<PAGE>   1
                       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, 1999
                                       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 PHARMA INCORPORATED
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

        1945 CRAIG ROAD, ST. LOUIS, MISSOURI                    63146
---------------------------------------------------   --------------------------
   (Address of principal executive office)                    (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 PER SHARE
--------------------------------------------------------------------------------
                                (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. [X]

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of March 1, 2000, was approximately $2.6
billion.

Number of shares outstanding of registrant's Common Stock as of March 1, 2000:
65,429,778.

Documents incorporated by reference:  NONE.


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INTRODUCTORY NOTES

Unless the context otherwise requires, the term "the Company" and the words
"we," "us," and "our" refer to JONES PHARMA INCORPORATED and its subsidiaries.
Thrombin-JMI(R), Levoxyl(R), Tapazole(R), Triostat(R), Cytomel(R),
Brevital(R)Sodium, Soloxine(R), Liqui-Char(R), Therevac(R) and Derma-Scrub(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. All share data and historical financial information appearing
in this report have been restated for all prior periods to reflect a three for
two split of the Company's Common Stock effective August 6, 1999, and a second
three for two split of the Company's Common Stock effective March 1, 2000.
Product and product line net sales and related percentages discussed in Item 1
reflect the reclassification of certain items.

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. Words such as "intends," "expects," "anticipates," "believes" and
"may" are generally used to identify such forward-looking statements. 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

We manufacture and market specialty pharmaceutical products in the United States
under our own trademarks and tradenames. Since our founding in 1981, we have
acquired domestic rights to specialty or niche pharmaceuticals such as
prescription treatments for thyroid disorders and critical care treatments
involving hemostasis and anesthesia.


BUSINESS STRATEGY

Our business strategy is

-        to generate internal growth through the targeted promotion of our
         portfolio of niche pharmaceutical products; and

-        to acquire additional specialty pharmaceutical product lines or
         operations that complement or expand the marketing or distribution
         of our existing product lines.

Our current product lines have been acquired through a series of acquisitions
that have complemented or expanded our existing lines of business. As our
business has grown, we have sold or discontinued certain product lines or
operations which no longer fit our strategic criteria or objectives. This
permits us to concentrate our efforts on higher margin products and on products
which we believe have continued growth potential.

We intend to continue to build upon existing marketing and sales capabilities to
increase unit volume and market share for our products and to maintain or
increase net selling prices as market conditions allow. We also intend to
evaluate and pursue additional strategic acquisitions of pharmaceutical products
or business operations which we believe have growth potential.



<PAGE>   3


The key elements of our business strategy include:

-    leveraging established pharmaceutical marketing and sales efforts. We seek
     to maximize productivity of our sales force through the targeted marketing
     of promotion-sensitive, niche pharmaceutical products. We employ evolving
     marketing approaches to maximize the productivity of our sales force. Our
     marketing efforts focus on physicians and other health care providers,
     retail pharmaceutical chains and managed-care operations such as health
     maintenance organizations ("HMOs"), preferred provider organizations
     ("PPOs") and pharmacy benefit managers ("PBMs").

-    maintaining high gross and operating margins. By focusing our marketing
     efforts on a limited number of high margin products, we have achieved
     significant increases in both sales and margins. These marketing
     initiatives have permitted us to increase unit pricing while maintaining or
     expanding market share. We also endeavor to control manufacturing, selling
     and overhead costs.

-    acquiring and building market share in other specialty pharmaceuticals. We
     will continue to seek the rights to products that we believe can benefit
     from focused marketing efforts. We will also pursue the possible
     acquisition of pharmaceutical operations which we believe can benefit from
     our marketing strategies. Such operations may relate to the development of
     new pharmaceuticals or the development of currently available products in
     new dosage forms or for use in the treatment of new therapeutic
     indications.

Our pursuit of these strategies involves risks and may also present conflicts
between short-term and long-term objectives. These risks and conflicts include
the following:

-    The marketing and sale of pharmaceuticals is intensely competitive and
     highly regulated. The demand for pharmaceutical products can be affected by
     the introduction of new pharmaceutical treatments, by the marketing of
     generic alternatives and by regulatory initiatives.

-    Increased profit margins, particularly those arising from increasing unit
     pricing,

                  ~    may adversely affect unit volume and market share,

                  ~    may attract competition from generic formulations,

                  ~    may adversely affect the availability of additional
                       under-marketed product lines at prices we deem reasonable
                       and attractive, and

                  ~    may result in governmental or other pressures to restrict
                       or limit price increases.

-             The acquisition or introduction of new product lines or operations
              may adversely affect margins, even if incrementally benefiting
              both total revenues and total earnings. The acquisition of
              operations engaged in development activities may increase overhead
              costs since we have not historically engaged in significant
              research and development activities.

We provide additional information concerning certain of these and other risks
under the captions "Competition," "Principal Suppliers" and "Government
Regulation" elsewhere in this report.

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<PAGE>   4


PRODUCTS

The Company's principal pharmaceutical product groups, each of which contributed
more than 10% of revenues during 1998 or 1999, are:

-        levothyroxine synthetic T4 thyroid products;
-        liothyronine synthetic T3 thyroid products;
-        methimazole anti-thyroid products;
-        thrombin hemostatic products; and
-        methohexital anesthetic products.

The following charts reflect the relative sales contributions of these product
groups to sales during 1998 and 1999 (in thousands of dollars).

<TABLE>
<CAPTION>
                                        1998                     1999
                                        ----                     ----
<S>                                <C>             <C>         <C>         <C>
               Levothyroxine           $ 30,266     29.3%       $ 37,536     28.3%
               Liothyronine            $  8,551      8.3%       $ 13,582     10.3%
               Methimazole             $ 24,127     23.3%       $ 26,507     20.0%
               Thrombin                $ 17,252     16.7%       $ 33,663     25.4%
               Methohexital            $ 10,876     10.5%       $ 10,228      7.7%
               Other                   $ 12,342     11.9%       $ 11,028      8.3%
                                      ---------     -----       --------     -----
                        Total          $103,414     100.0%      $132,544    100.0%
                                       ========    ======       ========    ======
</TABLE>

         Levothyroxine synthetic T4 thyroid products. Levothyroxine
     pharmaceutical products are synthetic hormones used to supplement or
     enhance tetraiodothyronine or T4 levels produced by underactive thyroid
     glands. Our primary branded product is Levoxyl, an orally administered
     product containing levothyroxine sodium. The Food and Drug Administration
     requires, effective August 14, 2000, that Levoxyl and all other oral
     levothyroxine sodium pharmaceuticals file and receive approval of "new drug
     applications." We provide additional information regarding the new drug
     application approval process for Levoxyl under the caption "Government
     Regulation." Sales of Levoxyl represented $32.8 million or approximately
     24.7% of our 1999 sales. We also market Soloxine, a levothyroxine
     formulation for use by veterinarians in the treatment of thyroid problems
     in companion animals.

         Liothyronine synthetic T3 thyroid products. Liothyronine products are
     synthetic forms of a naturally occurring hormone called triiodothyronine or
     T3. These products are primarily used to treat thyroid hormone
     deficiencies, replacing or supplementing patients' natural thyroid hormone
     levels. Our branded products are Cytomel (tablet form) and Triostat
     (injectible form) which we market as treatments for acute thyroid
     disorders.

         Methimazole anti-thyroid products. Methimazole products are used in the
     treatment of hyperthyroidism. These products inhibit or suppress the
     synthesis and production of natural thyroid hormones and act as agents to
     reduce the size of a goiter (an abnormal growth resulting from over
     activity of the thyroid gland). Our products are marketed and sold under
     the name Tapazole. These products are used by physicians to treat humans
     and by veterinarians to treat companion animals.

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         Thrombin hemostatic products. Our thrombin products are hemostatic
     agents which are used during invasive surgical procedures to promote rapid
     clotting, control blood loss and maintain visibility of the surgical site.
     These products are derived from bovine blood and are used as a topical
     application. We also supply thrombin products to other pharmaceutical
     companies as a branded product and for use in combination with collagen and
     cellulose fibrin sealants.

         Methohexital anesthetic products. Methohexital is a general anesthetic
     agent administered intravenously. Our branded product is Brevital Sodium
     which addresses both the short-term and long-term anesthesia markets
     because of its rapid onset of action and quick recovery time. Brevital is
     used alone and in combination with other anesthetics. Its rapid onset of
     action makes it a useful induction agent prior to the administration of
     other agents to maintain the anesthesia.

         Other products.  Our other products include:

       - Liqui-Char, a toxin antidote;

       - Therevac, a mini-enema for rehabilitation therapy;

       - Derma-Scrub, a line of anti-microbial soaps and lotions;

       - Tussigon, a pain manager for companion animals and a treatment for
         kennel cough; and

       - Pancrezyme, a companion animal digestive aid.


