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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

For the fiscal year ended DECEMBER 31, 1997
                                                        OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from __________ to __________.

Commission File No. 0-15098

                         JONES MEDICAL INDUSTRIES, INC.
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             (Exact name of registrant as specified in its charter)


    DELAWARE                                                43-1229854
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(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

1945 CRAIG ROAD, ST. LOUIS MISSOURI                                 63146
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(Address of principal executive offices)                          (Zip Code)


Registrant's telephone number, including area code:  (314) 576-6100

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class                   Name of exchange on which registered

        NONE
---------------------------            --------------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.04 PAR VALUE
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                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X/ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of February 27, 1998, is approximately $853
MILLION. (This calculation is based on the closing price of the stock as quoted
on the NASDAQ National Market and excludes shares of stock held by directors and
officers of the Registrant.)

Number of shares outstanding of registrant's Common Stock as of February 27,
1998: 28,696,348.


Documents incorporated by reference:  NONE.
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INTRODUCTORY NOTES

Tapazole(R), Levoxyl(R), Thrombin-JMI(R), Brevital(R)Sodium, Bronson(TM),
Bronson Pharmaceutical(TM), MD Pharmaceutical(TM), Liqui-Char(R), Therevac(R),
Derma-Scrub(R), Soloxine(R), Nasabid(R), Vanex(TM), Obenix(R),  Triostat(R) and
Cytomel(R) are trademarks owned by or under license to the Company. All other
trademarks and registered trademarks used in this Form 10-K are the property of
their respective owner. Unless the context otherwise requires, references
herein to: (i) "JMI" or the "Company" refer to Jones Medical Industries, Inc.
and its subsidiaries; (ii)"JMI Canton" refers to the Company's wholly-owned
subsidiary, JMI Canton Pharmaceuticals, Inc.; (iii)"GenTrac" refers to the
Company's wholly-owned subsidiary, GenTrac, Inc.; (iv)"JMI-Daniels" refers to
the Company's wholly-owned subsidiary, JMI-Daniels Pharmaceuticals, Inc.;
(v)"JMI-Phoenix" refers to the Company's wholly-owned subsidiary, JMI-Phoenix
Laboratories, Inc.; (vi) "Daniels Acquisition" refers to the Company's
acquisition of Galen Drugs of Florida, Inc. ("Galen"), and Galen's
subsidiaries, including Daniels Pharmaceuticals, Inc. ("Daniels"), on August
30, 1996 in a transaction accounted for as a pooling of interests; and (vii)
"Abana Acquisition" refers to the Company's acquisition of Abana
Pharmaceuticals, Inc. ("Abana") on December 31, 1996.

In February, 1998, the Company's Board of Directors ("Board") authorized the
Company to entertain offers to purchase the Company's nutritional supplements
product line and contract manufacturing operations. On March 16, 1998, by
unanimous written consent, the Board approved: (i) a plan to discontinue and
dispose of the Company's nutritional supplements product line and contract
manufacturing operations; and (ii) an agreement with certain operating
subsidiaries of Twinlab Corporation ("Twinlab") to sell the Company's
nutritional supplements product line and contract manufacturing operations
conducted through its wholly-owned subsidiary, JMI-Phoenix, for $55 million in
cash. The Company and Twinlab executed the agreement on March 17, 1998. The
actions to be taken pursuant to the Board's March 16, 1998 plan represent
'discontinued operations' requiring a restatement of the Company's historical
financial information under applicable accounting principles and regulations,
and the operations to be discontinued are hereinafter collectively referred to
as "Discontinued Operations." As a result of the Company's restatement of its
historical financial information, the comparative dollar values and percentage
amounts used throughout this report reflect this restatement and relate solely
to the Company's continuing pharmaceutical operations, unless otherwise
indicated.

The following discussion contains forward-looking statements that involve risks
and uncertainties. Certain of these risks and uncertainties are discussed below
in Item 1 as they relate to the Company's existing operations and strategies and
in Item 7 as they relate to the Company's results of operations and financial
condition. The Company's actual results in future periods may differ
significantly from the results discussed in or anticipated by such
forward-looking statements.


                                     PART I

ITEM 1. BUSINESS

GENERAL

     Founded in 1981, Jones Medical Industries, Inc. manufactures, markets,
distributes and sells specialty pharmaceutical products under its own trademarks
and tradenames. As a result of the decision relating to the Discontinued
Operations, the Company will cease to manufacture, market, distribute and sell
nutritional supplements and cease contract manufacturing operations
(See "Business--Discontinued Operations"). Subject to stockholder approval at
the Company's Annual Meeting of Shareholders to be held on May 19, 1998, the
name of the Company will be changed to 'JONES PHARMA INCORPORATED' to reflect
the nature of the Company's continuing operations.
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BUSINESS STRATEGY

     The Company's business strategy is to acquire specialty prescription
pharmaceutical product lines or operations that complement or expand the
marketing or distribution of existing product lines and to develop and apply
marketing initiatives to such products. All of the Company's product
lines have been acquired through a series of acquisitions which have
complemented or expanded its existing lines of business. The Company intends to
leverage its existing marketing and sales capabilities through additional
strategic acquisitions of complementary pharmaceutical products and businesses
and by expanding and increasing the penetration of its existing customer base.
The key elements of the Company's strategy include:

     Acquire and Build Market Share in Specialty Pharmaceuticals. Since
inception, the Company has purchased domestic rights to certain specialty
pharmaceuticals addressing markets such as prescription treatments for thyroid
disorders and critical care treatments involving hemostasis and anesthesia. The
Company intends to continue to seek the rights to products that
it believes can benefit from focused marketing efforts.

     Leverage Established Pharmaceutical Marketing and Sales Efforts. The
Company intends to maximize productivity of its sales force through replacement
of existing, lower-volume products with new products with larger market
opportunities. In addition, the Company intends to raise the awareness of
selected products through targeted sales efforts focused on hospital
pharmacists, prescribing physicians and other health care professionals in the
United States.

     Improve Margins Through Focus on High-Margin Pharmaceutical Products and
Cost Control. The Company intends to increase gross and operating margins by
using sales personnel efficiently, minimizing corporate overhead and focusing on
high margin products. The Company believes that by focusing on a limited number
of products, the Company can increase sales by maximizing the productivity of
its sales force and controlling overhead costs.

SIGNIFICANT OPERATING EVENTS DURING 1997

     Acquisition of Triostat and Cytomel. On June 27, 1997, the Company
acquired the products Triostat and Cytomel from SmithKline Beecham Corporation
("SmithKline") for $22.8 million in cash. Although the Company is not obligated
to pay SmithKline royalties on future sales of Triostat and Cytomel, the
agreement with SmithKline does provide that in the event that the Company files
for and receives approval for any additional indications for Triostat from the
United States Food and Drug Administration ("FDA"), the Company will be
obligated to pay SmithKline a ten (10) year royalty equal to ten percent (10%)
of the net incremental sales of Triostat resulting from such additional
indications. Triostat is a relatively new drug, having received its new drug
application from the FDA in 1991, whereas Cytomel is a relatively mature drug
which had not been actively promoted in the past by SmithKline.   While the
Company plans to market Triostat and Cytomel through its hospital-based sales
and marketing staff, there can be no assurance that the Company will be
successful in its marketing and sales efforts, and failure to successfully
market and sell Triostat and Cytomel could have a material adverse effect on
the Company's business, financial condition and results of operations.

PRINCIPAL PRODUCTS

     The Company's principal products primarily serve the endocrine treatment
and the critical care segments of the health care industry as well as the
companion animal segment of the veterinary industry. The Company's principal
products are as follows:

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     Endocrine Pharmaceuticals.

        Tapazole. Tapazole is an anti-thyroid product used for the treatment of
    hyperthyroidism; the extreme form of hyperthyroidism is commonly known as
    'Graves' Disease.' Tapazole is prescribed to inhibit the synthesis and
    production of natural thyroid hormones and to reduce the size of the goiter
    (an abnormal growth resulting from overactivity of the thyroid gland).
    Although the Company is not aware of any generic forms of Tapazole in the
    marketplace, Tapazole faces competition from propylthiouracil ("PTU"). PTU
    is manufactured by Lederle Labs ("Lederle"), a division of American
    Cyanamid Company, which has greater financial resources than the Company,
    and is marketed and distributed by a number of independent generic
    pharmaceutical companies who acquire product from Lederle. During 1997, the
    Company had net sales of $18.3 million relating to Tapazole, equal to 20.6%
    of the Company's sales.

         Levoxyl. Levoxyl is a synthetic thyroid hormone for the treatment of
     hypothyroidism and is reported to be the second most widely prescribed
     brand of levothyroxine in the United States. Levothyroxine pharmaceuticals
     are used to supplement or enhance endocrine levels produced by underactive
     thyroid glands. The U.S. domestic market for levothyroxine is estimated at
     $330 million annually and is dominated by Synthroid(R) which is
     manufactured by Knoll Pharmaceutical Company, a subsidiary of Boots Plc,
     which has substantially greater sales, marketing and financial resources
     than the Company. New FDA requirements, effective August 14, 2000, mandate
     that Levoxyl receive new drug approval from the FDA (See "Business--
     Government Regulation"). Competitive action in the marketing and
     distribution of Synthroid(R) as well as the process of obtaining new drug
     approval could disrupt the Company's strategies for market development of
     Levoxyl and have a material adverse effect on the Company's business and
     financial condition and its results of operations. During 1997, the
     Company had net sales of $22.2 million relating to Levoxyl, equal to 25.0%
     of the Company's sales.

         Triostat. Triostat is an injectable thyroid replacement hormone which
     is used to treat acute thyroid disorders. Triostat is a synthetic form of
     a naturally occurring hormone called triiodothyronine or T3. It is
     primarily used for the treatment and management of myxedema coma and
     precoma. The Company is not aware of any generic forms of Triostat in the
     market place and under current FDA regulations, no generic form of
     injectable T3 may be introduced prior to January 1, 1999. However, after
     that date, other pharmaceutical companies may seek approval to market and
     sell generic forms of injectable T3 which could lead to a decrease in
     the price that customers may be willing to pay for Triostat. With respect
     to Triostat, there can be no assurances that the Company will be able to
     compete effectively with new market entrants, that additional competitors
     will not enter the market or that competitive factors will not have a
     material adverse effect on the Company's business, financial condition and
     results of operations. During the period from the Company's acquisition of
     Triostat on June 27, 1997 through December 31, 1997, the Company had net
     sales of $1.8 million relating to Triostat, equal to approximately 2.0% of
     the Company's 1997 sales.

         Cytomel. Cytomel is a thyroid replacement hormone in tablet form which
     is used to treat chronic thyroid disorders. Like Triostat, it is a
     synthetic form of T3. It is primarily used for replacement or supplemental
     therapy for patients suffering from cretinism, myxedema and primary and
     tertiary hypothyroidism. As with Triostat, the Company is not aware of any
     generic forms of Cytomel in the market place. However, other pharmaceutical
     companies may choose to market and sell generic forms of T3 which could
     lead to a decrease in the price that customers may be willing to pay for
     Cytomel. With respect to Cytomel, there can be no assurances that the
     Company will be able to compete effectively with new market entrants, that
     additional competitors will not enter the market or that competitive
     factors will not have a material adverse effect on the Company's business,
     financial condition and results of operations. During the period from the
     Company's acquisition of Cytomel on June 27, 1997 through December 31,
     1997, the Company had net sales of $2.6 million relating to Cytomel, equal
     to approximately 2.9% of the Company's 1997 sales.


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     Critical Care Pharmaceuticals.

         Thrombin-JMI. During invasive surgical procedures, surgeons typically
     limit bleeding in order to control blood loss and maintain visibility of
     the surgical site. Surgeons may apply pressure bandages, suture severed
     vessels and/or use a topical hemostatic agent to control bleeding within
     the surgical site. In most cases, collagen, cellulose or thrombin-based
     hemostatic agents are used because of their ability to rapidly begin the
     clotting process. Thrombin-JMI is a thrombin-based topical hemostatic
     agent derived from bovine blood. The Company's thrombin product offers
     advantages over collagen and cellulose products because of faster activity
     at the surgical site. Additionally, because of its physical
     characteristics, Thrombin-JMI does not need to be removed from the
     surgical site prior to closure, whereas non-thrombin competing products
     need to be removed, often leading to recurrence of bleeding. The topical
     hemostat market was estimated to be greater than $90 million in the United
     States in 1997. In 1997, thrombin products accounted for 23% of the United
     States topical hemostat market of which the Company has an approximate 95%
     share with sales of $19.4 million, equal to 21.8% of Company sales.

         Brevital Sodium. The intravenous ("I.V.") anesthetic market is split
     into segments based on type and length of therapeutic, diagnostic or
     surgical procedures. Short-term general anesthesia is required when
     performing minor surgical procedures such as dental surgery, cardioversion
     and other brief ambulatory surgeries. Long-term general anesthesia is
     required when more complex and invasive surgical procedures are performed.
     In order to administer long-term general anesthesia, induction agents are
     used to begin the anesthetic event and are subsequently followed by
     another drug or gas to maintain the anesthesia. The Company's product,
     Brevital Sodium ("Brevital"), is a general I.V. anesthetic agent that
     addresses both the short-term and long-term anesthesia markets and was
     originally introduced by Eli Lilly and Company ("Lilly") in 1961. Brevital
     is used in both long-term and short-term procedures because of its rapid
     onset of action and quicker recovery time. Brevital's rapid onset of
     action also makes it a useful induction agent prior to the administration
     of another agent to maintain the anesthesia. The I.V. anesthetic market in
     the United States is estimated to be $500 million. The Company acquired
     the exclusive domestic perpetual license to distribute Brevital from Lilly
     in August 1995. During 1997, the Company had net sales of $9.1 million
     relating to Brevital, equal to 10.2% of the Company's sales.

     Veterinary Pharmaceuticals.

         The Company also manufactures and distributes veterinary
     pharmaceuticals, the most prominent of which are Soloxine, Tussigon and
     Pancrezyme. Soloxine is used for the treatment of hypothyroidism in
     companion animals. Tussigon is used for pain management and to treat kennel
     cough. Pancrezyme is a small animal digestive aid. Veterinary
     pharmaceuticals accounted for $7.9 million or 8.9% of the Company's 1997
     sales.

MARKETING AND SALES

     The Company markets and promotes its products primarily through a direct
sales force. The Company also attends major medical conventions and symposia and
utilizes advertising in trade publications. The Company maintains product line
sales staffs directed to the physician and hospital markets together with an
internal marketing staff which provides marketing administration and support and
customer service.

     The Company's marketing and sales staff consists of 103 field sales
personnel of whom 83 market and sell endocrine pharmaceuticals, 17 market and
sell critical care pharmaceuticals and 3 market and sell veterinary
pharmaceuticals.



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     Marketing activity for endocrine pharmaceuticals is focused on physicians
prescribing the Company's products and on retail pharmacies carrying the
Company's products for prescription and branded generic use. In addition to
selling efforts based upon the merits and characteristics of its products, the
Company provides physicians with sample product packages for trial use by
patients and to aid in establishing dosage levels prior to the time at which
prescriptions are written. The cost of sampled products, including related
packaging and recordkeeping expense, is charged as a selling expense.

     Sales activities for critical care pharmaceuticals are focused on major
hospitals and hospital buying groups which, in the aggregate, manage and
contract for a majority of the purchasing of pharmaceuticals for private
sector hospitals through bid and contract agreements. The Company presently
has contracts for one or more product lines with substantially all of the
major hospital buying groups. The Company's marketing efforts focus upon
hospital-based physicians in various departments including, operating rooms,
emergency rooms, anesthesiology and directors of pharmacy.

PRODUCT SOURCES AND MANUFACTURING

     In 1997, approximately 40.0% of the Company's sales were from products
manufactured for the Company by third parties and the remaining 60.0% of sales
were from products manufactured by the Company. The percentage of products
manufactured is subject to variance from year to year based not only on the
relative mix of the Company's existing product lines, but also as a result of
acquisition and disposition activity. The Company manufactures pharmaceuticals
at its facilities in St. Petersburg, Florida, Middleton, Wisconsin, and St.
Louis, Missouri, each of which is registered with the FDA.

     Products Manufactured by Others. Historically, the Company has relied on
third-party manufacturers to produce certain of its products. As a result,
increases in the percentage of in-house manufacturing arising from the Company's
current production of Thrombin-JMI at its GenTrac facility in Middleton,
Wisconsin, and its production of Levoxyl and other products at its facility in
St. Petersburg, Florida, are more than offset by contract manufacturing for the
Company of Brevital and Tapazole by Lilly, Triostat by SB Pharmco Puerto Rico
("SB Pharmco") and Cytomel by Schering Canada, Inc. ("Schering"). With respect
to such third party manufacturing, there can be no assurance that the Company
will be able to obtain adequate supplies of products so manufactured in a timely
fashion, or at all. The Company also faces the risk that upon expiration of the
term of any third-party manufacturing agreement it may not be able to renew or
extend the agreement with the third-party manufacturer, to obtain an alternative
manufacturing source from other third parties or develop internal manufacturing
capabilities on commercially viable terms, if at all. In such circumstances the
Company may be unable to continue to market its products as planned and could be
required to abandon or divest itself of a product line on terms which would
materially adversely affect the Company's business, financial condition and
results of operations. The Company's principal products which are currently
manufactured by third parties are:

         Brevital and Tapazole. Brevital and Tapazole are each manufactured for
     the Company by Lilly from whom these product lines were acquired in 1995
     and 1996, respectively. Pursuant to each such acquisition, the Company
     obtained a perpetual, exclusive license to market and distribute the
     product in the United States and entered into 10-year manufacturing
     agreements with Lilly for supply of the products. As to either product, the
     manufacturing agreement may be terminated by Lilly at any time after the
     first five years by giving at least five years notice to the Company prior
     to ceasing the manufacture of the product for the Company. The Brevital
     agreement was entered in August 1995 and the Tapazole agreement was entered
     in March 1996. In the event of such termination, Lilly has agreed to use
     reasonable efforts to assist the Company in obtaining all the necessary
     licenses and approvals to enable the Company or an alternative manufacturer
     to manufacture either product. Although Lilly continues to manufacture and
     distribute Brevital and Tapazole for its own account in connection with
     foreign markets, there can be



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     no assurance that Lilly will continue to meet FDA or product specification
     standards for Brevital or Tapazole or that the Company's demands for these
     products can be met in a consistent and timely manner. Lilly is the sole
     manufacturer of Brevital and Tapazole and any alternative manufacturer
     would require regulatory change-in-site qualification to manufacture these
     products. In the event of any interruption in the supply of Brevital or
     Tapazole from Lilly due to regulatory or other causes, there can be no
     assurance that the Company could make alternative manufacturing
     arrangements on a timely basis, if at all. Such an interruption would have
     a material adverse effect on the Company's business, financial condition
     and results of operations.

