the resulting classification of debt at December 31, 2004.  This control deficiency resulted in the Company failing to identify and disclose non compliance with certain debt covenants and in the misclassification of the related debt as long-term rather than current. This control deficiency resulted in the restatement of the Company's year-end 2004 and 2003 financial statements as well as the interim financial statements for the quarters ended September 30, 2003 and March 31, 2004, June 30, 2004 and September 30, 2004 and in the amendment of disclosures with respect to debt covenant compliance.  These control deficiencies could result in a misstatement in the aforementioned accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Based on the factors described above, management has concluded that these control deficiencies constitute four material weaknesses in internal control over financial reporting as of December 31, 2004.



Because of the material weaknesses described above, the Company's management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, based on the criteria in "Internal Control - Integrated Framework" issued by the COSO.



Management had previously concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because of the existence of the material weaknesses described in (A), (B) and (C) above.  In connection with the restatement of the Company's consolidated financial statements described in Note 1A to the consolidated financial statements, management has determined that the material weakness described in (D) above also existed as of December 31, 2004.   Accordingly, management has restated its report on internal control over financial reporting to include this additional material weakness.







The reportable conditions noted were (i) inadequate staffing and supervision at the USHP division, leading to the untimely identification and resolution of certain accounting matters; and (ii) failure to perform timely reviews, substantiation and evaluation of certain general ledger account balances at the USHP division.  These two reportable conditions are related to the USG material weakness described above.







Management has discussed the material weaknesses and corrective actions with the Audit and Corporate Governance Committee.



Other than as described herein, there were no significant changes in the Company's internal controls, or to the Company's knowledge, in other factors that could significantly affect the Company's internal controls and procedures subsequent to the Evaluation Date.

___________

Statements made in this Form 10-Q/A, are forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Information on other significant potential risks and uncertainties not discussed herein may be found in the Company's filings with the Securities and Exchange Commission including its Form 10-K/A for the year ended December 31, 2004.





PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

See Note 12 to the Company's Consolidated Condensed Financial Statement included in Part 1 of this Report for a discussion of material developments in the Company's legal proceedings.



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



(e)  During the first half of 2004, in connection with the exercise of options to purchase Common Stock of the Company by an executive who was legally prohibited from selling such shares in the public market, the Company repurchased 2,029 shares of its Common Stock for an aggregate cost of $40 thousand.



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

The stockholders of the company voted on one item at the Annual Meeting of Stockholders held on May 25, 2004:  the election of nine directors to terms ending in 2005.

Proxies were solicited by Alpharma Inc. and there was no solicitation in opposition to the nominees listed in the proxy statement.  All such nominees were elected to the classes indicated in the proxy statement pursuant to the vote of the stockholders as follows:



|Class A Directors | VotesFor   | Withheld 
|----------------- | ---------- | ---------
|                  |            |          
|William I. Jacobs | 31,942,378 | 4,206,726
|Peter G. Tombros  | 32,276,135 | 3,872,969
|Farah M. Walters  | 34,581,335 | 1,567,769
|                  |            |          
|                  |            |          
|Class B Directors |            |          
|                  |            |          
|Glen E. Hess      | 11,872,897 | 0        
|Jill Kanin-Lovers | 11,872,897 | 0        
|Ramon M. Perez    | 11,872,897 | 0        
|Einar W. Sissener | 11,872,897 | 0        
|Robert Thong      | 11,872,897 | 0        
|Ingrid Wiik       | 11,872,897 | 0        

Item 6.   Exhibits and Reports on Form 8-K

(a)      Exhibits



|10.1 | Amended and Restated Supply Agreement between Plantex USA, Inc. and Purpac Pharmaceutical Co., dated April 26, 2004 is filed as an Exhibit to this Report.**      
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                   
|10.2 | Selective Waiver Agreement by and between Alpharma Inc. and Teva Pharmaceutical Industries Ltd., dated April 26, 2004.**                                          
|     |                                                                                                                                                                   
|10.3 | Amendment No. 4 to the Credit Agreement, dated as of April 19, 2004, among the Company, Bank of America and other lenders is filed as an Exhibit to this Report.**
|     |                                                                                                                                                                   
|10.4 | Amendment No. 5 to Bank Credit Agreement, dated as of August 3, 2004, among the Company, Bank of America and other lenders is filed as an Exhibit to the Report.**
|     |                                                                                                                                                                   
|31.0 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as an Exhibit to this Report.                                                  
|     |                                                                                                                                                                   
|32.0 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are filed as an Exhibit to this Report.                                                  



*  Portions of this Exhibit have been omitted pursuant to a request for confidential treatment.

** Previously filed with original Form 10Q and Form 10Q/A for quarter ended June 30, 2004.

(b)       Reports on Form 8-K

A current report on Form 8-K was furnished to the SEC on May 6, 2004, in connection with the Company's intention to restate its consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2003 and for the year ended December 31, 2003.



A current report on Form 8-K was furnished to the SEC on May 7, 2004, in connection with the Company's announcement of its financial results for the first quarter ended March 31, 2004.





SIGNATURES



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

|                  |                                                                                          
|----------------- | -----------------------------------------------------------------------------------------
|                  | Alpharma Inc.(Registrant)                                                                
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|                  |                                                                                          
|                  |                                                                                          
|Date: May 5, 2005 | /s/ Matthew Farrell 
Matthew Farrell
Executive Vice President and
Chief Financial Officer
|Date: May 5, 2005 | /s/ Jeffrey S. Campbell
Jeffrey S. Campbell
Vice President and Controller