MARKETING AND SALES

Although consumers obtain our products from pharmacies, hospitals and health
care providers, the Company's sales are primarily made to wholesale drug
distributors such as McKesson HBOC, Inc., Bergen Brunswig Corp. and Cardinal
Health, Inc., and to warehousing retail pharmacy chains such as Walgreens and
Wal-Mart. The following chart reflects the sales to customer categories in 1999
and shows which of our customers accounted for 10% or more of our 1999 sales:

                ------------------------------- -------------------
                      CUSTOMER/CATEGORY          % OF 1999 SALES
                ------------------------------- -------------------
                McKesson HBOC, Inc.                    19%
                ------------------------------- -------------------
                Bergen Brunswig Corp.                  18%
                ------------------------------- -------------------
                Cardinal Health, Inc.                  16%
                ------------------------------- -------------------
                Other Wholesalers                      25%
                ------------------------------- -------------------
                Pharmacies                             15%
                ------------------------------- -------------------
                Other                                   7%
                ------------------------------- -------------------

We market and promote our products primarily through our unified field sales
force of 115 employees who call upon office and hospital based physicians and
other health care providers. The structure of our sales force permits the field
sales personnel to focus on all of our key products that are currently subject
to competition as well as focus on the expansion of distribution channels. Prior
to 1999, we divided our sales force to concentrate on hospital pharmacies with
respect to critical care products such as Thrombin-JMI and Brevital and on
prescribing physicians with respect to endocrine products.

The activities of our field sales force are assisted by an internal marketing
staff providing administration and support, including customer service
functions. Our management and marketing staff negotiate contracts with managed
care organizations such as HMOs, PPOs and PBMs and with hospital buying groups.
We also attend major medical conventions and symposia and utilize advertising in
trade publications.

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Marketing activity for endocrine pharmaceuticals focuses on physicians
prescribing our products, on retail pharmacies filling prescriptions for our
products and on administrators of HMOs, PPOs and PBMs who establish formularies
of approved and preferred pharmaceutical products. Due to the emerging
predominance of HMOs, PPOs and PBMs in the provision of managed or insured
health care, we have entered into contracts with managed care organizations.
These contracts provide incentive rebates tied to increased usage of our
products.

Marketing activities for critical care pharmaceuticals focus 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. During 1999, we renegotiated the product
pricing under these arrangements to reduce discounts in the form of chargebacks.
As a result of this change, our sales of these products during 1999 reflected
higher net unit pricing.

We provide various rebates and discounts for our levothyroxine products and
selected other products. In 1999 we continued to discount levothyroxine to major
national accounts and various indirect accounts. In addition, we negotiated
incentive-based rebates with certain customers making them eligible for rebates
if they attain and maintain certain market share levels.

Rebates and discounts are reflected in reported net sales. Under certain of our
contracts with hospitals, buying groups and pharmacies, we pay fees to these
customers to offset their administrative expenses in connection with the
contracts. These fees are accounted for as a selling expense. In addition to
selling efforts based upon the merits, characteristics and pricing of our
products, we provide 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 also accounted for as a selling expense.


COMPETITION

The marketing and sale of pharmaceuticals is highly competitive. Many of our
competitors are large well-known pharmaceutical companies which have
considerably greater financial, sales, marketing and technical resources than
the Company. In addition, many of our present and potential competitors have
research and development capabilities that may allow such competitors to develop
new or improved products that may compete with our product lines.

Although our products are marketed under our own trademarks and tradenames, our
products do not enjoy patent protection. As a result, many of our key products
face potential competition from generic formulations.

The pharmaceutical industry is characterized by rapid product development and
technological change. Our pharmaceutical products could be rendered obsolete or
uneconomical by any of the following actions by any of our present and potential
competitors:

-    development of new pharmaceuticals to treat the conditions addressed by our
     products;

-    technological advances affecting the cost of production; and

-    marketing or pricing action affecting sales prices or gross margins.

The foregoing competitive factors constitute a risk to our business and can
materially and adversely affect the results of our operations, the viability of
our business strategy and our financial condition. A discussion of these
competitive factors as they relate to our principal products follows:

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<PAGE>   7


         Levothyroxine. The U.S. wholesale domestic market for levothyroxine is
     estimated at $450 million annually and is dominated by Synthroid(R) which
     is manufactured by Knoll Pharmaceutical Company, a subsidiary of BASF
     Pharma. We believe that Levoxyl is the second most widely prescribed brand
     of levothyroxine in the U.S. There are also three generic manufacturers of
     levothyroxine products currently in the U.S. Although prescription costs
     remain lower for treatments using Levoxyl rather than Synthroid(R),
     Synthroid(R) has been manufactured and marketed by Knoll for approximately
     50 years and enjoys an established historical base of familiarity. While
     the dollar volume of our sales of Levoxyl indicates a market share below
     10%, independent data relating to outstanding prescriptions indicates a
     17.7% growth in the number of new prescriptions for Levoxyl and a 24.5%
     growth in the number of active prescriptions for Levoxyl in 1999 as
     compared to 1998. We believe, based upon such data, that our share of the
     market based upon the number of active prescriptions grew to approximately
     27% during 1999.

         Liothyronine. While both Triostat and Cytomel are subject to potential
     competition from generic forms of T3, we are not aware of any current
     domestic generic forms of liothyronine in either injectible form or tablet
     form. We believe that due to the fact that the market for liothyronine is
     small, the manufacture and sale of generic forms of this compound are not
     economically attractive to potential competitors. If such generic
     formulations were approved for marketing and sale in the U.S., this could
     lead to a decrease in the price that customers would be willing to pay for
     our branded products.

         Methimazole. At the present time there are no generic alternatives to
     Tapazole although the product faces competition from propylthiouricyl, a
     product marketed by a number of independent generic pharmaceutical
     companies.

         Thrombin. The market for topical hemostats includes fibrin sealants
     made from collagen and cellulose in addition to thrombin products. Based
     upon published information, we estimate that the total market for topical
     hemostats was approximately $135 million in 1999 and that thrombin products
     held a 29% share of this $135 million market. Our manufacturing facility in
     Middleton, Wisconsin is the sole FDA licensed domestic producer of
     therapeutic thrombin products. Our Thrombin-JMI products account for
     approximately 88% of the thrombin product sub-market.

         Brevital Sodium.  Brevital Sodium faces competition in the intravenous
     anesthetic market from other intravenous anesthetic products.


PRODUCT SOURCES AND MANUFACTURING

We manufacture our products for our own account and for others. We also acquire
certain of our products from third party manufacturers. The percentage of
products manufactured by us or by others is subject to variance from year to
year based not only on the relative mix of our existing product lines, but also
as a result of acquisition and disposition activity. The following chart
reflects the relative mix of products manufactured by us and others during
1999, based on contribution to our net sales revenue:


                                                         1999
                                                         ----
                   By us for our account                60.8%
                   By us for others                      1.2%
                   By others for us                     38.0%


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         Products Manufactured by the Company.  Our principal manufacturing
operations are conducted in St. Petersburg, Florida and in Middleton, Wisconsin.

         -   St. Petersburg Facility. This facility processes raw materials
             purchased from outside sources to produce final products in
             compressed tablet form. The most significant product manufactured
             at this facility is Levoxyl which is produced within the guidelines
             of FDA regulations pertaining to prescription drugs. We are nearing
             completion of an $8.5 million project at this facility to remodel
             and expand capacity through production efficiencies. The project
             was undertaken in connection with the required new drug application
             for Levoxyl discussed under the caption "Government Regulation."

         -   Middleton Facility. This facility is licensed for the production of
             thrombin, USP products. This facility produces Thrombin-JMI and
             also acts as the licensed manufacturer of Thrombogen(R), a line of
             proprietary thrombin products manufactured under a distribution and
             development agreement for Ethicon, a subsidiary of Johnson &
             Johnson. The agreement with Ethicon expires in October 2000. In
             1999, sales of thrombin products to Ethicon approximated $1.6
             million; sales to Ethicon in 2000 are expected to be approximately
             $6.6 million, reflecting the end of the supply arrangement.

         Products Manufactured by Others. We rely on third-party manufacturers
to produce certain of our products. Our product line acquisitions generally
include on-going manufacture and supply arrangements with the former owner or
manufacturer of the acquired product. Reliance on such third-party manufacturing
involves risks. There is no assurance that we will be able to obtain adequate
supplies of products manufactured by others in a timely fashion, or at all. Such
an interruption would have a material adverse effect on our business, financial
condition and results of operations.