     Triostat. Triostat is manufactured for the Company under a two (2) year
     supply agreement with SB Pharmco, an affiliate of SmithKline, from whom
     this product line was acquired in June 1997. The Company has agreed to use
     its best efforts to transfer manufacturing of Triostat to its own facility
     or that of a third party within the 2-year term; however, if approval to
     transfer the manufacturing is not received from the FDA within such term,
     the Company may extend the 2-year term for one (1) additional year. Upon
     termination of the supply agreement, there can be no assurance that the
     Company will have made alternative manufacturing arrangements on a timely
     basis, if at all. The failure to make such alternative manufacturing
     arrangements would have a material adverse effect on the Company's
     business, financial condition and results of operations.

     Cytomel. Cytomel is manufactured for the Company by Schering under a
     certain Third Party Manufacturing Agreement dated March 11, 1991, entered
     into between a division of SmithKline and Schering, the rights and
     obligations of which were respectively assigned to, and assumed by, the
     Company in connection with the acquisition of Cytomel from SmithKline in
     June 1997. The Third Party Manufacturing Agreement runs for a term of
     three (3) years and provides for automatic renewal for successive three
     (3) year terms unless either party provides eighteen (18) month advance
     written notice of non-renewal prior to the end of any term. While the
     Company has not received any non-renewal notice from Schering, in the
     event that such agreement is not renewed, there can be no assurance that
     the Company could make alternative manufacturing arrangements on a timely
     basis, if at all. The failure to make such alternative manufacturing
     arrangements would have a material adverse effect on the Company's
     business, financial condition and results of operations.

     Products Manufactured by the Company. In 1996, in connection with the
Daniels Acquisition, the Company assumed operations of its St. Petersburg,
Florida facility which has been manufacturing pharmaceuticals since 1975. At
this facility, the Company processes raw materials purchased from outside
sources to produce final products in compressed tablet form. Products are
produced within the guidelines of FDA regulations pertaining to prescription
drugs.

     In 1991, in connection with the Company's acquisition of GenTrac, the
Company assumed operations of the GenTrac facility located in Middleton,
Wisconsin which is licensed by The Center for Biologics Evaluation and Research
("CBER"), a division of the FDA, for the production of therapeutic and
diagnostic thrombin products. Biological products such as Thrombin-JMI must be
produced at a licensed biologic facility specifically licensed to manufacture
that product. The Company's GenTrac facility, which produces Thrombin-JMI, is
licensed for the production of thrombin United States Pharmacopoeia ("U.S.P.")
products and also acts as the licensed manufacturer of Thrombogen(R), a line of
proprietary thrombin products manufactured for Johnson & Johnson Medical, Inc.
("Johnson & Johnson") under distribution and development agreements. A reduction
in the volume of product sold to Johnson & Johnson, or a failure to continue
production for it on terms satisfactory to the Company upon expiration of the
current contract in the year 2000, could adversely affect overhead rates at the
facility and have a material adverse effect upon the Company's operating
results.

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PRINCIPAL CUSTOMERS AND SUPPLIERS

     The Company's principal customers are retail pharmacies and hospitals.
The Company's sales, however, are through wholesale drug distributors, who in
turn supply product to pharmacies, hospitals and physicians.  No one customer
accounted for 10% or more of the Company's sales in 1997.

     The Company has not experienced to date any significant shortages in
supplies of raw materials. The raw materials utilized by the Company in its
manufacturing operations are purchased from a variety of suppliers. The Company
endeavors to maintain multiple suppliers in order to minimize delays or cost
disparities in the event of supplier shortages.

     The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, (i) the manufacture
of Brevital and Tapazole are each dependent upon Lilly's ability to procure
certain raw materials used in the manufacture of such products; (ii) the
manufacture of Triostat is dependent upon SB Pharmco's ability to procure
certain raw materials used in the manufacture of such product; and (iii) the
manufacture of Cytomel is dependent upon Schering's ability to procure certain
raw materials used in the manufacture of such product. Although the Company has
no reason to believe that Lilly, SB Pharmco or Schering will be unable to
procure adequate supplies of such raw materials on a timely basis, disruptions
in supplies of Brevital, Tapazole, Triostat or Cytomel, including delays due to
the respective third party manufacturer's inability to procure raw materials,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

     The manufacture and sale of pharmaceuticals is highly competitive. Many of
the Company's competitors are large well-known pharmaceutical companies which
have considerably greater financial, sales, marketing and technical resources
than those of the Company. Additionally, many of the Company's present and
potential competitors have research and development capabilities that may allow
such competitors to develop new or improved products that may compete with the
Company's product lines. The pharmaceutical industry is characterized by rapid
product development and technological change. The Company's products could be
rendered obsolete or uneconomical by the development of new pharmaceuticals to
treat the conditions addressed by the Company's products or as the result of
technological advances affecting the cost of production, or as a result of
marketing or pricing action by one or more of the Company's competitors. The
Company's business, financial condition and results of operations could be
materially and adversely affected by any one or more of such developments.

     Tapazole competes with PTU, a product manufactured by Lederle and sold by a
number of independent generic pharmaceutical companies. Levoxyl competes with
Synthroid(R), which is produced by Knoll Pharmaceutical Company, and other
levothyroxine producers. Thrombin-JMI competes with those thrombin products
produced for and marketed by Johnson & Johnson. Brevital faces competition in
the I.V. anesthetic market from other I.V. anesthetic products, including
Diprivan, which is produced by Stuart Pharmaceuticals, a business unit of
Zeneca, Inc., and Versed, produced and marketed by Roche Labs, a division of
Hoffmann- LaRoche, Inc. Each of the named competitors has substantially greater
marketing, sales and financial resources than the Company.



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TRADEMARKS

     The Company's products are sold under a variety of trademarks. While the
Company believes that it has valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the United States
government. The Company's licenses from Lilly for the Brevital and Tapazole
trademarks are limited to the United States.

GOVERNMENT REGULATION

     The manufacturing, processing, formulation, packaging, labeling, storage,
promotion, distribution and advertising of the Company's products are subject to
extensive regulation by one or more federal agencies including the FDA, the Drug
Enforcement Administration ("DEA"), the Environmental Protection Agency ("EPA"),
the Federal Trade Commission ("FTC"), the Occupational Safety and Health
Administration, the Department of Agriculture,  the Consumer Product Safety
Commission ("CPSC") and the United States Customs Service. These activities are
also regulated by various agencies of the states and localities in which the
Company's products are sold.

     All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA. New drugs must be approved by the FDA before they may be
marketed, except for those prescription drugs about which the FDA has knowledge
but for which the FDA is not requiring applications either because of
'grandfather status' under 1938 legislation, 'grandfather status' under 1962
legislation, or for other reasons. The FDA has the authority to revoke existing
approvals, or to review the status of currently exempt pharmaceuticals and
require application and approval, of prescription drugs if new information
reveals that they are not safe or effective. The FDA also regulates the
advertising of prescription drugs.

     The FDA announced in an August 14, 1997, Federal Register Notice that
orally administered drug products containing levothyroxine sodium are now
classified as new drugs. Manufacturers who wish to continue to market these
products must submit new drug applications ("NDA"). After August 14, 2000, any
levothyroxine sodium product marketed without an approved NDA will be subject
to regulatory action. Levoxyl, since it was marketed prior to the date of this
notice will continue to be eligible for marketing until August 14, 2000. The
FDA is allowing the Company and other current manufacturers three (3) years to
obtain approved NDA's. The Company plans to dedicate significant resources to
this NDA process during 1998 and 1999 and expects to incur costs in excess of
$2 million to secure an approved NDA for Levoxyl.

     The Company's marketing of OTC drugs is affected by the establishment of
FDA monographs, a regulatory system arising under 1962 legislation. FDA
monographs effectively exempt from FDA approval OTC drugs which are produced and
labeled in accordance with the standards set forth in FDA regulations. The
rulemaking process to establish or revise an FDA monograph allows a 12 month
grace period to make appropriate formulation or label changes following
publication of the final monograph. The FTC also regulates advertising of OTC
drug products. Drug products must be manufactured, packaged, and labeled in
accordance with their approvals and in conformity with current good
manufacturing practice ("CGMP"). The Company is subject to periodic inspection
by the FDA to assure such compliance. Drugs must be distributed, sampled and
promoted in accordance with FDA requirements.

     The Company also manufactures and sells drugs which are "controlled
substances" as defined in the Controlled Substances Act. The Company must comply
with the regulatory guidelines for this class of drugs. These include security
and recordkeeping requirements which are administered and audited by the DEA, a
division of the United States Department of Justice.


                                        8
<PAGE>   10
     The FDA has extensive enforcement powers over the activities of
pharmaceutical manufacturers, including authority to seize and prohibit the sale
of unapproved or non-complying products, and to halt manufacturing operations
that are not in compliance with CGMP. Both the FDA and DEA may impose civil
penalties and seek criminal penalties arising from non-compliance with
applicable regulations. Any restriction or prohibition applicable to sales of
products marketed by the Company could materially adversely affect the Company's
business, financial condition, and results of operations.

     The sampling of products to prescribing physicians is subject to the
Prescription Drug Marketing Act ("PDMA") which permits regulation of such
activities at both the federal and state level. Under PDMA, states are permitted
to require registration of manufacturers and distributors who provide sample
pharmaceuticals even if such manufacturers or distributors have no place of
business within the state and states are permitted to adopt regulations limiting
the distribution of sample products to licensed practitioners. PDMA imposes
extensive recordkeeping and reporting requirements on the Company to prevent the
sale of sampled pharmaceutical products or other diversion from their intended
use.

ENVIRONMENTAL STANDARDS

     The Company uses certain hazardous substances which require special
handling and disposal as dictated by the EPA. The Company believes that its
manufacturing operations are in compliance with environmental protection and
other government regulations.

EMPLOYEES

     At February 1, 1998, the Company had 562 full-time employees: 288 in
manufacturing, 127 in pharmaceutical sales and marketing, 47 in finance and
administration, 71 in quality assurance, and 29 in distribution. The Company
believes that its relationship with its employees is good. The Company estimates
that in connection with disposition of the Discontinued Operations, there will
be a reduction of approximately 200 employees.

DISCONTINUED OPERATIONS

     The Company's Discontinued Operations involved the marketing and
distribution of a full line of branded nutritional supplements (marketed
under the Bronson Pharmaceutical and MD Pharmaceutical tradenames) and contract
manufacturing. Prior to the restatement of its historical financial information
to reflect Discontinued Operations, sales of nutritional supplements and
contract manufacturing accounted for approximately 29% of the Company's total
1997 sales.

     The Bronson Pharmaceutical product line consists of over 260 branded
vitamin, mineral and herbal extract formulations sold through catalogs and
direct mailings to health care and nutritional professionals as well as mail
order and retail customers. Products bearing the MD Pharmaceutical tradename
are sold exclusively through military base retail outlets and consist of a
broad line of branded nutritional supplements which compete with national
brands. The Company manufactures nutritional supplements through its
subsidiary, JMI-Phoenix, at its facilities in Tempe, Arizona which are being
sold as part of the Discontinued Operations. In addition, certain nutritional
supplement and contract manufacturing has been conducted at the Company's
Canton facility.



                                       9
<PAGE>   11
ITEM 2. PROPERTIES

     The Company's distribution operations, including warehousing and shipping
for the Company's branded products, are located in a 150,000 square foot
facility on a 15 acre site in St. Louis, Missouri which was acquired by the
Company in mid-1993. The 24,000 square feet of office space within the facility
permit it to serve as corporate headquarters and to house the Company's
administration, sales and marketing operations and certain laboratory and
quality assurance operations. Liquid products, including Liqui-Char and the
Derma-Scrub line, are also manufactured and packaged at this facility.

     The Company owns a facility at St. Petersburg, Florida, where its
subsidiary, JMI-Daniels, manufactures and packages pharmaceuticals for the
Company. The facility consists of six buildings containing a total of
approximately 42,000 square feet providing manufacturing, laboratory, packaging,
warehouse and administrative space.

     The Company manufactures thrombin products for the Company and Johnson &
Johnson in a 40,000 square foot FDA-licensed sterile fill facility owned by the
Company which is located on an eight acre site in Middleton, Wisconsin.

     The Company owns a 25,000 square foot facility at Canton, Ohio where its
subsidiary, JMI Canton, warehouses, packages and distributes products.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not presently involved in any litigation in which it
believes an adverse outcome would materially adversely affect the Company's
business, financial condition or results of operations. However, the Company has
been involved in litigation and is subject to certain claims as set forth below.

     The Company, as successor to Abana, is a defendant in a number of lawsuits
involving the manufacture and sale of dexfenfluramine, fenfluramine and
phentermine (collectively, "Fen/Phen"). The plaintiffs in these cases claim
injury as a result of ingesting a combination of these weight-loss drugs. Abana
was, and the Company now is, a distributor of Obenix, its branded phentermine
product; however, neither the Company nor Abana has at any time manufactured
Obenix or other Fen/Phen combinations. These suits have been filed in various
jurisdictions throughout the United States and in each of these suits, the
Company or Abana is one of many defendants. The Company denies any liability
incident to its distribution of Obenix and has tendered defense of these
lawsuits to its insurance carriers for handling. The lawsuits are in their
preliminary stages and it is too early to determine what, if any, liability the
Company will have with respect to the claims set forth in these lawsuits. In
the event that the Company's insurance coverage is inadequate to satisfy any
resulting liability, the Company will have to resume defense of these lawsuits
and be responsible for the damages, if any, that are awarded against it.
Management of the Company does not believe that the outcome of these lawsuits
will have a material adverse effect on the Company's business, financial
condition and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted during the fourth quarter of 1997 to a vote of
security holders of the Company through the solicitation of proxies or
otherwise.


                                       10
<PAGE>   12
                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock ("Common Stock") is traded on the Nasdaq
National Market under the symbol "JMED". The following table sets forth the
splits-adjusted quarterly high and low sales prices for the Common Stock
reported by Nasdaq for the periods indicated:


<TABLE>
<CAPTION>
                                                   High                       Low
                                                   ----                       ---
<S>                                            <C>                           <C>
1996(1)

       First Quarter                           $ 30 1/3                      $ 10 3/8

       Second Quarter                            39 1/2                        25 2/3

       Third Quarter                             50 1/2                        21

       Fourth Quarter                            48 5/8                        32 1/2


1997

       First Quarter                             38                            23 5/8

       Second Quarter                            47 1/2                        24 1/2

       Third Quarter                             45 1/4                        26

       Fourth Quarter                            38 1/4                        26 3/4
</TABLE>


       As of February 27, 1998, there were approximately 931 stockholders of
record and a total of 28,696,348 shares of Common Stock outstanding.

       Approximately 20 million shares or 70.0% of the Company's outstanding
Common Stock are held in depository accounts representing "street name" or
similar nominee ownership. The Company believes that such shares are held for
more than 15,000 non-record beneficial holders' accounts.

       During 1996 and 1997, cash dividends of $0.077 and $0.095 per share,
respectively, were declared with respect to the Common Stock.

       The future declaration and payment of cash dividends is subject to the
discretion of the Board of Directors and will be dependent on many factors,
including the Company's earnings, financial condition and capital needs of the
Company and such other factors as are deemed relevant by the Company's Board of
Directors. The Company anticipates that it will continue to pay a dividend each
quarter; however, the Company's Board of Directors intends to review this policy
from time to time.

--------
(1)      The quarterly high and low sale prices for the Common Stock in 1996
         have been adjusted to reflect a three for two split of the Common Stock
         effective March 1, 1996, and a second three for two split of the Common
         Stock effective June 10, 1996.


                                       11
<PAGE>   13
ITEM 6. SELECTED FINANCIAL DATA

     The following table summarizes certain selected consolidated financial
data of the Company which should be read in conjunction with the accompanying
consolidated financial statements of the Company and the notes thereto and
which has been restated to reflect Discontinued Operations. The financial data
as of December 31, 1997, 1996, 1995 and 1994 and for the four years ended
December 31, 1997 have been derived from the audited consolidated financial
statements of the Company. The financial data as of December 31, 1993 and for
the year then ended has been combined by the Company using the Company's
audited historical financial statements and audited financial data concerning
Galen. In the opinion of management of the Company, all adjustments necessary
for a fair presentation of the restated results arising from the pooling of
interest of the Company and Galen as a result of the Daniels Acquisition are
reflected. In the following summary consolidated financial data, for 1995 and
prior years, fiscal years of Galen ending September 30 have been combined with
the Company's historical results for years ending December 31. Beginning in
1996, both the Company and Galen were combined using a December 31 fiscal year
end. See Note 1 of Notes to Consolidated Financial Statements appearing
elsewhere in this Report.

