1. BASIS OF PRESENTATION


The Darvon(R)/Darvocet(R) Product Line (the "Product") includes all formulations
of the analgesics Darvon(R)/Darvocet(R) that are sold under the Eli Lilly and
Company (the "Company") brand names. The special purpose financial statements
include sales of the Product in the United States and Puerto Rico.


Historically, financial statements were not prepared for the Product. These
statements have been developed from the historical accounting records of the
Company and represent the direct revenues and standard costs of sale of the
Product. Manufacturing capacity variances are not included in standard cost of
sales, as discussed in Note 2. Further, no marketing or selling costs are
included in the financial statements as the Company did not promote the Product
during the periods presented.


All of the estimates in the financial statements, as described in Note 2, are
based on assumptions that Company management believes are reasonable. However,
these estimates are not necessarily indicative of the net sales and costs that
would have resulted if the Product had been operated as a separate entity.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



REVENUE RECOGNITION



Revenue from sales of products is recognized at the time title of goods passes
to the buyer and the buyer assumes the risks and rewards of ownership. This is
generally at the time products are shipped to the customer. Provisions for
discounts and rebates to customers are established in the same period the
related sales are recorded.



NET SALES



Net sales include certain sales deductions. Sales deductions include deductions
specifically attributable to the Product and deductions allocated to the Product
by management. The types of deductions included in the calculation of net sales
are as follows:


SALES REBATES - Medicaid rebates and wholesaler chargebacks are charged
to the Product monthly based on actual historical rebate payments.
Actual chargebacks are allocated to the Product monthly, based on
actual sales.


CASH DISCOUNTS - Cash discounts are allocated to the Product based upon
the percentage of actual Product gross sales less chargebacks and
wholesaler returns to total Company gross sales less chargebacks and
wholesaler returns.


SALES RETURNS - Sales returns are directly attributable to identifiable
products based on actual sales returns.



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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



STANDARD COST OF SALES



Standard cost of sales includes raw materials, direct labor, and plant overhead.
Certain overhead costs are specifically identifiable to specific brands, and the
remaining costs are allocated based on the Product's percentage of total
production for the production facility. Manufacturing capacity variances are not
allocated to individual product lines and, thus are not included in cost of
sales.


Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives of the assets. Generally, the lives of the
buildings range from twelve to fifty years, and five to eighteen years for
machinery and equipment.



USE OF ESTIMATES



The preparation of the special purpose financial statements of
Darvon(R)/Darvocet(R) Product Contribution in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of gross profit for the years ended December 31,
2001, 2000 and 1999. Actual results could differ from those estimates.


3. SIGNIFICANT CUSTOMERS


The Product is distributed through wholesalers that serve physicians and other
health care professionals, pharmacies and hospitals. The Company sold Product to
three significant wholesalers in 2001. Sales to these three wholesalers in the
aggregate are estimated to have been 85% to 95% of total Product sales in 2001,
2000, and 1999. These three wholesalers are estimated to have each accounted for
between 20% and 40% of total Product sales in each of these three years. Certain
of these wholesalers have acquired some of their competitors during the three
years presented. This sales data has been adjusted to include the
pre-acquisition sales to any companies acquired by these three wholesalers
during the periods presented.



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aaiPharma Inc.