We also face the risk that, upon expiration of the term of any third-party
manufacturing agreement, we may not be able to renew or extend the agreement
with the third-party manufacturer, obtain an alternative manufacturing source
from other third parties or develop internal manufacturing capabilities on
commercially viable terms, if at all. Transfer of manufacturing of
pharmaceutical products generally requires FDA or other regulatory
change-in-site approvals. Cessation or interruption of manufacture may mean that
we are unable to continue to market products as planned and that we could be
required to abandon or divest a product line on materially adverse terms.

The most significant products currently manufactured by third parties for us
include Tapazole, Brevital, Cytomel and Triostat.

         -   Tapazole and Brevital. These products are manufactured for us by
             Eli Lilly & Company from whom they were acquired. As a result of
             each of these acquisitions, we obtained a perpetual, exclusive
             license to market and distribute the acquired product in the U.S.
             and entered into long-term manufacturing agreements with Lilly for
             supply of each of these products. These manufacturing agreements
             may be terminated by Lilly only after giving us at least five years
             notice. In the event of such termination, Lilly has agreed to use
             reasonable efforts to assist us in obtaining all the necessary
             licenses and approvals to enable us or an alternative manufacturer
             to manufacture either product.

         -   Triostat. Triostat is currently manufactured for us by SB Pharmco,
             an affiliate of SmithKline, pending transfer of manufacture to a
             successor. We have selected a new third-party manufacturer as a
             successor to SB Pharmco and have negotiated satisfactory terms for
             future supply of our needs. We anticipate that contract
             arrangements with this manufacturer will be finalized by July 2000,
             concurrently with anticipated receipt of site change approval from
             the FDA. We intend to acquire and maintain adequate inventory from
             SB Pharmco to cover product needs through the transition from SB
             Pharmco to this new manufacturer. We

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<PAGE>   9



              anticipate that SB Pharmco will continue to manufacture
              Triostat for a limited period in the event of unanticipated
              delays in the FDA site change approved process. The failure to
              successfully complete this alternative manufacturing arrangement
              in a timely manner, however, could have a material adverse effect
              on our business, financial condition and results of operation.

-             Cytomel. Cytomel is manufactured for us by Schering Canada, Inc.
              under rights and obligations which were respectively assigned to,
              and assumed by, us in connection with the acquisition of Cytomel
              from SmithKline. Schering's obligation to continue to manufacture
              Cytomel for us expires in December 2000. We are currently
              negotiating with Schering to extend the manufacture of Cytomel for
              us beyond December 2000. The failure to negotiate such an
              extension, however, could have a material adverse effect on our
              business, financial condition and results of operation.


PRINCIPAL SUPPLIERS

The raw materials for most of our products (whether they are manufactured by us
or by third-parties) are available from a single source primarily as the result
of a lack of quality raw materials from other sources, barriers to new entrants
arising from significant manufacturing and processing start-up costs, and
various regulatory approval processes which apply to many raw materials used in
the manufacture of pharmaceuticals. Disruptions in the supply of the raw
materials necessary to manufacture our products, including disruptions in
supplies of any of our products manufactured by others due to a third-party
manufacturer's inability to procure raw materials, would have a material adverse
effect on our business, financial condition and results of operations.

Although we have not experienced any significant shortages in supplies of raw
materials used in our manufacture of product, we have experienced temporary
product shortages with respect to the supply of finished goods from third-party
manufacturers. Generally such shortages do not affect marketing activity or the
availability of product to pharmacies or consumers because of inventory levels
maintained by pharmaceutical distributors. Such shortages may, however, impact
the Company's sales revenue and unit volume.

The most recent such occurrence was in the second quarter of 1998 and related to
an approximate $700,000 backorder of Brevital. This product shortage resulted
from increased demand for Brevital that Lilly was unable to supply due to
production and delivery delays. The Brevital backorders at June 30, 1998 were
filled during the third quarter of 1998.

We have been advised by Lilly that delays in obtaining release of key raw
materials from one of its suppliers may affect deliveries of Brevital to us
during the second quarter of 2000. As a result, we expect to experience
shortages in some Brevital dosages from time to time during the second quarter.
Lilly received delivery of the needed raw materials in March 2000. We currently
expect that any resulting shortages will be cured prior to the end of the second
quarter. Deliveries of raw material to Lilly in March appear sufficient to
provide product availability for Brevital through 2001. Lilly has indicated that
it is qualifying an alternative supplier for the raw material needed to produce
Brevital.

Although Lilly continues to manufacture and distribute Brevital and Tapazole for
its own account in connection with foreign markets, there can be no assurance
that Lilly will continue to meet FDA or product specification standards for
Brevital or Tapazole or that our 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 we could make alternative
manufacturing

                                       8

<PAGE>   10


arrangements on a timely basis, if at all. Unavailability of the
Company's products to end-users could materially and adversely affect the future
market for such products.


TRADEMARKS

Our products are sold under a variety of trademarks. We believe that we have
valid proprietary interests in all currently used trademarks, although only
certain of the trademarks are registered with the U.S. government. Our licenses
from Lilly for the Brevital and Tapazole trademarks are limited to the U.S.


GOVERNMENT REGULATION

The manufacturing, processing, formulation, packaging, labeling, storage,
promotion, distribution and advertising of our products are subject to extensive
regulation by one or more federal agencies as well as various agencies of the
states and localities in which our products are sold. The list of federal
agencies having regulatory power over our products include:

        -     the Food and Drug Administration ("FDA")
        -     the Drug Enforcement Administration ("DEA")
        -     the Environmental Protection Agency ("EPA")
        -     the Federal Trade Commission ("FTC")
        -     the Occupational Safety and Health Administration ("OSHA")
        -     the Department of Agriculture ("USDA")
        -     the Consumer Product Safety Commission ("CPSC")
        -     the United States Customs Service

All pharmaceutical products must be manufactured, packaged and labeled in
accordance with FDA approvals and in conformity with current good manufacturing
practices ("CGMP"). In order to ensure compliance with federal and state
regulations and with CGMP, all manufacturers, including the Company, are subject
to periodic inspections by the FDA and by state agencies. In addition,
pharmaceutical products must be distributed, sampled and promoted in accordance
with both FDA and state regulatory requirements. We believe that we are in
material compliance of both FDA and state regulations and that our products are
in material compliance with CGMP.

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 our products could materially
adversely affect our business, financial condition, and results of operations.

The primary statutes and regulations with which we must comply as a result of
the products we manufacture and market are

     -  New drug application approval
     -  Controlled Substances Act
     -  Modernization Act of 1997
     -  Prescription Drug Marketing Act

                                       9



<PAGE>   11
         New Drug Application Approval. Generally, new pharmaceutical products
must be approved by the FDA through review of new drug applications, or "NDAs,"
before they may be marketed. An exception to the NDA process exists for certain
prescription pharmaceuticals which do not require new drug applications because
these pharmaceuticals are deemed to have "grandfather status" under 1938
legislation, pursuant to Drug Effectiveness Study Implementation or under 1962
legislation, as well as for other reasons. Furthermore, the FDA has the
authority to revoke existing approved NDAs or to review the status of currently
exempt pharmaceuticals. In these situations, the FDA requires that such
pharmaceutical products receive approval through the NDA process if new
information reveals that they are not safe and effective.

The FDA announced on August 14, 1997, that orally administered drug products
containing levothyroxine sodium such as Levoxyl and Synthroid(R) would no longer
have "grandfather status" and would be reclassified as new drugs. The FDA
provided manufacturers with a three year period to submit and obtain NDA
approvals. In light of a new draft guidance policy issued by the FDA in 1999
pertaining to NDA requirements for levothyroxine sodium products, we, along with
other levothyroxine sodium manufacturers, challenged the FDA requesting that the
August 14, 2000 approval date be extended. At this time we have no indication
that the FDA will extend the approval date and we intend to comply with the
August 14, 2000 date. We have dedicated significant resources to the NDA process
for Levoxyl and to improvements to our St. Petersburg facility necessitated by
the NDA process. In 1999 we expended approximately $1.5 million in connection
with the NDA process and improvements to our St. Petersburg facility. We expect
to incur approximately an additional $7 million in 2000 to complete this Levoxyl
NDA related project and to expand manufacturing capacity.

         Controlled Substances Act. We manufacture and sell pharmaceutical
products which are "controlled substances" as defined in the Controlled
Substances Act. As a result, we must comply with the regulatory guidelines for
this class of pharmaceuticals, including security and recordkeeping requirements
which are administered and audited by the DEA.

         Modernization Act of 1997. We utilize advertising pieces in our
marketing and sales promotions that are subject to FDA and FTC regulations. The
FDA, under the Modernization Act of 1997, promulgated regulations which address
the utilization of peer-reviewed scientific studies covering non-approved, or
"off-labeled," indications. The Washington Legal Foundation brought legal action
challenging the constitutionality of these regulations on the premise that they
limit pharmaceutical companies' rights under the First Amendment of the U.S.
Constitution (namely, freedom of speech). Although the Washington Legal
Foundation was successful in its action at the trial court level, in February
2000, the FDA was successful in their appeal of the trial court's decision and
the Modernization Act became law.