STATEMENT OF OPERATIONS DATA:
(In thousands of dollars except per share data)

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31
                                                   -----------------------------------------------------------------------
                                                       1993             1994           1995            1996           1997
                                                       ----             ----           ----            ----           ----

<S>                                                <C>                <C>             <C>             <C>           <C>
Sales from continuing operations                   $ 36,121           $ 41,154        $ 39,937        $64,181       $88,781

Cost of sales                                        14,801             18,268          14,639         20,277        25,430
                                                   --------           --------        --------        -------       -------

Gross profit                                         21,320             22,886          25,298         43,904        63,351

Selling, general and administrative expenses         12,795             14,485          16,426         20,166        25,271

Non-recurring merger expense (1)                       --                 --              --            5,743          --
                                                   --------           --------        --------        -------       -------

Operating income from continuing operations           8,525              8,401           8,872         17,995        38,080

Other income (expense)                                  (80)              (486)           (484)         1,755         2,315
                                                   --------           --------        --------        -------       -------

Income before taxes from continuing
operations                                            8,445              7,915           8,388         19,750        40,395

Provision for taxes                                   3,210              3,008           3,074          8,232        15,351
                                                   --------           --------        --------        -------       -------

Income from continuing operations                     5,235              4,907           5,314         11,518        25,044

Income from discontinued operations                   2,349              2,613           7,075          6,621         6,926
                                                   --------           --------        --------        -------       -------

Net income                                         $  7,584(2)        $  7,520        $ 12,389        $18,139       $31,970
                                                   ==========         ========        ========        =======       =======


Earnings per share (3)

  Basic: From continuing operations                $   0.17           $   0.21        $   0.22        $  0.43       $  0.88

         From discontinued operations              $   0.07           $   0.11        $   0.30        $  0.24       $  0.24
                                                   --------           --------        --------        -------       -------

         Total                                     $   0.24           $   0.32        $   0.52        $  0.67       $  1.12
                                                   ========           ========        ========        =======       =======


  Diluted: From continuing operations              $   0.15           $   0.19        $   0.21        $  0.41       $  0.85


         From discontinued operations              $   0.07           $   0.10        $   0.29        $  0.24       $  0.24
                                                   --------           --------        --------        -------       -------

         Total                                     $   0.22           $   0.29        $   0.50        $  0.65       $  1.09
                                                   ========           ========        ========        =======       =======


  Cash dividends declared per share                  $0 .04           $  0.045        $   0.05        $ 0.077       $ 0.095
                                                   ========           ========        ========        =======       =======

</TABLE>

                                       12
<PAGE>   14
----------------
Notes to Statement of Operations Data:

     (1) Reflects non-recurring expenses associated with the Daniels Acquisition
         which was treated as a "pooling of interests" for financial accounting
         and reporting purposes. In the absence of such charges, operating
         income from continuing operations and income from continuing operations
         for the 1996 year would have been $23.7 million and $15.8 million,
         respectively, and total diluted earnings per share would have been
         $0.80

     (2) Net income and earnings per share in 1993 do not reflect the cumulative
         effect of a change in accounting principle of $207,100.

     (3) Earnings per share amounts have been presented, and where appropriate,
         restated to conform to FASB Statement No. 128, "Earnings Per Share"
         which the Company adopted in 1997.



BALANCE SHEET DATA:
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31
                           -----------------------------------------------------------------
                             1993          1994          1995           1996          1997
                             ----          ----          ----           ----          ----


<S>                        <C>           <C>           <C>           <C>            <C>
Total assets               $58,113       $63,342       $86,238       $177,233       $204,228

Current assets             $22,232       $26,385       $33,337       $ 80,551       $ 85,113

Current liabilities        $ 7,823       $ 7,952       $14,405       $ 10,032       $  6,580

Working capital            $14,409       $18,433       $18,932       $ 70,519       $ 78,533

Long-term debt             $ 5,400       $ 6,778       $11,420       $     -0-      $     -0-

Shareholders' equity       $40,832       $44,478       $55,939       $161,919       $191,726

Per share book value(*)    $  1.17       $  1.84       $  2.31       $   5.69       $   6.69

Current ratio                2.8:1         3.3:1         2.3:1          8.0:1         12.9:1
</TABLE>


-----------------------
Note to Balance Sheet Data:

         (*)      Per share book value is computed assuming conversion of
                  preferred stock outstanding in 1995 and earlier years.



                                       13
<PAGE>   15
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The Company's decision to dispose of its nutritional supplements
product line and contract manufacturing operations requires a restatement of its
historical financial information under applicable accounting principles and
regulations to reflect such operations as 'discontinued operations' (See
Introductory Note and Item 1 elsewhere in this report). As a result of the
Company's restatement of its historical financial information, the comparative
dollar values and percentage amounts used throughout Item 7 of this report
reflect this restatement and relate solely to the Company's continuing
pharmaceutical operations, unless otherwise indicated.

         The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results in future periods
may differ significantly from the results discussed in or anticipated by such
forward-looking statements. Certain factors which may impact results for future
periods are discussed below under the captions "Overview" and "Risks and
Uncertainties."

OVERVIEW

         Founded in 1981, the Company manufactures, markets and distributes
specialty pharmaceutical products. The Company has achieved significant
increases in sales and net income through acquisitions of pharmaceutical
products and businesses to complement or expand the Company's business and to
add selected manufacturing capacity to support certain product lines. At
December 31, 1997, the Company had completed 16 such acquisitions of which five
were completed in the preceding 28 months, including the acquisition of Cytomel
and Triostat from SmithKline on June 27, 1997.

        In addition to the significant revenue growth derived from acquisition
activity, the Company pursues internal growth initiatives to develop marketing
opportunities with respect to the acquired product lines and businesses. Sales
from continuing operations and income from continuing operations have increased
from $36.1 million and $5.2 million in 1993, respectively, to $88.8 million and
$25.0 million in 1997, respectively, representing four-year compounded annual
growth rates of approximately 25.0% in sales from continuing operations and
48.0% in income from continuing operations.

        Sales from continuing operations are reported net of returns, rebates
and discounts during the period in which product is shipped. Product rebates
and discounts are incurred due to volume or other contractual allowances on
certain sales under contracts with hospitals, buying groups and managed care
organizations. As of December 31, 1996 and 1997, the Company maintained
reserves of $1.9 million and $2.2 million, respectively, for unclaimed but
anticipated rebates and discounts. Product returns, pursuant to operating
policies with respect to unused pharmaceuticals, are less than 2% of gross
annual sales. Return policies applicable to products acquired as a result of
the Daniels Acquisition were revised effective December 31, 1996, to conform to
other pharmaceuticals having lower rates of product return. Sales from
continuing operations are reflected prior to royalties due on sales of certain
pharmaceuticals arising from product line acquisitions. Such royalties are
recorded as a selling expense. Royalty arrangements typically extend for a
fixed period from the date of acquisition and do not require minimum payments
to maintain ownership or any rights to products.

        During the year ending December 31, 1997, sales from continuing
operations were $88.8 million comprised of $44.9 million of endocrine
pharmaceuticals, $28.5 million of critical care pharmaceuticals, $7.9 million
of veterinary pharmaceuticals and $7.5 million of other products. The increase
in such sales has been influenced by acquisition activity as well as by
enhanced marketing activity, customer demand and product availability. In
August 1995 the Company acquired domestic rights to the Brevital pharmaceutical
line from Lilly for $14 million and a 10-year royalty of 5% on net sales of
Brevital. Sales of Brevital represented



                                       14
<PAGE>   16
approximately 11.0% of the Company's sales from continuing operations in 1996
and approximately 10% in 1997. In March 1996 the Company acquired domestic
rights to the Tapazole pharmaceutical line from Lilly for $26 million and a
10-year royalty of 5% on net sales of Tapazole. Sales from continuing operations
of Tapazole for periods after the 1996 acquisition represented approximately
19.0% of The Company's sales from continuing operations in 1996 and
approximately 21.0% in 1997. Sales from Levoxyl, a key product acquired in
connection with the Daniels Acquisition in 1996, represented approximately 22.0%
of the Company's sales from continuing operations in 1996 and has increased to
approximately 25.0% in 1997. In June 1997, the Company acquired domestic, Puerto
Rican and Canadian rights to the Cytomel and Triostat pharmaceutical lines from
SmithKline for $22.8 million. Although the Company is not obligated to pay
SmithKline royalties on future sales of Cytomel and Triostat, the acquisition
agreement does provide that in the event Triostat is approved by the FDA for any
additional indications, the Company will be obligated to pay SmithKline a
10-year royalty of 10% on net incremental sales of Triostat resulting from such
indications. Since their acquisition on June 27, 1997, combined sales from
continuing operations of Cytomel and Triostat represented approximately 5.0% of
such Company sales in 1997.

         The Company's strategy for continued growth is materially dependent
upon its continued ability to acquire, by purchase or exclusive license
arrangements, niche-market pharmaceuticals which can be promoted through
existing marketing and distribution channels. The Company also intends to market
aggressively the principal products in its current portfolio together with new
formats or formulations of existing products and, when appropriate, to enhance
its marketing and distribution channels.

        In pursuing its acquisition strategy, the Company relies to a
significant degree upon the availability of product lines subject to
divestiture or sale by other manufacturers. There can be no assurance that the
Company will be able to acquire rights to additional products on acceptable
terms, if at all, and the failure to do so could have a material adverse effect
upon the Company's rate of growth and on its business and financial conditions
and results of operations. The success of the Company's efforts in managing its
existing business is subject to a number of risks and uncertainties. Factors
which may affect the Company include its dependence upon a limited number of
key pharmaceuticals, the Company's ability to integrate new product
acquisitions and to adapt and expand its marketing capabilities to the needs of
such products, and its reliance upon third-party manufacturers to produce
certain key products. The Company's operations and growth will also be
influenced by regulatory and governmental policies and by competitive forces
within the pharmaceutical industry. In particular,the FDA announced in an
August 14, 1997, Federal Register Notice that orally administered drug products
containing levothyroxine sodium are now classified as new drugs. Manufacturers
who wish to continue to market these products must submit NDA's. After August
14, 2000, any levothyroxine sodium product marketed without an approved NDA
will be subject to regulatory action. Levoxyl, since it was marketed prior to
the date of this notice will continue to be eligible for marketing until August
14, 2000. The FDA is allowing the Company and other current manufacturers three
(3) years to obtain approved NDA's. The Company plans to dedicate significant
resources to this NDA process during 1998 and 1999 and expects to incur costs
in excess of $2 million to secure an approved NDA for Levoxyl.

RESULTS OF OPERATIONS

        The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere in this report. The following table sets forth
certain data as a percentage of net sales from continuing operations for the
periods indicated.



                                       15
<PAGE>   17
<TABLE>
<CAPTION>
             PERCENTAGE OF SALES                                  Year Ended December 31,
                                                            ---------------------------------
                                                             1995          1996         1997
                                                             ----          ----         ----

<S>                                                         <C>           <C>           <C>
Sales from continuing operations                            100.0%        100.0%        100.0%

Cost of sales                                                36.7          31.6          28.6
                                                            -----         -----         -----

Gross profit                                                 63.3          68.4          71.4

Selling, general & administrative expenses                   41.1          31.4          28.5

Non-recurring merger expense                                 --             9.0*         --
                                                            -----         -----         -----

Operating income from continuing operations                  22.2          28.0          42.9

Other income (expenses)

     Interest income                                          0.7           3.7           2.9

     Interest expense                                        (1.6)         (0.9)         (0.3)

     Other miscellaneous income (expenses)                   (0.3)         --            --
                                                            -----         -----         -----

Income from continuing operations (before income tax)        21.0          30.8          45.5

Provision for income taxes                                    7.7          12.8          17.3
                                                            -----         -----         -----

Income from continuing operations                            13.3          18.0          28.2

Income from discontinued operations                          17.7          10.3           7.8
                                                            -----         -----         -----

Net income                                                   31.0%         28.3%         36.0%
                                                            =====         =====         =====
</TABLE>

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

*    Transaction costs and other non-recurring expenses arising in connection
     with the Daniels Acquisition and charged against operating income in
     accordance with "pooling of interests" accounting treatment. In the absence
     of such charges, operating income from continuing operations would have
     been 37.0% of net sales and income from continuing operations (before
     income tax) would have increased to 39.7%.

Sales From Continuing Operations

     Sales from continuing operations for the year ended December 31, 1997,
increased 38.3% to $88.8 million from $64.2 million for the year ended December
31, 1996, following an increase in 1996 of 60.7% to $64.2 million from sales
from continuing operations of $39.9 million for the year ended December 31,
1995. In both 1996 and 1997 the Company's increases in sales from continuing
operations were the result of the acquisition of Brevital (August 1995), the
acquisition of Tapazole (March 1996), the acquisition of Triostat and Cytomel
(June 1997) and internal sales growth in both unit and dollar growth in the
Company's primary products.

     Specifically, sales from continuing operations grew due to both unit and
dollar sales growth of Thrombin-JMI, Levoxyl and Brevital, as well as a full
twelve months of Tapazole sales (versus nine months in 1996) and six months of
sales of Cytomel and Triostat.

     Sales from continuing operations in 1996 grew due to both unit and dollar
sales growth of Thrombin-JMI and Levoxyl, as well as the inclusion of four
additional months of Brevital sales in 1996, and the acquisition of Tapazole in
March 1996.


                                       16
<PAGE>   18
Gross Profit

     Gross profit during 1997 increased 44.3% or $19.4 million to $63.4 million
from $43.9 million in 1996. As a percentage of sales from continuing operations,
margins increased to 71.4% in 1997 from 68.4% in 1996 due to the continued sales
growth of the Company's higher margin products.

     Gross profit during 1996 increased 73.5% or $18.6 million to $43.9 million
from $25.3 million in 1995. As a percentage of sales from continuing operations,
margins grew to 68.4% in 1996 from 63.3% in 1995 as a result of greater
manufacturing efficiencies and sales increases in the higher margin products.

Selling, General and Administrative Expenses

     Selling expenses increased 39.2% or approximately $4.0 million to $14.4
million in 1997 from $10.4 million in 1996 due to increased royalties related to
sales of Brevital and Tapazole in 1997, the addition of 55 endocrine field sales
personnel in December, 1996, increased administrative fees to hospital buying
groups resulting from sales increases in Thrombin-JMI and Levoxyl and increased
sampling of products to physician prescribers. As a result of the addition of
the sales and marketing staff and the planned increase in sampling of products
to physician prescribers in 1997, it was expected that selling expenses would
increase significantly in 1997; however, as a percentage of sales from
continuing operations, the Company was able to hold selling expenses relatively
flat at 16.2% of sales from continuing operations in 1997 versus 16.1% of sales
from continuing operations in 1996.

     Selling expenses increased 26.0% or $2.2 million to $10.4 million in 1996
from $8.2 million in 1995 due to increased royalties, administrative fees and
the increase in the endocrine sales staff from 10 persons in 1995 to 20 persons
in 1996. As a percentage of sales from continuing operations, these expenses
decreased to 16.1% in 1996 from 20.6% in 1995.

     General and administrative expenses remained relatively flat in 1997 at
$7.5 million compared to $7.4 million in 1996 and as a percentage of sales from
continuing operations, declined from 11.5% in 1996 to 8.4% in 1997.

     General and administrative expenses in 1996 increased 6.6% or $455,000 to
$7.4 million from $6.9 million in 1995 primarily as a result of higher salaries
and overhead, but declined as a percentage of sales from continuing operations
to 11.5% in 1996 from 17.4% in 1995.

     There were no research and development expenses in 1997 as compared to
$410,000 in 1996 due to the reduction of new product development at the
Company's wholly-owned subsidiary, JMI-Daniels.

     Research and development expenses declined 9.3% in 1996 to $410,000 from
$452,000 in 1995 primarily due to the reduction of ongoing expenses by GenTrac
related to development efforts for pre-mixed liquid thrombin formulations.

     Amortization expenses associated with intangible assets and included in
selling, general and administrative expenses increased 66.9% to $3.4 million in
1997 from $2.0 million in 1996 due to a full year of amortization expense
associated with the Tapazole product line acquired in March 1996, the Abana
Acquisition on December 31, 1996 and a half-year of amortization expense
associated with the acquisition of Cytomel and Triostat in June 1997. As a
percentage of sales from continuing operations, amortization expense increased
from 3.1% in 1996 to 3.8% in 1997.


                                       17
<PAGE>   19
     Amortization expenses increased 144.1% to $2.0 million in 1996 from $0.8
million in 1995 due to the acquisition of the Tapazole product line in March
1996 and a full year of amortization expense associated with the Brevital
product line acquired in August 1995. As a percentage of sales from continuing
operations, these expenses increased from 2.1% in 1995 to 3.1% in 1996.

     A one time acquisition charge of $5.7 million was taken in 1996 in
conjunction with certain costs and expenses associated with the Daniels
Acquisition which was treated as a 'pooling of interests' transaction.
Approximately $3.5 million of such charges related to compensation items
directly or indirectly related to the change of control of Daniels, including
certain costs paid by shareholders, and $1.8 million to financial advisory
services incurred by Daniels. The remaining charges related primarily to
transaction expenses including the fees and expenses of counsel and accountants
for both Daniels (and its parent, Galen) and the Company.

Operating Income From Continuing Operations

     Operating income from continuing operations during 1997 increased 111.6% or
$20.1 million to $38.1 million from $18.0 million in 1996, and increased as a
percentage of sales from continuing operations to 42.9% in 1997 from 28.0% in
1996, as the result of higher overall gross profits and marginal increases in
operating expenses.

     Operating income from continuing operations during 1996 increased 102.8% or
$9.1 million to $18.0 million from $8.9 million in 1995 and increased as a
percentage of sales from continuing operations to 28.0% in 1996 from 22.2% in
1995 as a result of a greater increase in gross profits offset partially by an
increase in operating expenses.