Prior to the Modernization Act becoming law, the marketing of pharmaceutical
products for "off-labeled" indications by manufacturers, not only directly
through their own marketing efforts but also indirectly through the prescribing
habits of physicians, was an important marketing tool available to
pharmaceutical companies. The Modernization Act limits our potential for
marketing our key products for "off-labeled" indications at this time. We
anticipate that the change in the regulations will not have a material impact on
our marketing and sales efforts as the effects of this change will be borne by
the entire pharmaceutical industry. In order to comply with these regulation
changes, we have taken appropriate action to comply with the Modernization Act
on a prospective basis, and also to restrict the dissemination of reprints of
our prior advertising referencing "off-labeled" indications.

                                       10

<PAGE>   12


In January 2000, we received a Warning Letter from the FDA challenging the use
of terminology in an advertisement for our product Levoxyl that appeared in an
endocrinology meeting pamphlet. Although we disagree with the FDA on its limited
interpretation of our use of the word "interchangeable" in the context of the
advertisement, we have chosen to comply with terms of the Warning Letter which
include the discontinuance of the use of such advertisement materials and the
sending of a letter disclaiming the "interchangeable" language. At this time we
have no reason to believe that the FDA will take any further action, however, we
have not received final correspondence from the FDA on this matter.

         Prescription Drug Marketing Act. 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 levels. Under PDMA, states are permitted to require registration of
manufacturers and distributors and, in addition, they are permitted to require
registration of those who provide sample pharmaceuticals even if such
manufacturers or distributors have no place of business within the state. States
are also permitted to adopt regulations limiting the distribution of sample
products to licensed practitioners. PDMA imposes extensive recordkeeping and
reporting requirements on pharmaceutical companies, including us, to prevent the
sale of sampled pharmaceutical products or other diversion from their intended
use.


ENVIRONMENTAL STANDARDS

We use certain hazardous substances in our manufacturing processes. Such
substances require special handling and disposal as dictated by the EPA. We
believe that our manufacturing operations are in compliance with environmental
protection and other related government regulations.


EMPLOYEES

As of March 1, 2000, we had 381 full-time employees: 125 in sales and marketing,
46 in finance and administration, 71 in quality assurance, 121 in manufacturing,
and 18 in distribution.

We believe that our relationship with our employees is good. Approximately 60%
of our employees participate in ownership of the Company, either directly or
through participation in our employee stock option programs.

                                       11

<PAGE>   13
<TABLE>
<CAPTION>

ITEM 2.           PROPERTIES
-------           ----------
         -------------------------------- -------------------------------------------------------------------

              LOCATION OF FACILITY                      DESCRIPTION OF FACILITY AND OPERATIONS
              --------------------                      --------------------------------------
         -------------------------------- -------------------------------------------------------------------
<S>                                       <C>
               St. Louis, Missouri        -    150,000 square foot facility on a 15 acre site.
                                          -    Distribution   operations,   including   warehousing  and
                                               shipping, for our branded products.
                                          -    24,000 square feet of office space for our corporate
                                               headquarters.  This space houses our administration, sales and
                                               marketing operations and certain laboratory and quality
                                               assurance operations.
                                          -    Liquid   products,    including    Liqui-Char   and   the
                                               Derma-Scrub  line,  are  manufactured  and  packaged  at this
                                               facility.
         -------------------------------- -------------------------------------------------------------------
             St. Petersburg, Florida      -    42,000 square foot facility.
                                          -    We   manufacture,   package,   warehouse  and  distribute
                                               pharmaceuticals   at  this  facility,   including   primarily
                                               Levoxyl.
                                          -    As the result of recent  renovations and  consolidations,
                                               this facility consists of four buildings.
         -------------------------------- -------------------------------------------------------------------
              Middleton, Wisconsin        -    40,000 square foot, eight acre FDA-licensed  sterile fill
                                               facility.
                                          -    Manufacturing site for our thrombin products.
         -------------------------------- -------------------------------------------------------------------
                  Canton, Ohio            -    25,000 square foot facility
                                          -    This facility  warehouses and  distributes our controlled
                                               substance products.
         -------------------------------- -------------------------------------------------------------------
</TABLE>

ITEM 3.           LEGAL PROCEEDINGS
-------           -----------------
We are a defendant in more than two thousand five hundred multi-defendant
lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine and
phentermine (collectively, "Fen/Phen"). We did, following an acquisition in late
1996, act as a distributor of Obenix, a branded phentermine product. We also
distributed a generic phentermine product. We believe that our phentermine
products have been identified in less than one hundred of the foregoing cases.
The plaintiffs in these cases claim injury as a result of ingesting a
combination of these weight-loss drugs. They seek compensatory and punitive
damages as well as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories including but not
limited to, product liability, strict liability, negligence, breach of warranty,
and misrepresentation. These suits are filed in various jurisdictions throughout
the U.S. and in each of these suits, we are one of many defendants, including
manufacturers and other distributors of these drugs.

We deny any liability incident to the distribution of our phentermine products
and intend to pursue all defenses available to us. We have tendered defense of
these lawsuits to our insurance carriers for handling and they are currently
defending us in these suits. The lawsuits are in various stages. It is too early
to determine what, if any, liability we will have with respect to the claims set
forth in these lawsuits. In the event that our insurance coverage is inadequate
to satisfy any resulting liability, we will have to

                                       12
<PAGE>   14



resume defense of these lawsuits and be responsible for the damages, if any,
that are awarded against us. We do not believe that the outcome of these
lawsuits will have a material adverse effect on our business, financial
condition or results of operations.

We are not presently involved in any other litigation in which we believe an
adverse outcome would materially adversely affect our business, financial
condition or results of operations.

Reference is made to "Item 1 - Business - Government Regulation - Modernization
Act of 1997" elsewhere in this report for information concerning a Warning
Letter received from the FDA concerning advertising of Levoxyl.



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

We did not submit any matters to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.


                                       13

<PAGE>   15


                                     PART II

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

Our common stock is traded on the Nasdaq National Market under the symbol
"JMED." The following table sets forth the quarterly high and low sales prices
for our common stock reported by Nasdaq for the periods indicated (rounded to
the nearest cent):

<TABLE>
<CAPTION>
                                                    HIGH         LOW
                                                   -----        -----
                     1998
<S>                           <C>                  <C>          <C>
                              First Quarter        17.94        15.53
                              Second Quarter       16.72        12.83
                              Third Quarter        15.81        9.22
                              Fourth Quarter       16.78        11.61
                     1999
                              First Quarter        16.14        11.68
                              Second Quarter       17.58        13.63
                              Third Quarter        22.90        15.81
                              Fourth Quarter       30.83        17.66
</TABLE>

As of March 1, 2000, there were approximately 865 stockholders of record and a
total of 65,429,778 shares of our common stock outstanding. Approximately 59.9
million shares or 91.5% of the Company's outstanding common stock are held in
depository accounts representing "street name" or similar nominee ownership. We
believe that such shares are held for more than 18,000 non-record beneficial
holders' accounts.

We paid per share cash dividends of $0.0511 in 1998 and $0.0622 in 1999.

The future declaration and payment of cash dividends is subject to the
discretion of our Board of Directors and will depend upon many factors,
including our earnings, financial condition and capital needs and such other
factors as are deemed relevant by our Board. We anticipate that we will continue
to pay a dividend each quarter; however, our Board of Directors intends to
review this policy from time to time.


ITEM 6.           SELECTED FINANCIAL DATA

         The selected consolidated financial data presented below as of and for
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived
from our consolidated financial statements included elsewhere in this report,
which have been audited by Ernst & Young, LLP. This selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report as well as in conjunction with our audited consolidated financial
statements and the notes thereto.