Other Income (Expense)

     Interest income from investing activities increased to $2.6 million in 1997
from $2.3 million in 1996 as a result of higher cash balances. Interest expense
of $238,000 in 1997 was down from interest expense of $553,000 in 1996 due to
the final payment in the third quarter of 1997 under the borrowings related to
the acquisition of the Brevital product line. At December 31, 1997, the Company
had no outstanding debt.

     Interest income from investing activities increased sharply to $2.3 million
in 1996 from $304,000 in 1995 as the result of the $75 million cash infusion
from the April 1996 sale of additional common stock. Interest expense, primarily
associated with borrowings related to the acquisition of the Brevital product
line which were paid with a portion of the proceeds from the stock offering,
decreased from $655,000 in 1995 to $553,000 in 1996.

Income Taxes

     The provision for income taxes in 1997 decreased to 38.0% of pre-tax income
compared to 41.7% of pre-tax income in 1996, due to certain non-recurring merger
expenses associated with the Daniels Acquisition in 1996 that were not tax
deductible.

     The provision for income taxes increased to 41.7% of pre-tax income in 1996
compared to 36.6% in 1995 due to the non-recurring merger expenses associated
with the Daniels Acquisition discussed above.


                                       18
<PAGE>   20
Income From Continuing Operations

     Income from continuing operations increased 117.4% or $13.5 million to
$25.0 million in 1997 from $11.5 million in 1996, and increased as a percentage
of sales from continuing operations to 28.2% in 1997 from 18.0% in 1996.

     In 1996, income from continuing operations increased 116.7% or $6.2 million
over 1995. As a percentage of sales from continuing operations, income from
continuing operations increased to 18.0% in 1996 from 13.3% in 1995.

Income From Discontinued Operations

     Income from discontinued operations, net of taxes, remained relatively
unchanged at $7.1 million in 1995, $6.6 million in 1996 and $6.9 million in
1997. As a percentage of sales from continuing operations, income from
discontinued operations decreased from 17.7% of sales from continuing operations
in 1995 to 10.3% in 1996 and 7.8% in 1997. The decline in significance of the
Discontinued Operations results from the Company's strategy to increase, both
through acquisitions and internal growth, the sales of higher-margin products
and to focus on its proprietary pharmaceutical operations.

Net Income

     Net income increased 76.3% or $13.8 million to $32.0 million in 1997 from
$18.1 million in 1996, and increased as a percentage of sales from continuing
operations to 36.0% in 1997 from 28.3% in 1996.

     Net income increased 46.4% or $5.7 million to $18.1 million in 1996 from
$12.4 million in 1995, and decreased as a percentage of sales from continuing
operations to 28.3% in 1996 from 31.0% in 1995.

Fourth Quarter - 1996 to 1997

     Sales from continuing operations during the fourth quarter of 1997
increased $8.1 million, or 45.0%, to $26.0 million from $17.9 million during the
fourth quarter of 1996. Income from continuing operations during the fourth
quarter of 1997 increased $2.4 million, or 46.4%, to $7.6 million from $5.2
million in the fourth quarter of 1996. Net income during the fourth quarter of
1997 increased $2.6 million, or 38.2%, to $9.4 million from $6.8 million during
the fourth quarter of 1996. Diluted earnings per share from continuing
operations were $.26 in the fourth quarter of 1997 compared to $.18 per share in
the fourth quarter of 1996. Total diluted earnings per share during the fourth
quarter of 1997 were $.32, with 29.3 million average shares outstanding,
compared to $.24 per share, with 28.6 million average shares outstanding, during
the fourth quarter of 1996. The 1997 increases resulted from improved operations
throughout 1997, increased sales of higher margin products, the addition of an
endocrine sales force in December 1996, and the acquisition of Cytomel and
Triostat on June 27, 1997.

FINANCIAL CONDITION

Balance Sheet Information

     The Company's current ratio increased to 12.9:1 as of December 31, 1997
from 8.0:1 as of December 31, 1996, working capital increased to $78.5 million
as of December 31, 1997 from $70.5 million as of December 31, 1996, and
financing debt as a percentage of equity was eliminated as of December 31, 1997
versus 1.8% as of December 31, 1996 due to the final payment in the third
quarter of 1997 under the borrowings related to the acquisition of the Brevital
product line.

                                       19
<PAGE>   21
Liquidity and Capital Resources

     Since inception the Company has financed its operations primarily
through cash flow from operations, public and private sales of equity
securities and borrowings under revolving credit facilities. At December 31,
1997 and 1996, the Company had cash and cash equivalents of $49.9 million and
$52.2 million, respectively. The net cash generated from operating activities
of $31.7 million in 1997 was used to fund the acquisition of Cytomel and
Triostat for $22.8 million, capital improvements of $5.5 million, repayment of
the remaining outstanding long-term debt of $3.0 million and payment of
dividends to common stockholders of $3.3 million. The Company believes that
available resources and anticipated cash flows from operations are adequate
to meet currently anticipated operating needs and, together with the net
proceeds to be derived from Discontinued Operations, to fund future
acquisitions. While the Company does not maintain current lines of credit, it
believes it has sufficient borrowing capacity in the event that acquisition
opportunities cannot be funded from existing resources.

     Total assets increased $27.0 million to $204.2 million at December 31, 1997
from $177.2 million at December 31, 1996, and total liabilities decreased $2.8
million to $12.5 million at December 31, 1997 from $15.3 million at December 31,
1996. Intangible assets, principally licenses, trademarks and goodwill
associated with acquired products, increased $19.5 million, net of amortization
charges during the year, to $89.3 million at December 31, 1997, due to the
acquisition of Cytomel and Triostat in June 1997. Intangible assets as a percent
of shareholders' equity increased slightly from 43.1% at December 31, 1996 to
46.6% at December 31, 1997.

     Inventories increased $2.6 million to $15.4 million at December 31,
1997, from $12.8 million at December 31, 1996. This 20.4% inventory increase in
1997 compares favorably with the 25% sales growth in 1997 prior to the
restatement for Discontinued Operations. Accounts receivable increased to $16.7
million at December 31, 1997 from $11.3 million at December 31, 1996, primarily
due to a 45.0% increase in fourth quarter sales from continuing operations in
1997. In days outstanding, accounts receivable increased to 41 days at December
31, 1997 from 39 days at December 31, 1996. Net property plant and equipment
increased by $3.4 million to $ 27.5 million at December 31, 1997, from $24.2
million at December 31, 1996, primarily due to the continued expansion of the
Company's GenTrac and JMI-Daniels manufacturing facilities during 1997.

     The Company has experienced only moderate raw material and labor price
increases in recent years. While the Company has passed some price increases
along to customers, the Company has primarily benefited from rapid sales
growth, negating most inflationary pressures. The Company's manufacturing
operations are not capital intensive and, as such, the impact of inflation on
the property, plant and equipment and associated depreciation expense of the
Company has been minimal.

RECENT ACCOUNTING PRONOUNCEMENTS

     During 1997 the Company adopted FASB Statement No. 128, "Earnings Per
Share." The adoption of this Statement did not have a material effect on the
Company's consolidated financial statements or results of operations. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement's requirements.

RISKS AND UNCERTAINTIES

     The future results of operations, both annually and from
quarter-to-quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates. In addition to
factors discussed above and elsewhere in this report, the following should be
considered.

                                       20
<PAGE>   22
     Dependence upon Key Products. The Company's continued growth in revenues
and earnings is primarily attributable to its acquisitions of a limited number
of key products with higher gross margins. During 1997, sales of Tapazole,
Levoxyl, Brevital and Thrombin-JMI represented, in the aggregate, approximately
78.0% of total sales. Any factor adversely affecting either the availability of,
or the market for, any of such products would have a material adverse effect
upon the Company's business, financial condition and results of operations.

     Product Pricing Constraints and Adjustments. In addition to other
competitive factors, the ability of the Company to maintain or increase profit
margins for products depends in part on the availability of adequate
reimbursement to the Company's customers and patients from third-party health
care payors, such as governments, private insurers and managed care
organizations. Policies adopted by third-party payors influence the pricing of
medical services and products. There can be no assurance that reimbursement will
be available for the Company's products or that such third-party reimbursement
will be adequate. Moreover, under contracts with hospitals and buying groups
applicable to the sale of many of the Company's products, final sales prices to
distributors may be subject to retroactive adjustment based upon volume or other
contractual discounts provided by the Company. While the Company believes that
it has adequate reserves to cover such adjustments, there can be no assurance
that the Company will not experience price adjustments in the future that
significantly exceed such reserves.

     Regulation and Product Risks. The manufacturing, processing, formulation,
packaging, labeling, advertising and sampling of the Company's products are
subject to extensive regulations by various federal and state  agencies,
including the FDA, the FTC, the DEA, the CPSC, the Department of Agriculture,
and the EPA. In addition to other costs of compliance with such regulations,
the Company is subject to possible risks arising from changes in such
regulations or based upon alleged violations of regulations. Such risks could
render products unavailable or unmarketable or result in product recalls. Any
such development could materially and adversely affect the Company's
reputation, business, financial condition and results of operations. In
particular, the FDA announced in an August 14, 1997, Federal Register Notice
that orally administered drug products containing levothyroxine sodium are now
classified as new drugs. Manufacturers who wish to continue to market these
products must submit NDA's.  After August 14, 2000, any levothyroxine sodium
product marketed without an approved NDA will be subject to regulatory action.
Levoxyl, since it was marketed prior to the date of this notice will continue
to be eligible for marketing until August 14, 2000. The FDA is allowing the
Company and other current manufacturers three (3) years to obtain approved
NDA's. The Company plans to dedicate significant resources to this NDA process
during 1998 and 1999 and expects to incur costs in excess of $2 million to
secure an approved NDA for Levoxyl.

     In addition to government regulation, the Company faces an inherent risk of
exposure to product liability claims in the event use of a product is alleged to
have resulted in adverse effects for a patient or consumer. Such risk exists
even with respect to those products which are manufactured in regulated
facilities or otherwise possess regulatory approval for commercial sale. While
the Company has taken, and continues to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company currently has product liability insurance in the
amount of $20 million per claim and $20 million in the aggregate and excess
coverage of $5 million through an "umbrella" policy; however, there can be no
assurance that such insurance would be sufficient to cover potential claims or
that such insurance coverage will be available in the future on commercially
reasonable terms, if at all. Specifically, in the event that the Company's
insurance coverage is inadequate to satisfy any resulting liability arising from
current litigation involving claims related to dexfenfluramine, fenfluramine and
phentermine in which the Company has been named as a defendant, then the Company
will have to resume defense of such lawsuits and be responsible for the damages
(See "Legal Proceedings").  Accordingly, a product liability claim could
materially and adversely affect the Company's business, financial condition and
results of operations.


                                       21
<PAGE>   23
     Reliance on Third-Party Manufacturers. The Company has historically relied
on third party manufacturers to produce many of its products and currently
relies upon third party manufacturers for production of Brevital, Tapazole,
Triostat and Cytomel, each of which is a key pharmaceutical. Although such
products are subject to manufacturing arrangements with reliable and substantial
entities, alternative sources are not readily available and there can be no
assurance that the Company will be able to obtain adequate supplies of such
products in a timely fashion, or at all. Disruption in the available supply of
Brevital, Tapazole, Triostat or Cytomel or the inability of the Company to
obtain sources of supply upon the expiration of current manufacturing
arrangements would be materially adverse to the business, financial condition
and results of operations of the Company.

     Competition. Many of the Company's competitors have considerably greater
financial, sales, marketing and technical resources than those of the Company.
In addition, many of the Company's present competitors have extensive research
and development capabilities that may allow such competitors to develop new or
improved products that may compete with the Company's products. Technological
advances affecting the cost of production as well as marketing or pricing action
by one or more of the competitors could also materially and adversely affect the
Company's business, financial condition and results of operations.

COMPLIANCE WITH YEAR 2000

     Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in such
programs and/or a computer running such programs recognizing a date using "00"
as the year 1900 rather than the year 2000. This, in turn, could result in major
system failures or miscalculations, and is generally referred to as the "Year
2000" problem.

     The Company is currently in the process of upgrading and replacing its
information technology systems in the normal course of its business. In
connection with the upgrades and replacement systems, the new functionality will
be compliant, in all material respects, with Year 2000 requirements.
Accordingly, the Company does not expect the Year 2000 requirements to result in
significant additional costs or to have a materially adverse effect on the
Company's business, financial condition and results of operations; however,
there can be no assurances that this will be the case. In addition, the ability
of third parties with whom the Company transacts business adequately to address
their Year 2000 issues is outside the Company's control. There can be no
assurance that the failure of any third parties adequately to address their
respective Year 2000 issues will not have a material adverse effect of the
Company's business, financial condition and results of operations.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is a non-bank and non-thrift institution with a market
capitalization of less than $2.5 billion on January 28, 1997 and, therefore, is
not currently required to provide disclosure pursuant to Item 7A of this report
on Form 10-K.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

     Reference is made to the Financial Statements contained in Part IV hereof
and to the Index to Consolidated Financial Statements on page 35.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     There were no disagreements with the Company's auditors, Ernst & Young LLP,
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.


                                       22
<PAGE>   24
                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

DIRECTORS AND OFFICERS

     The following table sets forth certain information as of March 1, 1998 with
respect to the directors and executive officers of the Company.

<TABLE>
<CAPTION>
     Name                         Age              Position
     ----                         ---              --------

<S>                               <C>         <C>
Dennis M. Jones                   59          Chairman of the Board, President and Chief Executive Officer

Judith A. Jones(1)                57          Executive Vice President, Secretary, Treasurer and Director

Michael T. Bramblett              55          Executive Vice President and Director

G. Andrew Franz                   45          Senior Vice President-Operations-Pharmaceuticals and Director

David A. McLaughlin               50          Senior Vice President-Operations-Nutritionals and Director

Tina A. Kaufman                   38          Senior Vice President-Finance

Thomas G. Lewandowski             51          Senior Vice President-Sales

Edward A. Chod(2)                 44          Director

Stanley L. Lopata(1)(2)           83          Director

Thomas F. Patton(1)(2)            49          Director

L. John Polite, Jr.               76          Director
</TABLE>

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


(1)      Member of the Audit Committee of the Board of Directors.

(2)      Member of the Compensation Committee of the Board of Directors.

         Dennis M. Jones and Judith A. Jones are husband and wife. G. Andrew
Franz is the son-in-law of Dennis M. and Judith A. Jones.

         Dennis M. Jones, the founder of the Company, has been the Company's
Chairman of the Board, President and Chief Executive Officer since its inception
in March 1981. Mr. Jones has been involved primarily in the pharmaceutical
industry since 1964 in various marketing, management and administrative
positions.

         Judith A. Jones joined the Company in October 1981 and has been in
charge of the financial affairs and books of the Company since that time. Mrs.
Jones has been a Director of the Company since December 1981, and the Secretary
and Treasurer since April 1982. Mrs. Jones served as Vice President of the
Company from March 1985 to February 1994 and has been Executive Vice President
of the Company since February 1994.


                                       23
<PAGE>   25
         Michael T. Bramblett, a Director of the Company since 1987, served as
Vice President - Marketing of the Company from January 1991 to February 1994 and
has served as Executive Vice President since February 1994.

         G. Andrew Franz, a Director of the Company since 1994, became Senior
Vice President-Operations-Pharmaceuticals for the Company in February 1994. He
has served as the Vice President-Operations of JMI-Canton since the facility was
acquired by JMI-Canton from Bowman Pharmaceuticals, Inc. in March 1984.

         David A. McLaughlin, a Director of the Company since 1994, became
Senior Vice President-Operations-Nutritionals in February 1994. Mr. McLaughlin
has served in various management and executive capacities with the Company since
1986.

         Tina A. Kaufman joined the Company in June 1997 as Senior Vice
President-Finance. Prior to joining the Company, Ms. Kaufman was a partner at
Ernst & Young LLP which has served as the Company's independent auditors since
December, 1995. Ms. Kaufman was a member of Ernst & Young's audit team that has
served the Company for the last 12 years.

         Thomas G. Lewandowski became Senior Vice President-Sales for the
Company in May 1997. Mr. Lewandowski served as Western Regional Sales Manager
for Daniels Pharmaceuticals, Inc. from 1989 until that company merged with the
Company in 1996. Prior to joining Daniels, Mr. Lewandowski spent 17 years with
Pennwalt Corporation holding various management positions in both the hospital
and prescription products divisions.

         Edward A. Chod has been a Director since 1991. Mr. Chod is an officer
and shareholder in the law firm of Greensfelder, Hemker & Gale, P.C. which he
joined in 1978 and which has served as counsel to the Company since 1982.

         Stanley L. Lopata, a Director since 1988, is the President of Lopata
Research and Development Corp. and has served in that capacity since 1988. Prior
to 1988, Mr. Lopata was the Chairman of the Board of Directors and Chief
Executive Officer of Carboline Corporation, a manufacturer of specialty paint
and coating products, from 1960 through 1988.

         Thomas F. Patton, Ph.D., a Director since 1995, is President of the St.
Louis College of Pharmacy and has served in that capacity since June 1994. From
April 1993 until January 1994 and from January 1994 until May 1994, Dr. Patton
served as Executive Director of Pharmaceutical Research and Development and as
Vice President of Pharmaceutical Research and Development, respectively, at
Dupont-Merck Pharmaceutical Co., a pharmaceutical company. Dr. Patton also
serves as a director of D&K Healthcare Resources, Inc., a drug wholesaler.

         L. John Polite, Jr., a Director since 1989, is Chairman of Peridot (New
Jersey) Chemicals, Inc., and has served in that capacity since December 1989. He
was the Chairman of the Board, President and Chief Executive Officer of Essex
Chemical Corporation ("Essex") from April 1978 to October 1988. Mr. Polite also
serves as a director of Rotonics Manufacturing, Inc., a manufacturer of plastic
containers for commercial, pharmaceutical, refuse, marine, health care and
residential applications.


                                       24
<PAGE>   26
         Directors of the Company are elected by the Company's stockholders and
hold office until the next annual meeting of stockholders and until their
successors are elected and qualified, or until their earlier resignation or
removal. All executive officers are appointed by and serve at the discretion of
the Board of Directors.

         No employee who is a director receives a director's fee for services
rendered as a director. However, each non-employee director receives
reimbursement for any expenses incurred in his capacity as a director of the
Company and $4,000 per meeting of the Board of Directors attended by such
non-employee director, subject to a minimum (as of December 31, 1997) of $10,000
per year. In addition, non-employee directors who are members of the Company's
compensation committee receive $500 per meeting of the compensation committee
attended by such non-employee directors. Finally, the present non-employee
directors of the Company have been granted stock options pursuant to the
Company's 1994 Formula Stock Option Plan for Non-Management Directors, as set
forth in the table below:


<TABLE>
<CAPTION>
                                Date of       No. of Options           Per Share              Initial             Expiration
           Name                  Grant            Granted           Exercise Price         Exercise Date             Date
           ----                  -----            -------           --------------         -------------             ----

<S>                            <C>            <C>                   <C>                    <C>                    <C>
Stanley L. Lopata               6/1/94            11,250                 $4.67                6/1/94                6/1/99

L. John Polite, Jr.             6/1/94            11,250                 $4.67                6/1/94                6/1/99

Edward A. Chod                  6/1/94            11,250                 $4.67                5/1/95                5/1/00

Thomas F. Patton                6/1/95            11,250                 $4.45                5/1/96                5/1/01
</TABLE>



                                       25
<PAGE>   27
ITEM 11.   EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

         Summary Compensation Table. The table below sets forth all compensation
received in each of the three fiscal years ended December 31, 1997, 1996 and
1995 for services rendered in all capacities to the Company and its subsidiaries
by the Chief Executive Officer and the other four (4) highest-compensated
Executive Officers of the Company during the fiscal year ended December 31, 1997
(the "Named Executives").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                     Annual Compensation                              Long-Term
                                                                                                     Compensation
                                                                                                       Awards
                                                                                                     Securities
Name and Principal Position     Year         Salary            Bonus           Other Annual          Underlying          All Other
---------------------------     ----         ------            -----           ------------          ----------          ---------
                                                                             Compensation (1)         Options           Compensation
                                                                             ----------------         --------          ------------

<S>                             <C>       <C>             <C>               <C>                      <C>                <C>
Dennis M. Jones, Chairman       1997      $400,000               0                  0                    0               $29,864(2)
of the Board, Director and
President and Chief
Executive Officer
                                1996      $360,000        $100,000                  0                 540,000            $17,599(2)

                                1995      $300,000         $75,000                  0                    0               $14,357(2)
------------------------------------------------------------------------------------------------------------------------------------
Judith A. Jones, Director,      1997      $220,000         $30,000                  0                    0               $ 9,500(3)
Executive Vice President,
Secretary and Treasurer
                                1996      $180,000         $50,000                  0                 135,000            $ 7,518(3)

                                1995      $150,000         $35,000                  0                    0               $ 5,644(3)
------------------------------------------------------------------------------------------------------------------------------------
Michael T. Bramblett,           1997      $220,000         $30,000                  0                    0               $ 9,500(4)
Director and Executive Vice
President
                                1996      $180,000         $50,000                  0                 63,000             $ 7,500(4)

                                1995      $150,000         $35,000                  0                    0               $ 6,771(4)
------------------------------------------------------------------------------------------------------------------------------------
G. Andrew  Franz, Director      1997      $175,000         $25,000                  0                    0               $ 9,500(4)
and Senior Vice President -
Operations -
Pharmaceuticals
                                1996      $144,000         $40,000                  0                    0               $ 7,500(4)

                                1995      $120,000         $20,000                  0                    0               $ 5,125(4)
------------------------------------------------------------------------------------------------------------------------------------
David A. McLaughlin,            1997      $175,000         $25,000                  0                    0               $ 9,500(4)
Director and Senior Vice
President - Operations -
Nutritionals
                                1996      $144,000         $40,000                  0                    0               $ 7,500(4)

                                1995      $120,000         $20,000                  0                    0               $ 5,125(4)
</TABLE>




(1)      No Named Executive received Other Annual Compensation which is required
         to be reported in this column.

(2)      Consists of a Company contribution to a 401(k) plan ($9,500 in 1997,
         $7,500 in 1996 and $6,196 in 1995) and the dollar value of premiums
         paid by the Company for a split-dollar life insurance policy on Mr.
         Jones, of which $20,184, $10,099 and $8,161 constituted his entire
         economic benefit in the years 1997, 1996 and 1995, respectively.

(3)      Consists of a Company contribution to a 401(k) plan ($9,500 in 1997,
         $4,375 in 1996 and $2,696 in 1995) and the dollar value of premiums
         paid by the Company for a split-dollar life insurance policy on Mrs.
         Jones, of which $3,143 and $2,948 constituted her entire economic
         benefit in the years 1996 and 1995, respectively.

(4)      Consists of a Company contribution to a 401(k) plan.


                                       26
<PAGE>   28
STOCK OPTIONS AND INCENTIVE AWARDS

         Shareholders of the Company have approved the adoption of stock option
and incentive stock plans which are administered by the Compensation Committee
of the Board of Directors of the Company. At December 31, 1997, the Company had
outstanding stock options for an aggregate of 1,498,676 shares of Common Stock
at a weighted average price of $15.82 per share held by 192 employees (including
the options held by the Named Executives as described below) and the four (4)
non-management directors. The Company's stock option plans permit "exchange
exercises" in which an optionee is permitted to pay the exercise price of vested
options by surrendering previously owned shares of the Company's Common Stock
having a market value equal to the exercise price of the option being exercised.

         Option/SAR Grants. Although permitted under certain of the stock option
and incentive stock plans, the Company did not issue or have outstanding in 1997
stock appreciation rights ("SARs") or restricted share grants to any Named
Executive. In addition, the Company did not grant stock options to the Named
Executives during 1997.

         Aggregate Option Exercises during 1997 and Year End Option Values. The
following table provides information with respect to the stock options exercised
during the fiscal year ended December 31, 1997 and the value as of December 31,
1997 of unexercised in-the-money options held by the Named Executives. The value
realized on the exercise of options is calculated using the difference between
the option exercise price and the fair market value of the Company's stock on
the date of the exercise. The value of unexercised in-the-money options at
fiscal year end is calculated using the difference between the option exercise
price and the fair market value of the Company's stock at fiscal year end,
December 31, 1997.

<TABLE>
<CAPTION>
                                                                                                       Value of
                                                                     Number of                    Unexercised In-the-
                              Shares                            Unexercised Options                Money Options at
                             Acquired         Value             at December 31, 1997               December 31, 1997
                           on Exercise       Realized                   (#)                               ($)
         Name                  (#)              ($)          Exercisable/Unexercisable         Exercisable/Unexercisable
        ------                -----            -----         -------------------------         -------------------------

<S>                        <C>              <C>              <C>                               <C>
Dennis M. Jones                 0               $0               108,000/432,000               $2,978,640/$11,914,560

Judith A. Jones                 0               $0                27,000/108,000                 $744,660/$2,978,640

Michael T. Bramblett         112,500        $3,398,400              9,000/54,000                 $248,220/$1,489,320

G. Andrew Franz               11,250         $387,563              11,250/22,500                  $390,375/$780,750

David A. McLaughlin             0               $0                 11,250/22,500                  $390,375/$780,750
</TABLE>


         JMI's Employee Profit-Sharing and 401(k) Plan. The Company maintains an
Employee Profit-Sharing and 401(k) Plan (the "401(k) Plan") which was
originally adopted as of January 1, 1987. The 401(k) Plan provides employees
with a convenient way to save on a regular and long-term basis and encourages
employees to make and continue careers with the Company.

         To become eligible to participate in the 401(k) Plan, an employee must
have completed six months of service and have reached his or her eighteenth
birthday ("Eligible Employee"). Pursuant to the 401(k) Plan, an Eligible
Employee who participates ("Participant") may direct that a portion of his or
her compensation be contributed to the 401(k) Plan ("Elective Contributions").
Elective Contributions are treated as salary deferrals for federal income tax
purposes and under current federal tax law may not exceed $10,000 per year. The
amount of a Participant's Elective Contribution may also be limited under the
Employee Retirement Income Security Act in the case of highly-compensated
individuals, including the Named Executives. Participants are not allowed to
make any voluntary contributions to the 401(k) Plan, other than their Elective
Contributions.



                                       27
<PAGE>   29
         Each year the Company may make contributions to match all or a portion
of Participants' Elective Contributions. For 1997, the matching contribution was
raised by the Company to six percent of Participants' compensation. In each of
1995 and 1996, the Company set the matching contribution at five percent of
Participants' compensation. In addition to matching contributions, the Company
may make a discretionary contribution which is allocated among Participants'
Accounts in proportion to compensation. No discretionary contributions have been
made in the last three years. The Company's matching and discretionary
contributions are collectively called "Company Contributions".

         A Participant's Account under the 401(k) Plan consists of the
Participant's Elective Contributions, the Company Contributions allocated to the
Participant and the earnings or investment performance arising from investment
of such funds. Generally a participant may not make withdrawals from his 401(k)
Plan Account prior to age 59 1/2, retirement, termination of employment, or
other conditions specified in the 401(k) Plan without incurring tax penalties,
although the Plan permits a Participant to borrow up to 50% of his Elective
Contributions in certain hardship circumstances as provided in the Plan.
Elective Contributions are always 100% vested, however, Company Contributions
are subject to a vesting schedule described below.

          Years of Service                            Vested Percentage
          ----------------                            -----------------
               2 ...............................................20%
               3................................................40%
               4................................................60%
               5................................................80%
               6...............................................100%

Any unvested portion of Company Contributions allocated to a Participant at the
time of such Participant's termination of employment with the Company, other
than by retirement or death, is forfeited by the Participant. Forfeitures of
discretionary Company Contributions will be allocated to the accounts of other
Participants. Forfeitures of matching contributions are allocated in proportion
to matching contributions.

         As of January 1, 1998, the Company had approximately 397 Eligible
Employees, including the Named Executives (Dennis M. Jones, Judith A. Jones,
Michael T. Bramblett, G. Andrew Franz and David A. McLaughlin). During 1997, the
Company made matching contributions to the 401(k) Plan aggregating $47,500 to
the accounts of the Named Executives and total matching contributions of
$613,684 to all Participants' Accounts.

         Participants in the 401(k) Plan may direct investment of amounts
allocated to their respective accounts among various investment funds selected
by the Plan Administrator. Prior to January 1, 1997, investment of funds in the
401(k) was directed by the Trustees of the 401(k) Plan and a portion of Company
Contributions was, from time to time, invested in shares of the Common Stock of
the Company. The investment funds currently available under the 401(k) Plan do
not include a fund for investment in the Company's Common Stock for either
Elective Contributions or Company Contributions.

         The Company is the 401(k) Plan Administrator and currently pays all
expenses of the 401(k) Plan other than audit fees, which are paid by the 401(k)
Plan. The Company has appointed Dennis M. Jones and Judith A. Jones as Trustees
of the 401(k) Plan and Smith Barney Corporate Trust Company is an additional
trustee with respect to the investment funds available to Participants. The
401(k) Plan may be modified by the officers of the Company at any time, provided
that the aggregate additional annual cost to the Company of any such
modification does not exceed $500,000 and provided further that no modification
shall adversely affect the rights of the Participants or divert any of the
401(k) Plan assets to purposes other than the benefit of the Participants.



                                       28
<PAGE>   30
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information regarding the record and
beneficial ownership of the Common Stock of the Company on the indicated date
by: (i) each director or nominee for director and the Named Executives (as such
term is defined below in "Executive Compensation -- Summary Compensation Table")
of the Company; and (ii) all directors or nominees for director and executive
officers of the Company as a group:


                  BENEFICIAL OWNERSHIP AS OF FEBRUARY 27, 1998

<TABLE>
<CAPTION>
           Name and Address of                                                                 Percentage of Shares
           Beneficial Owner (1)                    Shares Beneficially Owned (2)              Beneficially Owned (3)
           --------------------                    -----------------------------              ----------------------

<S>                                                <C>                                        <C>
Dennis M. Jones                                            3,699,900 (4)(5)                         12.8%
Chairman of the Board of Directors
   and President

Judith A. Jones                                            1,074,937 (6)                            3.7%
Executive Vice President, Secretary,
   Treasurer and Director

Michael T. Bramblett                                         164,700(7)(8)                          0.6%
Executive Vice President and Director

G. Andrew Franz                                              411,277(9)(10)                         1.4%
Senior Vice President-Operations-
   Pharmaceuticals and Director

David A. McLaughlin                                          123,750                                  *
Senior Vice President-Operations-
   Nutritionals and Director

Stanley Lopata                                               176,500(11)                            0.6%
Director
900 South Hanley Road
St. Louis, Missouri 63105

L. John Polite, Jr.                                           37,000(12)                              *
Director
211 Oldwoods Road
Franklin Lakes, New Jersey 07417

Edward A. Chod                                                27,625(13)                              *
Director
10 South Broadway, Suite 2000
St. Louis, Missouri 63102

Thomas F. Patton, Ph.D.                                        6,750(14)                              *
Director

All Directors and Executive Officers                       5,730,948(15)                           19.7%
   as a Group
(consisting of eleven persons)
</TABLE>


*  Less than one-half of one percent.



                                       29
<PAGE>   31
(1)    Except as otherwise indicated, the address for each individual named is
       c/o Jones Medical Industries, Inc., 1945 Craig Road, St. Louis, Missouri
       63146. Each beneficial owner has sole voting and investment power with
       respect to the shares of Common Stock shown as beneficially owned except
       that an individual may be deemed to have only indirect shared voting and
       investment power with respect to shares held by the individual's spouse
       as reflected in other footnotes.

(2)    Includes shares deemed owned as a result of purchase options which are
       presently or will become exercisable on or prior to June 1, 1998.

(3)    The number of shares of Common Stock deemed outstanding as of February
       27, 1998 includes: (i) 28,696,348 shares of Common Stock outstanding as
       of such date, and (ii) shares of Common Stock issuable pursuant to
       options held by the directors and executive officers that are currently
       exercisable or will become exercisable on or before June 1, 1998, by the
       person or group in question.

(4)    Includes 216,000 shares under option rights issued by the Company and
       held by Mr. Jones. Does not include 1,074,937 shares or options held by
       his spouse, with respect to which he disclaims beneficial ownership.

(5)    As a result of call options written and sold by Mr. Jones, an aggregate
       of 300,000 of the shares reflected as owned by him were subject to
       purchase by third parties at $40 per share under option rights which
       expired on March 13, 1998, unexercised.

(6)    Includes 54,000 shares under option rights issued by the Company and held
       by Mrs. Jones. Does not include 3,699,900 shares or options held by her
       spouse, with respect to which she disclaims beneficial ownership.

(7)    Includes 18,461 shares held by Mr. Bramblett's wife with respect to which
       he disclaims beneficial ownership. Also includes 18,000 shares under
       option rights issued by the Company.

(8)    As a result of call options written and sold by Mr. Bramblett, an
       aggregate of 30,000 of the shares reflected as owned by him are subject
       to purchase by third parties at $35 per share under option rights
       expiring June 19, 1998.

(9)    Includes 191,165 shares owned by Mr. Franz' wife, 42,840 shares held by
       his spouse as custodian for their children, 24,996 shares held by his
       wife as a co-trustee for the benefit of the Franz' children and 12,498
       shares held by his wife as a co-trustee for the benefit of her nephew.
       Mr. Franz disclaims beneficial ownership of all of the shares held by his
       wife.

(10)   As a result of call options written and sold by Mr. Franz, an aggregate
       of 50,000 of the shares reflected as owned by him are subject to purchase
       by third parties at $35 per share under option rights expiring June 19,
       1998.

(11)   Includes 64,950 shares held in revocable trust created by Mr. Lopata's
       wife and with respect to which he disclaims beneficial ownership. Also
       includes 9,000 shares under vested and unexercised options.

(12)   Includes 11,250 shares under option rights issued by the Company.

(13)   Includes 9,000 shares under option rights issued by the Company.

(14)   Includes 6,750 shares under option rights issued by the Company.

(15)   Includes the shares listed as beneficially owned for each individual
       included in the table as well as (i) 5,000 shares under option rights
       issued by the Company and held by Tina A. Kaufman, Senior Vice
       President-Finance; and 3,500 shares under option rights issued by the
       Company and held by Thomas G. Lewandowski, Senior Vice President-Sales.


                                       30
<PAGE>   32
       Other Significant Shareholdings

       Based upon filings with the Securities and Exchange Commission ("SEC")
under the Exchange Act , the Company is advised that as of December 31, 1997,
each of the following investment advisors held discretionary authority over
accounts holding, in the aggregate, the indicated numbers of shares of the
Company's Common Stock, in each case representing 5% or more of the then
outstanding shares of Common Stock:

          NAME AND ADDRESS OF INVESTMENT ADVISOR                 SHARES
          --------------------------------------                 ------

AMVESCAP PLC                                                1,722,700 (6.0%)
11 Devonshire Square
London EC2M 4YR
England

Putnam Investments, Inc.                                    1,837,364 (6.5%)
One Post Office Square
Boston, Massachusetts 02109


Compliance with Section 16(a) of the Securities Exchange Act of 1934

       Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the SEC and the National
Association of Security Dealers, Inc. Directors, officers and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.