                                       14

<PAGE>   16


         STATEMENT OF OPERATIONS DATA:
         (In thousands of dollars except per share data)
<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31
                                                             --------------------------------------------------------
                                                               1995        1996        1997        1998        1999
                                                             -------     -------     -------     --------    --------
<S>                                                          <C>         <C>         <C>         <C>         <C>
         Sales from continuing operations                    $39,937     $64,181     $88,781     $103,414    $132,544
         Cost of sales                                        14,639      20,277      25,430       23,839      25,077
                                                              ------      ------      ------       ------      ------
         Gross profit                                         25,298      43,904      63,351       79,575     107,467
         Selling, general and administrative expenses         16,426      20,166      25,271       29,141      34,365
         Nonrecurring charges(1)                                   -       5,743           -       10,500           -
                                                             -------     -------     -------     --------    --------
         Operating income from continuing operations           8,872      17,995      38,080       39,934      73,102
         Other income (expense)                                (484)       1,755       2,315        4,883       7,006
                                                             -------     -------     -------     --------    --------
         Income before taxes from continuing operations        8,388      19,750      40,395       44,817      80,108
         Provision for taxes                                   3,074       8,232      15,351       21,250      31,164
                                                             -------     -------     -------     --------    --------
         Income from continuing operations                     5,314      11,518      25,044       23,567      48,944
         Income from discontinued operations                   7,075       6,621       6,926       18,768           -
                                                             -------     -------     -------     --------    --------
         Net income                                          $12,389     $18,139     $31,970     $ 42,335    $ 48,944
                                                             =======     =======     =======     ========    ========
         Earnings per share(2)
           Basic:      From continuing operations            $  0.10     $  0.19     $  0.39     $   0.36    $   0.75
                       From discontinued operations          $  0.13     $  0.11     $  0.11     $   0.29           -
                                                             -------     -------     -------     --------    --------
                            Total                            $  0.23     $  0.30     $  0.50     $   0.65    $   0.75
                                                             =======     =======     =======     ========    ========
           Diluted:    From continuing operations            $  0.09     $  0.18     $  0.38     $   0.36    $   0.73
                       From discontinued operations          $  0.13     $  0.11     $  0.11     $   0.28           -
                                                             -------     -------     -------     --------    --------
                            Total                            $  0.22     $  0.29     $  0.49     $   0.64    $   0.73
                                                             =======     =======     =======     ========    ========
         Cash dividends declared per share                   $  0.02     $  0.03     $  0.04     $   0.05    $   0.06
                                                             =======     =======     =======     ========    ========
</TABLE>

----------
Notes to Statement of Operations Data:

(1)  The 1996 nonrecurring charge reflects nonrecurring expenses
     associated with the Company's acquisition of Galen Drugs of
     Florida, Inc. 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 1996
     would have been $23.7 million and $15.8 million, respectively,
     and earnings per share from continuing operations would have
     been $0.26 (basic) and $0.25 (diluted).

     The 1998 nonrecurring charge reflects a non-cash accounting
     charge related to an impairment of certain under-performing
     long-lived assets. Absent this charge, operating income from
     continuing operations and income from continuing operations
     for 1998 would have been $50.4 million and $34.1 million,
     respectively, and earnings per share from continuing
     operations would have been $0.82 (basic) and $0.80 (diluted).

(2)  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.


                                       15

<PAGE>   17


         BALANCE SHEET DATA:
         (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31
                                                       ---------------------------------------------------------------
                                                            1995          1996        1997         1998         1999
                                                       -------------    --------    --------     --------    ---------
<S>                                                   <C>              <C>         <C>          <C>         <C>
         Total assets                                      $86,238      $177,233    $203,729     $248,778    $300,465
         Current assets                                    $33,337      $ 80,551    $ 84,631     $153,977    $206,810
         Current liabilities                               $14,405      $ 10,032    $  6,081     $ 11,722    $ 15,726
         Working capital                                   $18,932      $ 70,519    $ 78,550     $142,255    $191,084
         Long-term debt                                    $11,420      $    -0-    $    -0-     $    -0-    $    -0-
         Shareholders' equity                              $55,939      $161,919    $191,726     $232,670    $279,604
         Per share book value  (1)                         $  1.03      $   2.53    $   2.97     $   3.59    $   4.29
         Current ratio                                       2.3:1         8.0:1      13.9:1       13.1:1      13.2:1
</TABLE>
----------
         Note to Balance Sheet Data:

         (1) Per share book value is computed assuming conversion of preferred
             stock outstanding in 1995.


ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

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."
References herein to "sales" and "income" are to the Company's continuing
operations unless the context otherwise requires. Sales data provided for
products and product lines reflect the reclassification of certain items.

OVERVIEW

JONES PHARMA INCORPORATED manufactures and markets specialty pharmaceutical
products. Our principal product lines currently consist of thyroid treatment
products directed to the endocrine therapy market and thrombin products used as
hemostatic agents in the critical care market.

We have achieved significant increases in sales and net income through
acquisitions of pharmaceutical products and businesses to complement or expand
our business and to add selected manufacturing capacity to support certain
product lines. Our most recent acquisitions were of the Triostat and Cytomel
synthetic thyroid product lines in June 1997. In April 1998 we sold our
nutritional supplements business and discontinued contract manufacturing in
order to concentrate on our pharmaceutical portfolio which carried higher gross
margins and greater growth potential.

Our strategy for continued growth depends upon our ability to increase unit and
dollar sales of our existing portfolio and to acquire, by purchase or exclusive
license arrangements, niche-market pharmaceuticals which can be promoted through
existing marketing and distribution channels.

Our marketing efforts emphasize targeted promotion of products to increase
awareness and demand. Our marketing initiatives have permitted us to increase
prices selectively as opportunities arise while maintaining or increasing unit
market share against competitive products or treatments. Sales and income have
increased from $41.2 million and $4.9 million, respectively, in 1994, to $132.5
million and $48.9


                                       16



<PAGE>   18

million, respectively, in 1999. These increases represent five-year compounded
annual growth rates of approximately 26.3% in sales and 58.4% in income.

Sales are reported net of returns, rebates and discounts during the period in
which product is shipped. Product rebates and discounts are incurred due to
incentive or other contractual allowances to hospital buying groups, managed
care organizations, Medicare programs and others. During 1999, we renegotiated
contract pricing with such parties to reduce discounts allowed as chargebacks.
We also negotiated incentive-based rebates with certain customers making them
eligible for rebates if they obtain and maintain certain market share levels.

Sales are reported prior to royalties due on sales of certain products arising
under product line acquisition agreements. Such royalties are recorded as a
selling expense. Royalty arrangements typically extend for a fixed period from
the date of the acquisition transaction and do not require minimum payments to
maintain ownership or any rights to the affected products.

Our 1999 sales totaled $132.5 million. Endocrine product sales, principally
consisting of Levoxyl, Triostat and Cytomel (for the treatment of
hypothyroidism) and Tapazole (for the treatment of hyperthyroidism), aggregated
$79.0 million or 59.6% of 1999 sales as compared to $65.1 million or 62.9% of
1998 sales. Critical care products, principally our Thrombin-JMI hemostatic
product used in surgical procedures to promote clotting and our Brevital Sodium
intravenous anesthetic, were $49.5 million or 37.3% of 1999 sales as compared to
$34.1 million or 33.0% of 1998 sales. Our marketing efforts, particularly with
respect to endocrine products and other prescription-based products, are
directed to physicians and other health care providers. Sales are made primarily
to wholesale distributors for resale to retail and hospital pharmacies which
deliver product to consumers. During both 1999 and 1998, approximately $8.8
million of sales (including $4.8 million and $4.6 million of Soloxine endocrine
products in 1999 and 1998, respectively) were made to the veterinary medical
market, primarily for use in the treatment of companion animals.

The ability to continue internal growth of our existing portfolio of products
depends upon the continued effectiveness of our sales force and marketing
initiatives, upon the impact of competing products and treatments in the
marketplace and upon general economic and policy factors affecting the delivery
and pricing of health and medical services in the U.S. Our operations and growth
will also be influenced by competitive factors within the pharmaceutical
industry, by our reliance on third-party manufacturers and other key suppliers,
and by regulatory and governmental policies affecting pharmaceuticals and the
health care industry.

Levoxyl (our principal synthetic thyroid endocrine product representing
approximately 24.7% of our 1999 sales) together with competing orally
administered levothyroxine products have been reclassified as "new drugs" by the
FDA. Under current regulations we must complete and obtain FDA approval of a new
drug application ("NDA") by August 14, 2000. We expect to comply with this
requirement. We anticipate that the cost of such compliance, together with
related improvements in plant and new production equipment, will approximate
$8.5 million. Research and development expense of approximately $1.3 million in
1999 is associated with compliance with the NDA approval process.

In pursuing our acquisition strategy, we rely to a significant degree upon the
availability of product lines which we can acquire on satisfactory terms and
which we believe can benefit from our marketing initiatives. In spite of recent
and prospective consolidations among the major pharmaceutical companies, there
is no assurance that "under-marketed" niche product lines will be identified as
available in the future. Our inability to acquire the rights to additional
products could materially and adversely impact our future rate of growth as our
present product lines reach limits on market share and on our ability to
maintain or increase profit margins. We intend to evaluate and consider the
possible acquisition of


                                       17



<PAGE>   19
product lines or operations involving pharmaceuticals in late-stage development.
We believe that in the current environment such situations may present more
attractive growth opportunities.