       To the Company's knowledge, based solely on review of the copies of such
forms received by the Company and written representations from certain reporting
persons that no Forms 5 or other reports were required for those persons, the
Company believes that, during the fiscal year ended December 31, 1997, its
directors, officers and greater than 10% beneficial owners complied with all
applicable filing requirements.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Edward A. Chod, a director of the Company, is a principal in the law firm
of Greensfelder, Hemker & Gale, P.C., which firm has served as counsel to the
Company since 1982. The amount of legal fees paid by the Company to
Greensfelder, Hemker & Gale, P.C. during the fiscal year ended December 31, 1997
did not exceed five percent (5%) of such firm's gross revenues for its
applicable fiscal year.


                                       31
<PAGE>   33
                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      1.   The consolidated financial statements filed as part of this report
              on Form 10-K are listed on the accompanying Index to Consolidated
              Financial Statements and Consolidated Financial Statement Schedule
              on page 35.

         2.   The consolidated financial statement schedule filed as part of
              this report on Form 10-K is listed on the accompanying Index to
              Consolidated Financial Statements and Consolidated Financial
              Statement Schedule on page 35.

         3.       Exhibits:

                  (3.1)  Restated Certificate of Incorporation of the Company
                         dated June 21, 1988 (incorporated by reference from
                         Form 10-K for the year ended December 31, 1995).

                  (3.2)  Certificate of Amendment of the Certificate of
                         Incorporation of the Company dated May 14, 1990
                         (incorporated by reference from Form 10-K for the year
                         ended December 31, 1995).

                  (3.3)  Certificate of Amendment of the Certificate of
                         Incorporation of the Company dated May 30, 1991
                         (incorporated by reference from Form 10-K for the year
                         ended December 31, 1995).

                  (3.4)  Amended and Restated Certificate of Incorporation of
                         the Company dated June 5, 1997 (incorporated by
                         reference from Form 8-K dated June 10, 1997).

                  (3.5)  Amended By-Laws of the Company as of June 14, 1988
                         (incorporated by reference from Form 10-K for the year
                         ended December 31, 1995).

                  (3.6)  Amendment to Section 3.02 of By-Laws of the Company as
                         of April 1, 1992 (incorporated by reference from Form
                         10-K for the year ended December 31, 1995).

                  (10.1) The Company's 1989 Incentive Stock Option Plan
                         (incorporated by reference from Form 10-K for the year
                         ended December 31, 1995).

                  (10.2) Employee Profit Sharing and 401(k) Plan as amended and
                         restated as of January 1, 1997 (incorporated by
                         reference from Form 10-K for the year ended December
                         31, 1996).

                  (10.3) The Company's 1994 Incentive Stock Plan effective June
                         1, 1994 (incorporated by reference from the Company's
                         Proxy Statement dated April 21, 1995 for the Annual
                         Meeting of Stockholders held May 15, 1995).

                  (10.4) The Company's 1994 Formula Stock Option Plan for
                         Non-Management Directors effective May 25, 1994
                         (incorporated by reference from the Company's Proxy
                         Statement dated April 21, 1995 for the Annual Meeting
                         of Stockholders held May 15, 1995).

                  (10.5) Asset Purchase Agreement dated as of February 12, 1993,
                         between the Company and Tsumura International, Inc.
                         (incorporated by reference from Form 8-K dated February
                         18, 1993).


                                       32
<PAGE>   34
                  (10.6)  Stock Purchase Agreement dated as of March 22, 1993,
                          among the Company and each of the stockholders of
                          Bronson Pharmaceuticals (incorporated by reference
                          from Form 8-K dated April 7, 1993).

                  (10.7)  Licensing Agreement dated August 31, 1995 between the
                          Company and Eli Lilly & Company is (incorporated by
                          reference from Form 8-K dated September 15, 1995).

                  (10.8)  Manufacturing Agreement dated August 31, 1995 between
                          the Company and Eli Lilly & Company (incorporated by
                          reference from Form 8-K dated September 15, 1995).

                  (10.9)  License Agreement dated March 18, 1996, between the
                          Company and Eli Lilly and Company (incorporated by
                          reference from Form 8-K dated March 18, 1996).

                  (10.10) Manufacturing Agreement dated March 18, 1996, between
                          the Company and Eli Lilly and Company (incorporated by
                          reference from Form 8-K dated March 18, 1996).

                  (10.11) Plan of Reorganization and Agreement dated as of July
                          30, 1996, by and among Galen Drugs of Florida, Inc.,
                          Daniels Pharmaceuticals, Inc. and the Company
                          (incorporated by reference from Form 8-K dated
                          September 6, 1996).

                  (10.12) Plan of Reorganization and Agreement dated as of
                          October 24, 1996, by and among the Company, Abana
                          Pharmaceuticals, Inc., Dale E. Eads and Perry N. Cole
                          (incorporated by reference from the Company's
                          Registration Statement on Form S-4 (Registration No.
                          333-15889) filed on November 8, 1996).

                  (10.13) The Company's 1997 Incentive Stock Plan (incorporated
                          by reference from the Company's Proxy Statement dated
                          April 10, 1997 for the Annual Meeting of Shareholders
                          held May 20, 1997).

                  (10.14) Asset Purchase Agreement dated as of June 27, 1997,
                          between the Company and SmithKline Beecham Corporation
                          (incorporated by reference from Form 8-K dated July 8,
                          1997).

                  (10.15) Supply Agreement dated as of June 27, 1997, between
                          the Company and SB Pharmco Puerto Rico (incorporated
                          by reference from Form 8-K dated July 8, 1997).

                  (11.1)  Statement re: computation of per share earnings.
                          (FILED HEREWITH)

                  (21.1)  Subsidiaries of the Registrant. (FILED HEREWITH)

                  (23.1)  Consent of Ernst & Young LLP. (FILED HEREWITH)

                  (23.2)  Consent of Hacker, Johnson, Cohen & Grieb. (FILED
                          HEREWITH)

                  (27.1)  Financial Data Schedule -- 1997 Year End and
                          Quarterly Information. (FILED HEREWITH)

                  (27.2)  Financial Data Schedule -- 1996 Year End and
                          Quarterly Information. (FILED HEREWITH)

                  (27.3)  Financial Data Schedule -- 1995 Year End Information.
                          (FILED HEREWITH)

(b)    No reports on Form 8-K were filed by the Company during the last quarter
       of the period covered by this report on Form 10-K.



                                       33
<PAGE>   35
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       JONES MEDICAL INDUSTRIES, INC.

                                       By:   /s/ Dennis M. Jones
                                             ---------------------------
                                               Dennis M. Jones, President
                                               DATE:  MARCH 31, 1998

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
                 SIGNATURES                              TITLE                             DATE
                 ----------                              -----                             ----

<S>                                            <C>                                   <C>
/s/ Dennis M. Jones                            President, Chief Executive            March 31, 1998
------------------------                       Officer and Director
Dennis M. Jones

/s/ Judith A. Jones                            Principal Financial and               March 31, 1998
------------------------                       Accounting Officer, Executive
Judith A. Jones                                Vice President, Secretary,
                                               Treasurer and Director
/s/ Michael T. Bramblett                       Executive Vice President and          March 31, 1998
------------------------                       Director
Michael T. Bramblett

/s/ G. Andrew Franz                            Senior Vice President -               March 31, 1998
------------------------                       Operations - Pharmaceuticals
G. Andrew Franz                                and
                                               Director

                                               Senior Vice President -               March 31, 1998
/s/ David A. McLaughlin                        Operations -
-------------------------                      Nutritionals and Director
David A. McLaughlin
                                               Director                              March 31, 1998
/s/ Edward A. Chod
-------------------------
Edward A. Chod

/s/ Stanley Lopata                             Director                              March 31, 1998
-------------------------
Stanley Lopata

/s/ L. John Polite, Jr.                        Director                              March 31, 1998
-------------------------
L. John Polite, Jr.
                                               Director                              March 31, 1998
/s/ Thomas F. Patton, Ph.D.
-------------------------
Thomas F. Patton, Ph.D.
</TABLE>




                                       34
<PAGE>   36
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE


<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----

<S>                                                                                   <C>
Report of Ernst & Young LLP, independent auditors                                     F-1

Report of Hacker, Johnson, Cohen & Grieb, independent auditors                        F-2

Consolidated balance sheets as of December 31, 1996 and 1997                          F-3

Consolidated statements of income for the years ended December 31, 1995, 1996 and
1997                                                                                  F-4

Consolidated statements of stockholders' equity for the years ended December 31,
1995, 1996 and 1997                                                                   F-5

Consolidated statements of cash flows for the years ended December 31, 1995, 1996
and 1997                                                                              F-6

Notes to consolidated financial statements                                            F-7

Consolidated schedule for the years ended December 31, 1995, 1996 and 1997:

II.  Valuation and qualifying accounts                                                F-25
</TABLE>


         All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.



                                       35
<PAGE>   37
                         Report of Independent Auditors

The Board of Directors and Stockholders
Jones Medical Industries, Inc.

We have audited the accompanying consolidated balance sheets of Jones Medical
Industries, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the September 30, 1995
consolidated financial statements of Galen Drugs of Florida, Inc. (acquired by
the Company in a business combination accounted for as a pooling of interests,
as described in Note 1 to the consolidated financial statements of Jones Medical
Industries, Inc.), which statements reflect total revenues of $18,394,720 for
the year ended September 30, 1995. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Galen Drugs of Florida, Inc., as of
September 30, 1995 and for the year then ended, is based solely upon the report
of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Jones Medical
Industries, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


St. Louis, Missouri
February 10, 1998, except for the                              ERNST & YOUNG LLP
first paragraph of Note 1, as to
which the date is March 17, 1998



                                                                             F-1
<PAGE>   38
                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Galen Drugs of Florida, Inc.
St. Petersburg, Florida:

We have audited the accompanying consolidated balance sheets of Galen Drugs of
Florida, Inc. and Subsidiaries (the "Company") as of September 30, 1995, 1994
and 1993 and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1995, 1994 and 1993 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.



HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
April 25, 1996, except for Note 16 as to which
 the date is July 30, 1996.



                                                                             F-2
<PAGE>   39
                         Jones Medical Industries, Inc.

                           Consolidated Balance Sheets
              (In thousands of dollars except per share amounts)


<TABLE>
<CAPTION>
                                                                        DECEMBER 31
                                                                    1996           1997
                                                                  -----------------------
<S>                                                               <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                                       $ 52,172       $ 49,877
  Accounts receivable, less allowance for doubtful accounts
    of $388 in 1996 and $1,196 in 1997                              11,301         16,689
  Inventories                                                       12,753         15,357
  Income taxes receivable                                            1,764           --
  Deferred income taxes                                              1,846          2,443
  Other                                                                715            747
                                                                  -----------------------
Total current assets                                                80,551         85,113
Intangible assets:
  Customer lists                                                     6,085          6,085
  Distribution systems, trademarks, and licenses                    48,409         69,403
  Restrictive covenants and other intangibles                        5,603          8,103
  Goodwill                                                          17,250         17,185
                                                                  -----------------------
                                                                    77,347        100,776
Less accumulated amortization                                        7,500         11,434
                                                                  -----------------------
Net intangible assets                                               69,847         89,342

Net property, plant, and equipment                                  24,170         27,543
Other assets                                                         2,665          2,230
                                                                  -----------------------
Total assets                                                      $177,233       $204,228
                                                                  =======================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses                           $  6,472       $  5,130
  Current portion of long-term debt                                  3,000           --
  Income taxes payable                                                --            1,450
  Dividends payable                                                    560           --
                                                                  -----------------------

Total current liabilities                                           10,032          6,580

Deferred income taxes                                                5,282          5,922

Stockholders' equity:
  Preferred stock, $.01 par value, 1,000,000 shares
    authorized in 1996 and 5,000,000 shares authorized
    in 1997, no shares issued or outstanding                          --             --
  Common stock, $.04 par value; 30,000,000 shares
    authorized, 28,435,451 shares issued and outstanding
    in 1996 and 75,000,000 authorized, 28,647,300 issued
    and outstanding in 1997                                          1,137          1,146
  Contributed capital                                              108,582        109,129
  Retained earnings                                                 52,200         81,451
                                                                  -----------------------
Total stockholders' equity                                         161,919        191,726
                                                                  -----------------------
Total liabilities and stockholders' equity                        $177,233       $204,228
                                                                 =======================
</TABLE>


   See accompanying notes.


                                                                             F-3
<PAGE>   40
                         Jones Medical Industries, Inc.

                        Consolidated Statements of Income
               (In thousands of dollars except per share amounts)


<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                       1995             1996           1997
                                                     ----------------------------------------

<S>                                                  <C>             <C>             <C>
Sales from continuing operations                     $ 39,937        $ 64,181        $ 88,781
Cost of sales                                          14,639          20,277          25,430
                                                     ----------------------------------------
Gross profit                                           25,298          43,904          63,351

Selling, general, and administrative expenses:
     Selling                                            8,216          10,356          14,415
     General and administrative                         6,934           7,389           7,499
     Research and development                             452             410            --
     Amortization                                         824           2,011           3,357
     Nonrecurring merger expenses                        --             5,743            --
                                                     ----------------------------------------
Total selling, general, and
   administrative expenses                             16,426          25,909          25,271
                                                     ----------------------------------------

Operating income from continuing
   operations                                           8,872          17,995          38,080

Other income (expense):
   Interest income                                        304           2,276           2,562
   Interest expense                                      (655)           (553)           (238)
   Miscellaneous                                         (133)             32              (9)
                                                     ----------------------------------------
                                                         (484)          1,755           2,315
                                                     ----------------------------------------
Income before taxes from continuing
   operations                                           8,388          19,750          40,395
Provision for income taxes                              3,074           8,232          15,351
                                                     ----------------------------------------
Income from continuing operations                       5,314          11,518          25,044
Income from discontinued operations (net
   of taxes)                                            7,075           6,621           6,926
                                                     ----------------------------------------
Net income                                           $ 12,389        $ 18,139        $ 31,970
                                                     ========================================

Earnings per share:
   Basic:  Continuing operations                     $   0.22        $   0.43        $    .88
           Discontinued operations                   $   0.30        $   0.24        $    .24
                                                     ----------------------------------------
                                                     $   0.52        $   0.67        $   1.12
                                                     ========================================
   Diluted:Continuing operations                     $   0.21        $   0.41        $   0.85
           Discontinued operations                   $   0.29        $   0.24        $   0.24
                                                     ----------------------------------------
                                                     $   0.50        $   0.65        $   1.09
                                                     ========================================
</TABLE>



See accompanying notes.


                                                                             F-4
<PAGE>   41
                        Jones Medical Industries, Inc.

                Consolidated Statements of Stockholders' Equity

                 Years ended December 31, 1995, 1996, and 1997
              (In thousands of dollars except per share amounts)


<TABLE>
<CAPTION>
                                       NUMBER OF SHARES
                                  -----------------------------
                                                                   PREFERRED     COMMON     CONTRIBUTED      RETAINED
                                    PREFERRED         COMMON         STOCK       STOCK        CAPITAL        EARNINGS       TOTAL
                                  -------------------------------------------------------------------------------------------------

<S>                               <C>                <C>           <C>        <C>           <C>             <C>           <C>
Balance at December 31, 1994           99,919        23,730,008      $ 1     $    949       $  19,507       $ 24,020      $  44,477
Exercise of stock options                  --           281,565       --           11             433             --            444
Restricted stock:
   Amortization of unearned
     compensation                          --                --       --           --              30             --             30
Conversion of preferred stock         (54,859)          215,850       (1)           9              (8)            --             --
Return of escrowed preferred
   stock                              (44,004)               --       --           --            (381)            --           (381)
Escrowed preferred dividend                --                --       --           --               9             --              9
Net income                                 --                --       --           --              --         12,389         12,389
Cash dividend declared - common
   stock ($.05 per historical
   JMED share)                             --                --       --           --              --         (1,026)        (1,026)
Cash dividend declared -
   preferred stock ($.16 per
   share)                                  --                --        -           --              --             (4)            (4)
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1995            1,056        24,227,423        -          969          19,590         35,379         55,938
Net proceeds from sale of common
   stock                                   --         3,450,000        -          138          75,084             --         75,222
Exercise of stock options                  --           333,397        -           13             787             --            800
Restricted stock:
   Amortization of unearned
     compensation                          --                --        -           --              12             --             12
Tax benefits associated with the
   exercise of nonqualified
   stock options                           --                --        -           --             846             --            846
Adjustment to increase pooled
   company's net income to a
   12-month amount                         --                --        -           --              --            702            702
Costs paid by shareholders on
   behalf of the Company                   --                --        -           --           2,900             --          2,900
Redemption of dissenters' shares           --                --        -           --          (4,022)            --         (4,022)
Shares issued in connection with
   the Abana purchase                      --           420,553        -           17          13,875             --         13,892
Other                                      --                --        -           --            (490)                         (490)
Conversion of preferred stock          (1,056)            4,078        -           --              --             --             --
Net income                                 --                --        -           --              --         18,139         18,139
Cash dividend declared - common
   stock ($.0767 per share)                --                --        -           --              --         (2,020)        (2,020)
Cash dividend declared -
   preferred stock ($.04 per
   share)                                  --                --        -           --              --             --             --
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1996               --        28,435,451        -        1,137         108,582         52,200        161,919
Exercise of stock options                  --           224,724        -            9             687             --            696
Shares tendered in payment of
   option price                            --           (10,182)       -           --            (340)            --
                                                                                                                               (340)
Tax benefits associated with the
   exercise of nonqualified
   stock options                           --                --        -           --             287             --            287
Return of escrowed shares                  --            (2,693)       -           --             (87)            --            (87)
Net income                                 --                --        -           --              --         31,970         31,970
Cash dividend declared - common
   stock ($.095 per share)                 --                --        -           --              --         (2,719)        (2,719)
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1997               --        28,647,300       $-      $ 1,146       $ 109,129       $ 81,451      $ 191,726
                                  =================================================================================================
</TABLE>



See accompanying notes.



                                                                             F-5
<PAGE>   42
                        Jones Medical Industries, Inc.

                    Consolidated Statements of Cash Flows
                          (In thousands of dollars)


<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31
                                                    1995          1996           1997
                                                 --------------------------------------
<S>                                              <C>            <C>            <C>
OPERATING ACTIVITIES
Net income                                       $ 12,389       $ 18,139       $ 31,970
Adjustment to increase pooled company's
   net income above to a 15-month amount               --            702             --
Noncash adjustments:
   Costs paid by shareholders on behalf of
     the Company                                       --          2,900             --
   Depreciation                                     1,109          1,363          2,148
   Amortization                                     1,430          2,630          3,963
   Provision for uncollectibles                        64            200            809
   Deferred income taxes                               (8)           527             43
   Loss on sale of assets                             126            101             31
   Change in assets and liabilities, net
     of effects from acquisitions:
        Accounts receivable                        (3,702)        (1,406)        (6,196)
        Inventories                                (2,726)           868         (2,604)
        Other assets                                 (716)        (1,603)         1,445
        Accounts payable and accrued
          expenses                                  1,867         (1,119)        (1,341)
        Income taxes payable                          471         (2,635)         1,450
                                                 --------------------------------------
Net cash from operating activities                 10,304         20,667         31,718

INVESTING ACTIVITIES
Additions to property, plant, and equipment        (5,448)        (7,386)        (5,566)
Proceeds from sale of assets                          766            408            276
Purchases of intangible assets in product
   line acquisitions, net of seller
   financing                                       (7,072)        (8,757)       (22,800)
Net decrease in note receivable from
   related party                                       80            175             --
                                                 --------------------------------------
Net cash used for investing                       (11,674)       (15,560)       (28,090)

FINANCING ACTIVITIES
Net proceeds from sale of common stock                 --         75,222             --
Proceeds from debt                                  7,000          8,700             --
Repayment of long-term debt                        (4,653)       (37,758)        (3,000)
Purchase of dissenters' shares                         --         (4,022)            --
Repayment of note payable to former
  stockholder of pooled company                      (638)        (2,476)            --
Payments of cash dividends                           (984)        (1,743)        (3,279)
Proceeds from exercise of stock options               444            800            356
                                                 --------------------------------------
Net cash from (used for) financing                  1,169         38,723         (5,923)
                                                 --------------------------------------
Increase (decrease) in cash and
    cash equivalents                                 (201)        43,830         (2,295)
Cash and cash equivalents, beginning of
    year                                            8,543          8,342         52,172
                                                 --------------------------------------
Cash and cash equivalents, end of year           $  8,342       $ 52,172       $ 49,877
                                                 ======================================
</TABLE>


See accompanying notes.



                                                                             F-6
<PAGE>   43
                         Jones Medical Industries, Inc.

                   Notes to Consolidated Financial Statements
               (Dollars in thousands except per share amounts)

                                December 31, 1997


1. BASIS OF PRESENTATION

DISCONTINUED OPERATIONS

On March 16, 1998, the Board of Directors of Jones Medical Industries, Inc.
("JMED" or the "Company") approved a plan to discontinue the Company's
nutritional supplements product line and contract manufacturing operations. On
March 17, 1998, the Company signed a binding agreement with certain operating
subsidiaries    of Twinlab Corporation (Twin) to sell a portion of this
business for $55 million cash at closing. The sale to Twin is subject to
expiration or termination of applicable waiting periods under Federal antitrust
regulations and other customary closing conditions with an anticipated closing
date of mid-April, 1998. Gain on the subsequent sale is anticipated. The
accompanying consolidated statements of income reflect the operating results,
net of tax, of the Company's nutritional supplements product line and contract
manufacturing operations as discontinued operations.  Net assets associated
with the discontinued operations at December 31, 1997 approximate $24,500,
including approximately $3,000 of accounts receivable, $9,000 of inventory,
$4,300 of property, plant, and equipment and $8,800 of intangibles.  Net sales
associated with the discontinued operations approximate $36,249, $35,972 and
$34,855 for the years ended  December 31, 1997, 1996 and 1995, respectively.

DANIELS PHARMACEUTICALS, INC. POOLING OF INTERESTS

On August 30, 1996, the Company acquired Daniels Pharmaceuticals, Inc.
("Daniels"), a Florida corporation, in a business combination accounted for as a
pooling of interests by way of a merger (the "Merger") among Daniels, Daniels'
parent entity, Galen Drugs of Florida, Inc. ("Galen"), a Florida corporation,
and JMED's wholly owned subsidiary, JGD Acquisition Corporation, a Florida
corporation. The accompanying financial statements are based on the assumption
that the two companies were combined at the beginning of 1996, and financial
statements for prior periods presented have been restated to give effect to the
combination. Earnings per share data reflects the shares issued in the merger
for all periods presented.

In connection with the Merger, JMED issued 2,910,474 shares of its common stock
and paid cash consideration of approximately $4,022 to dissenting shareholders.
In addition, JMED issued 49,750 shares of its common stock to Daniels
Enterprises, Inc. ("DEI"), an S-Corporation controlled by the principal
shareholders of Galen, to acquire the real estate associated with the business.
The book value of the real estate acquired was $892 at the consummation date of
the combination.


                                                                             F-7
<PAGE>   44
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)


1. BASIS OF PRESENTATION (CONTINUED)

DANIELS PHARMACEUTICALS, INC. POOLING OF INTERESTS (CONTINUED)

Nonrecurring merger expenses related to this acquisition consisting of costs
paid by shareholders on behalf of the Company, investment banking and
professional fees, and severance costs total $5,743 and have been included in
selling, general, and administrative expenses in the accompanying 1996
consolidated statement of income.

In connection with the Merger, Daniels changed its fiscal year-end from
September 30 to December 31, which conforms to JMED's year-end. The consolidated
financial statements for periods prior to 1996 have not been restated to reflect
Daniels' change in fiscal year and include Daniels' results of operations on a
September 30 fiscal year-end basis and JMED's on a December 31 calendar year
basis. The accompanying 1996 financial statements combine both entities' results
as of December 31, 1996 and for the 12 months then ended. Because the conformity
of Daniels' fiscal year-end has been changed prospectively, Daniels' net income
for the three months ended December 31, 1995 has been added directly to retained
earnings of the combined Company. During the three months ended December 31,
1995, Daniels reported sales of $4,207 and net income of $702. The consolidated
statement of cash flows for the year ended December 31, 1996 combines JMED's
cash flows for that period with the cash flows of Daniels for the period from
October 1, 1995 to December 31, 1996.

The separate components of the combined results of JMED and Daniels are
presented below. Although the merger occurred on August 30, 1996, the separate
components are presented through September 30, 1996, which is the date the
Company merged the operating results of the two entities.

<TABLE>
<CAPTION>
                                                 YEAR ENDED       NINE MONTHS ENDED
                                                DECEMBER 31,         SEPTEMBER 30,
                                                   1995                 1996
                                               ------------------------------------
<S>                                            <C>                <C>
 Sales from continuing operations:
    JMED                                           $21,542               $33,189
    Daniels                                         18,395                13,072
                                               ------------------------------------
    Combined                                       $39,937               $46,261
                                               ====================================

 Income from continuing operations:
    JMED                                            $2,253                $5,253
    Daniels                                          3,061                 1,053
                                                -----------------------------------
    Combined                                        $5,314                $6,306
                                                ===================================

  Net income:
    JMED                                           $ 9,328               $10,323
    Daniels                                          3,061                 1,053
                                                -----------------------------------
    Combined                                       $12,389               $11,376
                                                ===================================
</TABLE>



                                                                             F-8
<PAGE>   45
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)



1. BASIS OF PRESENTATION (CONTINUED)

STOCK SPLITS

On February 7, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a stock dividend to be paid on March 1, 1996 to holders
of record on February 23, 1996. The financial statements, including stock
options, share data, per share data, and market prices, have been retroactively
adjusted to reflect the split.

On May 22, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a stock dividend to be paid on June 10, 1996 to holders
of record on June 3, 1996. The financial statements, including stock options,
share data, per share data, and market prices, have been retroactively adjusted
to reflect the split.

2. NATURE OF OPERATIONS AND CUSTOMER AND SUPPLIER CONCENTRATION

The Company is engaged in the manufacturing, marketing, and sale of
pharmaceuticals. The Company's principal customers are retail pharmacies and
hospitals. The Company's sales are through wholesale drug distributors, who in
turn supply product to pharmacies, hospitals and physicians.

No one customer accounted for more than 10 percent of the Company's consolidated
sales in 1995, 1996, or 1997.

The Company's most significant products include:

<TABLE>
<CAPTION>
                                       1995                      1996                      1997
                        ----------------------------------------------------------------------------
                        PRODUCT      PERCENT OF     PRODUCT     PERCENT OF    PRODUCT     PERCENT OF
                         SALES         SALES         SALES        SALES       SALES        SALES
                        ----------------------------------------------------------------------------
<S>                     <C>           <C>         <C>           <C>          <C>          <C>
Thrombin products       $14,573           36%      $17,406           27%      $19,375           22%
Levoxyl                 $11,684           29%      $14,197           22%      $22,273           25%
Brevital (acquired
  August 31, 1995)      $ 2,385            6%      $ 7,251           11%      $ 9,188           10%
Tapazole (acquired
  March 18, 1996)       $    --           --       $12,254           19%      $18,314           21%
</TABLE>



                                                                             F-9
<PAGE>   46
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands except per share amounts)




2. NATURE OF OPERATIONS AND CUSTOMER AND SUPPLIER CONCENTRATION (CONTINUED)

The Company currently relies on Eli Lilly and Company ("Lilly") for the
manufacture of Brevital and Tapazole. The Company has entered into ten-year
manufacturing agreements with Lilly, which may be terminated by Lilly at any
time after the first five years by giving at least five years' notice to the
Company prior to ceasing the manufacture of the related products. In the event
of such termination, Lilly must use reasonable efforts to assist the Company in
obtaining all the necessary licenses and approvals to enable the Company or an
alternative manufacturer to manufacture the products. Lilly is the sole
manufacturer of both products, and any alternative manufacturer would require
regulatory change-in-site qualification to manufacture the products.

The Company also relies on SB Pharmco Puerto Rico (SB Pharmco), an affliate of
SmithKline Beecham Corporation (SmithKline), for the manufacture of Triostat,
and Schering Canada, Inc. (Schering) for the manufacture of Cytomel.  The
Company has entered into a two year supply agreement with SB Pharmco which may
be extended for one additional year if the Company is not able to obtain Food
and Drug Administration (FDA) approval to transfer the manufacturing of
Triostat to the Company's own facility or that of a third party within the two
year term.  The Company has been assigned the rights, and has assumed the
obligations, under an agreement entered into between a division of SmithKline
and Schering pursuant to which Schering will manufacture Cytomel for a term of
three years.  The agreement also provides for automatic renewal unless either
party provides eighteen months advance written notice of non-renewal prior to
the end of any term.

In the event of any interruption in the supply of Brevital, Tapazole, Triostat
or Cytomel from Lilly, SB Pharmco or Schering  due to regulatory or other
causes, there can be no assurance that the Company could make alternative
manufacturing arrangements on a timely basis, if at all. Such an interruption
could have a material adverse effect on the Company's business, financial
condition, and results of operations.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Jones Medical
Industries, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.


                                                                            F-10
<PAGE>   47
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

Cash equivalents in short-term money market accounts and other investments with
original maturities of less than three months are stated at cost plus accrued
interest and are considered to be cash equivalents.

INVENTORIES

Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out basis.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are recorded at cost. Depreciation is computed by
the straight-line method over the useful lives of the assets as follows:

                                                         ESTIMATED
                   ASSET CATEGORY                       USEFUL LIFE
-------------------------------------------------------------------
     Buildings and improvements                         15-40 years
     Equipment and furniture                             5-15 years
     Automobiles                                          5 years

INTANGIBLE ASSETS

The cost of product line or business acquisitions accounted for using the
purchase method of accounting is allocated first to identifiable assets and
liabilities based on estimated fair values. The excess of cost over identifiable
assets and liabilities is recorded as goodwill.

Amortization is provided using the straight-line method over the estimated
useful lives of the assets as follows:

                                                              ESTIMATED
                       ASSET CATEGORY                        USEFUL LIFE
------------------------------------------------------------------------
     Customer lists                                            20 years
     Distribution systems, trademarks, and licenses           5-30 years
     Restrictive covenants and other intangibles              5-10 years
     Goodwill                                                25-40 years


                                                                            F-11
<PAGE>   48
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands except per share amounts)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLE ASSETS (CONTINUED)

The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangibles as well as the related amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying values and/or revised estimates of useful lives. This evaluation is
based on the Company's projection of the undiscounted operating income before
depreciation, amortization, and interest over the remaining lives of the
amortization periods of related goodwill and intangible assets. The projections
are based on the historical trend line of actual results since the date of
acquisition of the respective assets and adjusted for expected changes in
operating results.

To the extent such projections indicate that the undiscounted operating income
(as defined above) is not expected to be adequate to recover the carrying
amounts of related intangibles, such carrying amounts are written down by
charges to expense in amounts equal to the excess of the carrying amount of
intangible assets over the respective fair values. At this time, the Company
believes that no significant impairment of the goodwill and other intangibles
has occurred and that no reduction of the estimated useful lives is warranted.

REVENUE RECOGNITION

Sales are reported net of rebates, returns, and discounts during the period in
which product is shipped. Product rebates and discounts are incurred due to
volume or other contractual allowances on certain pharmaceutical sales under
contracts with hospitals, buying groups, and managed care organizations. Product
returns are permitted in accordance with operating policies established with
respect to unused pharmaceuticals. At December 31, 1996 and 1997, the Company
maintained reserves of $1,857 and $2,215, respectively, for product rebates,
returns, and discounts.

STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, no compensation expense
is recognized because the exercise price of the Company's incentive stock
options equals the market price of the underlying stock on the date of grant.



                                                                            F-12
<PAGE>   49
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands except per share amounts)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK OPTIONS (CONTINUED)

In connection with various nonqualified stock option plans, certain options have
been granted at exercise prices below the fair market value of the common stock
at the grant date. Differences between the option prices and fair market values
at the dates of grant are charged to compensation expense ratably over the
future service vesting periods.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

4. ACQUISITIONS

CYTOMEL AND TRIOSTAT

On June 27, 1997, the Company acquired two products, Cytomel and Triostat, from
SmithKline Beecham Corporation (SKB) for a cash purchase price of $22,800. The
purchase price has been allocated to the acquired intangibles with amortizable
lives ranging from 10 to 25 years. In connection with the acquisition, the
Company entered into manufacturing agreements for the future supply of both
Cytomel and Triostat. The Company also purchased approximately $850 of SKB's
related finished goods inventory that was on hand at the acquisition date.

ABANA

Since June 1, 1992, the Company has owned an investment in Abana
Pharmaceuticals, Inc. (Abana) equivalent to 16 percent of Abana's outstanding
common stock. In October 1996, the parties reached an agreement in principle
whereby the Company would acquire the remaining 84 percent of Abana's
outstanding common stock. On December 31, 1996, the consummation date of the
acquisition, the Company issued 420,553 shares of its common stock in exchange
for the remaining outstanding common stock of Abana. In addition, outstanding
Abana stock options were exchanged for approximately 40,000 of the Company's
stock options. The total purchase price of approximately $14,900, representing
the fair value of Company common stock given of approximately $13,900 and the
fair value of stock options given of approximately $1,000, has been allocated to
the fair value of assets acquired and liabilities assumed in accordance with the
purchase method of accounting. The excess of the purchase price over the fair
values of acquired assets and liabilities, totaling



                                                                            F-13
<PAGE>   50
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




4. ACQUISITIONS (CONTINUED)

ABANA (CONTINUED)

approximately $13,000, has been allocated to goodwill with an estimated
economic life of 25 years. Pro forma results of operations, assuming the
acquisition of Abana had occurred on January 1, 1996, would not materially
differ from the 1996 reported results of operations.

TAPAZOLE

On March 18, 1996, the Company entered into a perpetual licensing agreement with
Lilly for the exclusive United States marketing rights to the Tapazole product
line. The purchase price of approximately $26,000 was financed with short-term
bank debt of $8,700 and Lilly financing of $17,300 for six months. Approximately
$24,000 was allocated to the perpetual license with an amortizable life of 30
years, and $2,000 was allocated to a restrictive covenant with an amortizable
life of 10 years.

BREVITAL

On August 31, 1995, the Company acquired a perpetual licensing agreement for the
exclusive United States marketing rights to the Brevital product line from
Lilly. The purchase price of approximately $14,000 was financed with bank debt
of $7,000 and Lilly financing of $7,000. Approximately $13,000 was allocated to
the perpetual license with an amortizable life of 30 years, and $1,000 was
allocated to a restrictive covenant with an amortizable life of 10 years.

5. EARNINGS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share are very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the Statement No. 128 requirements.