Acquisition activity involves risks and, even if ultimately producing intended
results, may adversely impact near term results of our operations. Since we seek
acquisitions of products which we believe have future growth potential, it is to
be expected that any products or operations which we acquire will have lower
gross and operating margins than our present portfolio. In addition, the
acquisition of one or more late-stage development products or operations might
necessitate on-going research and development activities which we have not
previously conducted. The ultimate success of bringing late-stage development
products to market is subject to many risks including possible uncertainties
relating to the receipt or timing of necessary FDA approvals and the need to
create, rather than to expand, an existing niche market.


RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes thereto (which have been audited
by Ernst & Young LLP) contained elsewhere in this report. The following table
sets forth certain data as a percentage of sales from continuing operations for
the periods indicated.

                               PERCENTAGE OF SALES
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,

                                                               1997       1998      1999
                                                               ----       ----      ----
<S>                                                            <C>        <C>       <C>
         Sales from continuing operations                      100.0%     100.0%    100.0%
         Cost of sales                                          28.6       23.1      18.9
                                                               -----      -----     -----
         Gross profit                                           71.4       76.9      81.1
         Selling, general and administrative expenses           28.5       28.2      25.9
         Nonrecurring charges (1)                                  -       10.1        -
                                                               -----      -----     -----
         Operating income from continuing operations            42.9       38.6      55.2
         Other income                                            2.6        4.7       5.2
                                                               -----      -----     -----
         Income before taxes from continuing operations         45.5       43.3      60.4
         Provision for taxes                                    17.3       20.5      23.5
                                                               -----      -----     -----
         Income from continuing operations                      28.2       22.8      36.9
         Income from discontinued operations                     7.8       18.1         -
                                                               -----      -----     -----
         Net income                                             36.0%      40.9%     36.9%
                                                               =====      =====      ====
</TABLE>
         ----------
         Note to Percentage of Sales:

         (1)  The 1998 nonrecurring charge reflects a non-cash accounting charge
              related to an impairment of certain under-performing long-lived
              assets. Absent this charge, operating income from continuing
              operations and income from continuing operations for 1998 would
              have been $50.4 million and $34.1 million, respectively, and
              earnings per share from continuing operations would have been
              $0.82 (basic) and $0.80 (diluted).

Sales from Continuing Operations

         Sales for the year ended December 31, 1999, increased 28.2% to $132.5
million from $103.4 million for the year ended December 31, 1998, due primarily
to increases in net pricing arising in part from renegotiation of contract
pricing for Thrombin-JMI and other key products throughout 1999. In 1999,
contract sales to other pharmaceutical companies represented approximately 1.2%
of our sales. In


                                       18



<PAGE>   20
2000, such contract sales are expected to increase to approximately $6.6 million
in connection with the final year of our commitment to provide thrombin product
to Ethicon.

         Sales from continuing operations for the year ended December 31, 1998,
increased 16.5% to $103.4 million from $88.8 million for the year ended December
31, 1997. The increase in 1998 sales resulted from increased unit volume and net
revenue per unit on sales of our key products including Levoxyl, Brevital and
Tapazole. Sales revenue for our branded products in 1998 increased by 23.1% from
the prior year but that increase was offset by the absence of contract sales of
thrombin products to Ethicon, which were approximately $4.7 million in 1997.

Gross Profit

         Gross profit during 1999 increased 35.1% or $27.9 million to $107.5
million from $79.6 million in 1998 due primarily to increases in net pricing
arising in part from renegotiation of contract pricing for Thrombin-JMI and
other key products throughout 1999. As a percentage of sales, margins increased
to 81.1% in 1999 from 76.9% in 1998.

         Gross profit during 1998 increased 25.6% or $16.2 million to $79.6
million from $63.4 million in 1997 due to the continued sales growth of the
Company's higher margin products and the lack of the lower-margin thrombin
product contract sales to Ethicon. As a percentage of sales, margins increased
to 76.9% in 1998 from 71.4% in 1997.

Selling, General and Administrative Expenses

         Selling expenses increased 13.7% or approximately $2.3 million to $19.1
million in 1999 from $16.8 million in 1998 due to increases in sales commissions
and royalties, increased sampling of products to physicians and increases in
administrative fees to hospitals, buying groups and certain other customers. As
a percentage of sales, selling expenses in 1999 decreased to 14.4% as compared
to 16.2% in 1998.

         Selling expenses increased 16.7% or approximately $2.4 million to $16.8
million in 1998 from $14.4 million in 1997 due to increases in sales commissions
and royalties, increased sampling of products to physicians and increases in
administrative fees to hospitals, hospital buying groups and certain other
customers. As a percentage of sales, selling expenses in 1998 remained
relatively flat at 16.2% as compared to 1997.

         General and administrative expenses increased 22.4% or approximately
$1.9 million to $10.4 million in 1999 from $8.5 million in 1998 due to normal
salary increases and increases in bonuses, donations and medical insurance
claims. As a percentage of sales, general and administrative expenses in 1999
declined to 7.8% as compared to 8.2% in 1998.

         General and administrative expenses increased 13.8% or approximately
$1.0 million to $8.5 million in 1998 from $7.5 million in 1997 due to normal
salary increases and increases in bonuses, donations and medical insurance
claims. As a percentage of sales, general and administrative expenses in 1998
declined to 8.2% as compared to 8.4% in 1997.

         Research and development expenses in 1999 were $1.3 million as compared
to $117,000 in 1998. All research and development expenses in 1999 and 1998
related to certain non-capitalizable expenditures associated with the Levoxyl
NDA and other product improvement projects. There were no research and
development expenses in 1997.

         Amortization expenses associated with intangible assets and included in
selling, general and administrative expenses decreased 3.5% to $3.5 million in
1999 from $3.7 million in 1998. Amortization expense relating to intangible
items determined in June 1998 to be impaired and included in a $10.5 million
nonrecurring charge (discussed below) was included in 1998 amortization. As a
percentage of sales, amortization expense decreased from 3.5% in 1998 to 2.7% in
1999.



                                       19



<PAGE>   21

         Amortization expenses associated with intangible assets and included in
selling, general and administrative expenses increased 8.9% to $3.7 million in
1998 from $3.4 million in 1997 due to a full year of amortization expense
associated with the Cytomel and Triostat product line acquisitions in June 1997
offset by the reduction in amortization expense associated with the $10.5
million goodwill impairment write-off in 1998 discussed below. As a percentage
of sales, amortization expense decreased from 3.8% in 1997 to 3.5% in 1998.

         A nonrecurring charge of $10.5 million was taken in 1998 related to an
impairment of certain under-performing long-lived assets. As a result of our
strategic review process of the Company's product lines and related intangible
assets, we determined that a portion of the goodwill associated with certain
lower-margin pharmaceutical products had been impaired.

Operating Income

         Operating income during 1999 increased 83.1% or $33.2 million to $73.1
million from $39.9 million in 1998, and increased as a percentage of sales from
continuing operations to 55.2% in 1999 from 38.6% in 1998. Operating income
during 1999 increased 44.9% or $22.7 million excluding the $10.5 million
nonrecurring charge in 1998.

         Operating income during 1998 increased 4.9% or $1.9 million to $39.9
million from $38.1 million in 1997, and decreased as a percentage of sales to
38.6% in 1998 from 42.9% in 1997, as the result of the $10.5 million
nonrecurring charge in 1998. Excluding this charge, operating income in 1998 was
$50.4 million, representing a 32.3% increase over the prior year.

Other Income (Expense)

         Interest income from investing activities increased to $7.2 million in
1999 from $5.1 million in 1998. Interest income from investing activities
increased to $5.1 million in 1998 from $2.6 million in 1997. Both the increase
in 1999 from 1998 and the increase in 1998 from 1997 were primarily the result
of higher cash balances.

         Interest expense of $215,000 in 1998 resulted from federal and state
taxing authority assessments related to tax audit settlements. The Company had
no outstanding debt throughout 1999 and 1998.

Income Taxes

         The provision for income taxes in 1999 decreased to 38.9% of pre-tax
income compared to 47.4% of pre-tax income in 1998, primarily due to the
nondeductibility of the $10.5 million nonrecurring charge in 1998. Absent the
effects of the nonrecurring charge, the 1998 effective tax rate was 38.4%.

         The provision for income taxes in 1998 increased to 47.4% of pre-tax
income compared to 38.0% of pre-tax income in 1997, primarily due to the
nondeductibility of the $10.5 million nonrecurring charge in 1998.

Income From Continuing Operations

         Income from continuing operations increased 107.7% or $25.4 million to
$48.9 million in 1999 from $23.6 million in 1998, and increased as a percentage
of sales to 36.9% in 1999 from 22.8% in 1998.

         Due to the non-recurring charge in 1998, income from continuing
operations decreased 5.6% or $1.4 million to $23.6 million in 1998 from $25.0
million in 1997, and decreased as a percentage of sales to 22.8% in 1998 from
28.2% in 1997.


                                       20

<PAGE>   22



Income From Discontinued Operations

         Income from discontinued operations in 1998 reflects an approximate $17
million gain (net of tax) from the sale of our nutritional supplements product
line and contract manufacturing operations in April, 1998. In addition, income
from discontinued operations includes the after-tax operating results of our
nutritional supplements product line and contract manufacturing operations prior
to the sale.

Net Income

         Net income increased 15.6% or $6.6 million to $48.9 million in 1999
from $42.3 million in 1998, and decreased as a percentage of sales to 36.9% in
1999 from 40.9% in 1998.

         Net income increased 32.4% or $10.4 million to $42.3 million in 1998
from $32.0 million in 1997, and increased as a percentage of sales to 40.9% in
1998 from 36.0% in 1997.

Fourth Quarter - 1998 to 1999

         Sales during the fourth quarter of 1999 increased $10.6 million, or
40.0%, to $37.2 million from $26.6 million during the fourth quarter of 1998.
Income from continuing operations during the fourth quarter of 1999 increased
$5.4 million, or 56.0%, to $15.0 million from $9.6 million in the fourth quarter
of 1998. Net income during the fourth quarter of 1999 increased $5.4 million, or
56.0%, to $15.0 million from $9.6 million during the fourth quarter of 1998.
Diluted earnings per share were $.22 in the fourth quarter of 1999 compared to
$.15 per share in the fourth quarter of 1998. The 1999 increases resulted from
increased sales of higher margin products and through controlling overhead
costs.


FINANCIAL CONDITION

Balance Sheet Information

         Our current ratio increased slightly to 13.2:1 as of December 31, 1999
from 13.1:1 as of December 31, 1998. Financing debt as a percentage of equity
was zero at both December 31, 1999 and December 31, 1998. Working capital
increased to $191.1 million as of December 31, 1999 from $142.2 million as of
December 31, 1998 as a result of positive cash flow generated from operating
activities.

Liquidity and Capital Resources

         We believe that available resources and anticipated cash flows from
operations are adequate to meet currently anticipated operating needs and to
fund future acquisitions. While the Company does not maintain current lines of
credit, we believe we have sufficient borrowing capacity in the event that
acquisition opportunities cannot be funded from existing resources.

         At December 31, 1999 and 1998, we had cash and short term investments
of $111.0 million and $122.7 million, respectively. The net cash generated from
operating activities of $58.1 million in 1999, together with other available
funds, was used for the purchase of marketable fixed income securities of $63.2
million, capital improvements of $4.0 million, and payment of dividends to
common stockholders of $4.0 million. The marketable fixed income securities held
by the Company are available for sale. The market value of such securities are
subject to general conditions, including the effects of changes in prevailing
interest rates. If such securities were to be sold following a period of rising
interest rates, we would expect to incur losses on such investments. We do not
believe that the risk associated with such possible losses is material to our
financial condition although such losses, if realized, could materially and
adversely affect our periodic earnings.


                                       21




<PAGE>   23

         Total assets increased $51.7 million to $300.5 million at December 31,
1999 from $248.8 million at December 31, 1998, and total liabilities increased
$4.8 million to $20.9 million at December 31, 1999 from $16.1 million at
December 31, 1998. Net intangible assets decreased $3.5 million to $62.8 million
at December 31, 1999 from $66.3 million at December 31, 1998 due to scheduled
amortization expense. Intangible assets as a percent of shareholders' equity
decreased from 28.5% at December 31, 1998 to 22.5% at December 31, 1999.

         Inventories increased $4.1 million to $11.6 million at December 31,
1999, from $7.5 million at December 31, 1998. Accounts receivable decreased to
$15.9 million at December 31, 1999 from $19.1 million at December 31, 1998 due
to increased collection efforts and the lack of product shipped during the last
week of December 1999 due to a scheduled plant shut-down. In days outstanding,
accounts receivable decreased to 48 days at December 31, 1999 from 60 days at
December 31, 1998. Net property plant and equipment increased by $817,000 to
$24.5 million at December 31, 1999, from $23.7 million at December 31, 1998,
primarily due to the continued expansion of our pharmaceutical manufacturing
facilities during 1999. Accounts payable and accrued expenses increased from
$9.9 million at December 31, 1998 to $11.3 million at December 31, 1999 as a
result of an increase in trade payables due to the timing of inventory receipts
and payments, an increase in accrued sales discounts and rebates, and an
increase in accrued bonuses.

         The Company has experienced only moderate raw material and labor price
increases in recent years. We have benefited from rapid sales growth, negating
most inflationary pressures and have increased our net selling price per unit
for substantially all products. Our manufacturing operations are not capital
intensive and, as such, the impact of inflation on property, plant and equipment
and associated depreciation expense has been minimal.


RISKS AND UNCERTAINTIES

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

         Dependence upon Key Products. Our revenues and earnings are primarily
attributable to a limited number of key products which currently enjoy high
gross margins. During 1999, sales of our synthetic thyroid treatment products
(principally Levoxyl, Tapazole, Cytomel and Triostat) and our thrombin products
(principally Thrombin-JMI) represented, in the aggregate, approximately 80.4% of
total sales. Any factor adversely affecting either the availability of such
products, or the market or pricing for such products, would have a material
adverse effect upon our business and the results of our operations. Gross
margins applicable to the sale of thrombin products in 2000 will be reduced
somewhat due to the pricing of sales of Thrombogen(R) of approximately $6.6
million in this concluding year of our supply commitment to Johnson & Johnson's
Ethicon subsidiary. Sales of Thrombogen(R) in 1999 and 1998 were $1.6 million
and $0, respectively.

         Reliance on Third-Party Manufacturers. Tapazole, Triostat, Cytomel and
Brevital, which collectively represented approximately 38.0% of 1999 sales, are
produced for us by third party manufacturers under agreements arising from our
acquisition of these product lines. We depend upon such suppliers and they, in
turn, generally depend on sole-source suppliers for key raw materials used in
these products. Alternative sources of these products are not readily available
and any transfer of production would be subject to FDA site-change approval.
Although we believe our contracts for these products are with reliable and
substantial entities, interruption in product deliveries and/or the need to
enter into new agreements upon the expiration of the current term with the same
or another manufacturer present the risk that the Company may not be able to
obtain adequate supplies in a timely fashion or at all.


                                       22



<PAGE>   24

              -  A shortage of raw materials necessary to the production of
                 Brevital resulted in a disruption of supply of product to us by
                 Eli Lilly & Company during the second quarter of 1998. As a
                 result we were unable to fill order backlogs of approximately
                 $700,000 at June 30, 1998. Product shipments resumed and the
                 backlog and current orders were filled during the next quarter,
                 however, revenues and earnings for the second quarter of 1998
                 were affected. We have been advised by Lilly that a shortage of
                 raw materials for Brevital halted production during the first
                 quarter of 2000 and, although such raw material has recently
                 been obtained by Lilly, that we may experience some product
                 unavailability in the coming months. We do not anticipate
                 backlogs at March 31, 2000 and believe that any such shortages
                 will be cured prior to June 30, 2000. In March 2000, Lilly
                 received sufficient raw material to satisfy our anticipated
                 requirements for Brevital for 2000 and 2001. Lilly is
                 qualifying an alternative FDA approved source for this raw
                 material. Lilly also produces Tapazole for us and we have not
                 to date experienced material delays in the receipt of that
                 product.

              -  Our agreement with SB Pharmco, an affiliate of SmithKline,
                 which produces Triostat for us, is scheduled to expire in
                 mid-year 2000. We have selected an alternative manufacturer and
                 have applied to the FDA for site-change approval for the
                 manufacture of this product. We anticipate that final approval
                 and a definitive long-term contract will be concluded prior to
                 the scheduled expiration. We intend to acquire and maintain
                 adequate inventory to cover anticipated product needs through
                 the transition period and believe that SB Pharmco will continue
                 to manufacture for us in the event of unanticipated delays in
                 the FDA approval process.

              -  Cytomel is produced for us by Schering Canada, Inc. under an
                 amended agreement expiring in December 2000. We are currently
                 in negotiations with Schering to enter a new agreement for
                 continued manufacture of this product and believe that a
                 mutually satisfactory arrangement will be concluded.

Disruption in the available supply of Tapazole, Triostat, Cytomel or Brevital,
or an inability to obtain sources of supply upon the expiration of current
manufacturing arrangements would be materially adverse to our business and
financial condition and to the results of our operations.

Changes in manufacturing arrangements for these products, whether resulting in a
new supplier or new contract terms with an existing supplier, may result in an
increase in our costs of good sold. Even if prices are raised to offset some or
all of such additional costs, gross margins may be adversely affected.