                                                                            F-14
<PAGE>   51
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




5. EARNINGS PER SHARE (CONTINUED)

The following table sets forth the computations of basic and diluted earnings
per share:

<TABLE>
<CAPTION>
                                                        1995               1996               1997
                                                 ------------------------------------------------------

<S>                                             <C>                <C>                <C>
Numerator for basic and diluted
earnings per share:
   Income from continuing operations             $        5,314    $        11,518    $        25,044
   Income from discontinued operations                    7,075              6,621              6,926
                                                 ------------------------------------------------------
                                                         12,389             18,139             31,970
Denominator:
  Denominator for basic earnings per
   share-weighted average shares                     23,962,327         27,021,430         28,581,588
  Effect of dilutive stock options                      584,735            765,921            664,830
                                                 ------------------------------------------------------
Denominator of diluted earnings per share            24,547,062         27,787,351         29,246,418
                                                 ======================================================

Earnings per share:
  Basic:     Continuing operations                        $0.22              $0.43              $0.88
             Discontinued operations                      $0.30              $0.24              $0.24
                                                 ------------------------------------------------------
                                                          $0.52              $0.67              $1.12
                                                 ======================================================

  Diluted:   Continuing operations                        $0.21              $0.41              $0.85
             Discontinued operations                      $0.29              $0.24              $0.24
                                                 ------------------------------------------------------
                                                          $0.50              $0.65              $1.09
                                                 ======================================================
</TABLE>


6. SUPPLEMENTAL CASH FLOW INFORMATION

The following is a summary of supplemental cash flow information:

<TABLE>
<CAPTION>
                                      1995                1996                1997
                               ------------------------------------------------------------

<S>                             <C>                     <C>                 <C>
Interest paid                       $    502            $     532           $      259
Income taxes paid                   $  7,007            $  14,109           $   15,998
</TABLE>



                                                                            F-15
<PAGE>   52
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




7. INVENTORIES

Inventories at December 31, 1996 and 1997, are comprised of the following:
<TABLE>
<CAPTION>
                                             1996                  1997
                                         -----------------------------------
<S>                                        <C>                  <C>
Raw materials                              $  4,767             $    6,724
Work-in-process                               1,539                  1,569
Finished goods                                6,447                  7,064
                                         -----------------------------------
                                           $ 12,753             $   15,357
                                         ===================================
</TABLE>

8. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31, 1996 and 1997, are as follows:

<TABLE>
<CAPTION>
                                             1996                  1997
                                         -------------------------------------
<S>                                       <C>                   <C>
Land                                      $   2,420             $    2,420
Buildings and improvements                   11,710                 13,358
Equipment and furniture                      15,023                 17,238
Automobiles                                     438                    615
Projects in process                               -                  1,416
                                         -------------------------------------
                                             29,591                 35,047
Less accumulated depreciation                 5,421                  7,504
                                         -------------------------------------
                                            $24,170             $   27,543
                                         =====================================
</TABLE>



                                                                            F-16
<PAGE>   53
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 1996 and 1997, are
comprised of the following:

<TABLE>
<CAPTION>
                                      1996                  1997
                                     ------------------------------
<S>                                   <C>                   <C>
Trade payables                        $1,227                $1,083
Sales rebates, returns, and
   discounts                           1,857                 2,215
Compensation                           1,493                   480
Taxes other than income                  133                    45
Interest                                 196                     -
Royalties                                285                   382
Health insurance claims                  131                   115
Nonrecurring merger expenses             178                     -
Other                                    972                   810
                                     ------------------------------
                                      $6,472                $5,130
                                     ==============================
</TABLE>

10. LONG-TERM DEBT

Long-term debt at December 31, 1996 and 1997, consists of the following:

<TABLE>
<CAPTION>
                                               1996             1997
                                           ----------------------------
<S>                                        <C>                 <C>
Note payable to Lilly at 7%; payable in
installments of $4,000 in August 1996 and
$3,000 in August 1997                      $  3,000            $    -
                                           ----------------------------
                                              3,000                 -
Less current maturities                       3,000                 -
                                           ----------------------------
                                           $     -             $    -
                                           ============================
</TABLE>



                                                                           F-17
<PAGE>   54
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




11. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 and
1997, are as follows:

<TABLE>
<CAPTION>
                                                       1996             1997
                                                 -----------------------------
<S>                                                   <C>              <C>
Deferred tax liabilities:
   Depreciation and amortization                      $5,282           $5,922

Deferred tax assets:
   Accrued sales rebates, returns, and discounts       1,069            1,220
   Deferred compensation on stock options                 86               87
   Unicap adjustment on inventory                        267              298
   Allowance for doubtful accounts                       129              436
   Other                                                 295              402
                                                 -----------------------------
                                                       1,846            2,443
                                                 -----------------------------
Net deferred tax liabilities                          $3,436           $3,479
                                                 =============================
</TABLE>

Significant components of the provision for income taxes from continuing
operations are as follows:

<TABLE>
<CAPTION>
                        1995                 1996                  1997
                  -------------------------------------------------------------
<S>                    <C>                  <C>                   <C>
Current:
   Federal             $2,742               $7,311                $14,206
   State                  335                  570                  1,050
                  -------------------------------------------------------------
Total current           3,077                7,881                 15,256

Deferred:
   Federal                 (3)                 375                     93
   State                    -                   26                      2
                  -------------------------------------------------------------
Total deferred             (3)                 351                     95
                  -------------------------------------------------------------
                       $3,074               $8,232                $15,351
                  =============================================================
</TABLE>


                                                                            F-18
<PAGE>   55
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)



11. INCOME TAXES (CONTINUED)

The provision for income taxes from discontinued operations in 1995, 1996, and
1997 of $4,337, $4,058, and $4,244, respectively, has been netted against the
income from discontinued operations in the accompanying consolidated statements
of income.

A reconciliation of the difference between the United States federal statutory
tax rates and the effective income tax rate as a percentage of net income before
taxes from continuing operations is as follows:

<TABLE>
<CAPTION>
                                         1995           1996             1997
                                    --------------------------------------------
<S>                                    <C>              <C>              <C>
U.S. federal statutory tax rate         35.0 %          35.0%            35.0%
State income taxes, net of
federal tax benefit                      4.0 %           3.0%             1.7%
Other, net                              (2.4)%           3.7%             1.3%
                                    --------------------------------------------
                                        36.6 %          41.7%            38.0%
                                    ============================================
</TABLE>

12. PREFERRED STOCK

The Company's Board of Directors may without further action by the Company's
stockholders, from time to time, direct the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the rights,
preferences, and limitations of each series. The holders of preferred stock
would normally be entitled to receive a preference payment in the event of any
liquidation of the Company before any payment is made to the holders of the
common stock. As of December 31, 1996 and 1997, there were no shares of
preferred stock designated or outstanding.

13. STOCK OPTION PLANS

The Company has various incentive stock plans for executives and employees. In
connection with the plans, options to purchase common stock are granted at
option prices not less than the fair market values of the common stock at the
time the options are granted and vest ratably over five- to ten-year periods
from the grant dates. At December 31, 1997, options for 1,266,655 shares of
common stock are available for future grant. A total of 1,498,676 options to
purchase common stock are outstanding under these plans at December 31, 1997,
of which 247,431 are currently exercisable. Included in the outstanding options
under these plans are options to purchase 675,000 shares of common stock that
have been granted to certain officers of the Company under time accelerated
stock option agreements. The options



                                                                            F-19
<PAGE>   56
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
                 (Dollars in thousands except per share amounts)



13. STOCK OPTION PLANS (CONTINUED)

become exercisable at the end of eight years from the grant date; however,
the options may become exercisable at earlier dates if certain targeted common
stock prices are attained.

In November 1996, the Company amended the incentive stock plans to allow for
employee payment of option exercise prices in the form of either cash or
previously held common stock of the Company. Shares tendered in payment of the
option exercise price must be owned by the employee making the tender for not
less than six months prior to the date of tender.

Option activity for 1995, 1996, and 1997 was as follows:

<TABLE>
<CAPTION>
                                                          1995                1996              1997
                                                 ----------------------------------------------------------

<S>                                              <C>                    <C>                 <C>
  Outstanding options, January 1                          973,215             875,025         1,424,345
  Exercised                                              (281,565)           (333,397)         (224,724)
  Granted                                                 194,625             901,070           417,500
  Cancelled                                               (11,250)            (18,353)         (118,445)
                                                 ----------------------------------------------------------
  Outstanding options, December 31                        875,025           1,424,345         1,498,676
                                                 ==========================================================
  Weighted average price of options
    outstanding, January 1                                 $2.36              $ 2.76            $  9.65
                                                 ==========================================================
  Weighted average price of options exercised              $1.58              $  2.41           $  3.10
                                                 ==========================================================

  Weighted average price of options granted                $3.67              $ 13.24           $ 32.42
                                                 ==========================================================

  Weighted average price of options cancelled              $2.85              $  3.35           $ 24.19
                                                 ==========================================================
  Weighted average price of options
    outstanding, December 31                               $2.76              $  9.65           $ 15.82
                                                 ==========================================================
</TABLE>


                                                                            F-20
<PAGE>   57
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands except per share amounts)




13. STOCK OPTION PLANS (CONTINUED)

Outstanding options at December 31, 1997 are exercisable as follows, assuming
the targeted common stock prices are attained with respect to the time
accelerated stock options:

<TABLE>
<CAPTION>
                                                              WEIGHTED
                                                              AVERAGE             RANGE OF
                                           NUMBER              OPTION              OPTION
                                          OF SHARES            PRICE               PRICE
                                     ------------------------------------------------------------

<S>                                  <C>                     <C>              <C>
  Currently exercisable at
    December 31, 1997:                        247,431          $ 9.55         $  2.44 - $40.00
  Outstanding options vesting in:
    1998                                      282,205          $11.92         $  2.33 - $40.00
    1999                                      281,855          $13.63         $  2.89 - $40.00
    2000                                      277,655          $15.76         $  2.89 - $40.00
    2001                                      263,630          $20.42         $ 10.67 - $40.00
    2002 and thereafter                       145,900          $30.01         $ 10.67 - $35.56
                                     --------------------
                                            1,498,676          $15.82
                                     ====================
</TABLE>


Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
binomial option pricing model with the following weighted average assumptions
for 1995, 1996, and 1997, respectively: risk-free interest rates of 6.26
percent, 6.36 percent, and 5.52 percent; a dividend yield of 0.2 percent, 0.2
percent, and 0.3 percent; volatility factors of the expected market price of the
Company's common stock of 0.514, 0.516, and 0.610 percent; and a weighted
average expected life of the options of five years.

The binomial option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                                                            F-21
<PAGE>   58
                        Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




13. STOCK OPTION PLANS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                    1995                 1996                 1997
                                              -----------------------------------------------------------

<S>                                           <C>                    <C>                     <C>
  Pro forma net income                          $ 12,346             $  17,511               $  30,727
                                              ===========================================================
  Pro forma earnings per share - diluted
                                                $    .50             $     .63               $    1.05
                                              ===========================================================
</TABLE>


14. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan covering substantially all
employees. The plan provides the Company may match 100 percent of the employee
voluntary contributions up to a maximum matching contribution of 6 percent of
the employee's compensation. Company contributions in 1995, 1996, and 1997 were
approximately $224, $357, and $614, respectively, of which approximately $90
pertains to discontinued operations in each of the years.

15. CONTINGENCIES AND COMMITMENTS

At December 31, 1996, the Company carried product liability coverage of $20
million per occurrence and $20 million in the aggregate on a "claims made"
basis and carried excess coverage of $5 million through an umbrella
policy. There is no assurance that the Company's present insurance will cover
any potential claims that may be asserted in the future. In addition, the
Company is subject to legal proceedings and claims which arise in the ordinary
course of its business.

The Company is a defendant in a number of lawsuits involving the manufacture
and sale of dexfenfluramine, fenfluramine, and phentermine (collectively,
"Fen/Phen").  The Company distributes Obenix, its branded phentermine product;
however, the Company does not manufacture Obenix or other Fen/Phen
combinations.  The lawsuits are in their preliminary stages and it is too
early to determine what, if any, liability the Company may have with respect to
the claims set forth in these lawsuits.  Management of the Company believes
that the outcome of these lawsuits will not have a material adverse effect on
the Company's business, financial condition, and results of operations.


                                                                            F-22
<PAGE>   59
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




15. CONTINGENCIES AND COMMITMENTS (CONTINUED)

The FDA announced in an August 14, 1997, Federal Register Notice that orally
administered drug products containing levothyroxine sodium are now classified as
new drugs.  Manufacturers who wish to continue to market these products must
submit new drug applications (NDA).  After August 14, 2000, any levothyroxine
sodium product marketed without an approved NDA will be subject to regulatory
action.  Levoxyl, since it was marketed prior to the date of this notice, will
continue to be eligible for marketing until August 14, 2000.  The FDA is
allowing the Company and other current manufacturers three (3) years to obtain
approved NDA's. The Company plans to dedicate significant resources to this NDA
process during 1998 and 1999 and expects to incur costs in excess of $2 million
to secure an approved NDA for Levoxyl.

In connection with certain product line acquisitions, the Company is obligated
to pay royalties of up to 10 percent of certain product sales through 2008.
Total royalty expense in 1995, 1996, and 1997 was approximately $593, $872, and
$1,358, respectively.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                    1996                        FIRST           SECOND          THIRD           FOURTH
                                           --------------------------------------------------------------

<S>                                        <C>             <C>             <C>             <C>
  Net sales from continuing operations         $12,321         $16,418         $17,522         $17,920
  Gross profit                                   8,015          11,563          11,417          12,909

  Income from continuing operations              1,925           4,249             132           5,212
  Income from discontinued operations            1,824           1,589           1,657           1,551
                                           --------------------------------------------------------------
  Net income                                   $ 3,749         $ 5,838         $ 1,789         $ 6,763
                                           ==============================================================
  Earnings per share: (a)(b)(c)
  Basic:  Continuing operations                  $0.08           $0.15           $0.00           $0.18
          Discontinued operations                $0.07           $0.06           $0.06           $0.06
                                           --------------------------------------------------------------
                                                 $0.15           $0.21           $0.06           $0.24
                                           ==============================================================

  Diluted:Continuing operations                  $0.08           $0.15           $0.00           $0.18
          Discontinued operations                $0.07           $0.05           $0.06           $0.06
                                           --------------------------------------------------------------
                                                 $0.15           $0.20           $0.06           $0.24
                                           ==============================================================
  Stock prices: (a)
    High                                        $30.33          $39.50          $50.50          $48.63
    Low                                         $10.38          $25.67          $21.00          $32.50
</TABLE>


                                                                            F-23
<PAGE>   60
                         Jones Medical Industries, Inc.

             Notes to Consolidated Financial Statements (continued)
               (Dollars in thousands except per share amounts)




16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                    1997                        FIRST           SECOND          THIRD           FOURTH
                                           -----------------------------------------------------------------

<S>                                       <C>               <C>              <C>             <C>
  Net sales from continuing operations         $21,637         $18,999         $22,168         $25,977
  Gross profit                                  16,791          11,936          16,053          18,571

  Income from continuing operations              6,469           4,582           6,366           7,628
  Income from discontinued operations            1,649           1,794           1,751           1,731
                                           -----------------------------------------------------------------
  Net income                                  $  8,118        $  6,376        $  8,117        $  9,359
                                           =================================================================
  Earnings per share:
  Basic:  Continuing operations                  $0.23           $0.16           $0.22           $0.27
          Discontinued operations                $0.06           $0.06           $0.06           $0.06
                                           -----------------------------------------------------------------
                                                 $0.29           $0.22           $0.28           $0.33
                                           =================================================================

  Diluted:Continuing operations                  $0.22           $0.16           $0.22           $0.26
          Discontinued operations                $0.06           $0.06           $0.06           $0.06
                                           -----------------------------------------------------------------
                                                 $0.28           $0.22           $0.28           $0.32
                                           =================================================================
  Stock prices:
    High                                        $38.00           $47.50         $45.25          $38.25
    Low                                         $23.63           $24.50         $26.00          $26.75
</TABLE>


(a)  Retroactively adjusted to reflect the three-for-two stock split declared
     February 7, 1996 and the three-for-two stock split declared May 22, 1996.

(b)  Retroactively adjusted to reflect the shares issued in connection with the
     Daniels merger on August 30, 1996.

(c)  Earnings per share from continuing operations in the third quarter of 1996
     reflect $5,743 of non-recurring expenses associated with the Daniels
     acquisition.  In the absence of such charges, basic and diluted earnings
     per share from continuing operations would have been $0.15.



                                                                            F-24
<PAGE>   61
                         Jones Medical Industries, Inc.

                 Schedule II - Valuation and Qualifying Accounts


<TABLE>
<CAPTION>
                                                 BALANCE AT     CHARGED TO
                                                 BEGINNING       COSTS AND      DEDUCTIONS -      BALANCE AT
                  DESCRIPTION                    OF PERIOD      EXPENSES(a)     WRITE-OFFS      END OF PERIOD
                                               ------------------------------------------------------------------

<S>                                            <C>              <C>             <C>              <C>
Year ended December 31, 1997
Reserves and allowances deducted from
  asset accounts:
    Allowance for doubtful accounts                $   388        $   891         $   (83)         $  1,196
                                               ==================================================================

    Accumulated amortization of intangibles        $ 7,500        $ 3,963         $   (29)         $ 11,434
                                               ==================================================================

Year ended December 31, 1996
Reserves and allowances deducted from
  asset accounts:
    Allowance for doubtful accounts                $   187        $   237         $   (36)         $    388
                                               ==================================================================

    Accumulated amortization of intangibles        $ 4,883        $ 2,617         $    -           $  7,500
                                               ==================================================================

Year ended December 31, 1995
Reserves and allowances deducted from
   asset accounts:
    Allowance for doubtful accounts                $   111        $    76         $    -           $    187
                                               ==================================================================

    Accumulated amortization of intangibles        $ 4,092        $ 1,430         $  (639)*        $  4,883
                                               ==================================================================
</TABLE>



*Write-off of fully amortized intangibles in 1995.

(a)  Includes items charged to both continuing and discontinued operations.


                                                                            F-25