         Regulatory Risks. The manufacturing, processing, formulation,
packaging, labeling, advertising and sampling of pharmaceutical products are
subject to extensive regulation by various federal and state agencies including
the FDA, the FTC, the DEA, the CPSC, the EPA and the USDA. In addition to other
costs of compliance with such regulations, we are subject to possible risks
arising from changes in such regulations or based upon alleged violations of
regulations. Such risks could render our products unavailable to the market or
unmarketable or result in product recalls. Any such development could materially
and adversely affect our reputation, business, and financial condition and our
results of operations.




              -  As discussed in the "Overview," a pending change in the status
                 of levothyroxine products requires that we obtain approval of
                 Levoxyl as a "new drug." Failure to obtain such approval in a
                 timely fashion would materially and adversely affect our
                 business and financial condition and the results of our
                 operations.

              -  The FDA has adopted regulations under the Modernization Act of
                 1997 restricting the ability of pharmaceutical companies,
                 including us, to market products for "off labeled" indications.

                                       23




<PAGE>   25

              -  In January 2000 we received a Warning Letter from the FDA
                 challenging terminology used in an advertisement for Levoxyl.
                 We are in the process of complying with steps requested in the
                 letter and do not currently anticipate that the FDA will seek
                 to impose further sanctions.

         Product Liability Risks. In addition to government regulation, we face
an inherent risk of exposure to product liability claims. Such claims might
allege that the use of a product manufactured or distributed by us resulted in
adverse effects for a patient or consumer. Product liability claims could
materially and adversely affect our reputation, business and financial condition
and the results of our operations. Such risks exist even with respect to
products which are manufactured in regulated facilities or otherwise possess
regulatory approval for commercial sale. These risks exist even though we have
taken and continue to take what we believe are appropriate quality control and
precautions in our operations.

We maintain product liability insurance in the amount of $20 million per claim
and $20 million in the aggregate and excess coverage of $10 million through an
"umbrella" policy. (On a prospective basis with respect to claims arising after
June 30, 1999, such insurance covers legal defense costs in addition to the
stated claim limits.) We believe that such insurance is reasonable in amount and
scope of coverage but there is no assurance that our present coverage would be
sufficient to cover potential claims or that adequate insurance coverage will be
available in the future on commercially reasonable terms, if at all. In the
event that our applicable insurance coverage is inadequate to satisfy any
resulting liability arising from the current Fen/Phen litigation in which we are
a named as a defendant, we would have to resume the defense of such lawsuits and
be responsible for any resulting damages assessed against us.

         Product Pricing Constraints. Policies adopted by third-party health
care payors influence the pricing of, and demand for, medical services and
products. Pricing is a factor in the inclusion of branded pharmaceuticals on
formularies governing use or reimbursement practices. Our ability to maintain or
increase prices for products in the future depends in part on the competitive
bids to governments, private insurers, and managed care organizations such as
HMOs and PBMs.

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

         Changes in Marketing Strategies. During 1999 we implemented
modifications to our marketing approach to

              -  unify our field sales staff to concentrate on our endocrine
                 product line and other products subject to competitive markets,
                 and

              -  renegotiated contract pricing agreements which provide
                 incentive discounts and rebates.

Our current promotional emphasis could adversely affect sales levels of our
critical care products which now receive less promotion. Changes in available
incentive discounts and rebates may result in greater resistance to price
increases. Despite these risks, we believe that the intended benefits from these
strategic measures will favorably affect operating results in future periods.

         Impact of Year 2000. In prior years we discussed the nature and
progress of our plans to become Year 2000 ready. As a result of our planning and
implementation efforts, we experienced no significant disruptions in mission
critical information technology and non-information technology systems. We


                                       24

<PAGE>   26
believe our systems successfully responded to the Year 2000 date change. The
costs associated with our Year 2000 readiness generally consisted of planned
capital expenditures and budgeted internal staffing expenses. The total capital
expenditures related to system upgrades and/or replacements associated with our
installation of an Enterprise Reporting System approximated $1.5 million, of
which $1.0 million was capitalized and $500,000 was expensed as incurred. We are
not aware of any material problems resulting from Year 2000 issues, either with
our products, our internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the Year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

At December 31, 1999, we carried inventories at levels approximately 55% higher
than the prior year end. This increase was primarily due to our increased sales
volume, but it was also precautionary to assure continued availability of key
products in the event of Year 2000 difficulties. Although certain distributors
and pharmacies may also have carried higher than normal inventories of our
products at year-end due in part to Year 2000 concerns, any such action does not
appear at this time to have affected our sales of product to date in 2000.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is not involved in activities in derivative financial instruments,
other financial instruments and derivative commodity instruments and, therefore,
is not exposed to any market risk associated with such financial instruments.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Reference is made to the Financial Statements contained in Part IV of this
report and to the Index to Consolidated Financial Statements on page 38.


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

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


                                       25
<PAGE>   27
                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

DIRECTORS AND OFFICERS

         The following table sets forth certain information as of March 1, 2000
with respect to the directors and executive officers of the Company.

<TABLE>
<CAPTION>

                                                         POSITION
             NAME                AGE
<S>                              <C>    <C>
Dennis M. Jones (1)               61    Chairman of the Board, President, Chief Executive Officer and Director
G. Andrew Franz (2)               47    Executive Vice President, Chief Operating Officer and Director
Judith A. Jones(1)                59    Executive Vice President of Corporate Affairs, Secretary, Treasurer and
                                        Director
Michael T. Bramblett              57    Executive Vice President of Business Development and Director
David A. McLaughlin(3)            52    Senior Vice President of Operations and Director
Edward A. Chod(4)                 46    Director
Thomas F. Patton(4)(5)            51    Director
L. John Polite, Jr. (3)(5)        78    Director
J. Hord Armstrong, III(4)(5)      58    Director
</TABLE>

----------------------------------------
Notes to Directors and Executive Officers Table:

(1) Dennis M. Jones and Judith A. Jones are husband and wife.
(2) G. Andrew Franz is the son-in-law of Dennis M. and Judith A. Jones.
(3) Mr. McLaughlin and Mr. Polite will retire as directors at the close of our
    2000 Annual Shareholders' Meeting. As a result of Mr. McLaughlin's and Mr.
    Polite's respective retirements, we will amend our By-Laws to reduce our
    Board of Directors from nine members to seven members.
(4) Member of the Compensation Committee of the Board of Directors.
(5) Member of the Audit Committee of the Board of Directors.

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

         G. Andrew Franz, a Director since 1994, served as Senior Vice
President-Operations-Pharmaceuticals from February 1994 until July 1998 and as
Executive Vice President of Operations since July 1998. Effective January 1,
2000, Mr. Franz was appointed to the newly created position of Chief Operating
Officer.

         Judith A. Jones, a Director since 1981, and Secretary and Treasurer
since April 1982, served as a Vice President from March 1985 to February 1994
and as Executive Vice President from February 1994 to July 1998. Mrs.
Jones has been Executive Vice President of Corporate Affairs since July 1998.


                                       26
<PAGE>   28

         Michael T. Bramblett, a Director since 1987, served as Vice
President-Marketing from January 1991 to February 1994 and as Executive Vice
President from February 1994 to July 1998. Mr. Bramblett has been Executive Vice
President of Business Development since July 1998.

         David A. McLaughlin, a Director since 1994, served as Senior Vice
President-Operations-Nutritionals from February 1994 to July 1998 and has been
Senior Vice President of Operations since July 1998. Mr. McLaughlin has served
in various management and executive capacities for the Company since 1986.

         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 the Company's counsel since 1982. Mr.
Chod also serves as an Assistant Secretary for the Company.

         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 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.

         J. Hord Armstrong, III, a Director since May 1999, is Chairman and
Chief Executive Officer of D&K Healthcare Resources, Inc., a drug wholesaler,
which he founded in 1987.

         Directors 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 in
addition to the following fees:

          -   $4,000 for each meeting of the Board of Directors attended in
              person in 1999 (subject to a minimum of $10,000 for such year).

          -   $5,000 for each meeting of the Board of Directors attended in
              person and $500 for each meeting attended by telephone for the
              year 2000 and thereafter (subject to a minimum of $15,000 per
              year).

          -   $500 for each meeting of the compensation or audit committee
              attended, provided, however, if a committee meeting is held on the
              same day as a full meeting of the Board, no additional fee is
              paid.


                                       27
<PAGE>   29

         Our present non-employee directors hold stock options pursuant to our
1994 Formula Stock Option Plan for Non-Management Directors ("FSO Plan") or our
1999 Equity Participation Plan for Non-Management Directors ("Equity Plan") as
indicated in the table below.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                      NO. OF       NO. OF OPTIONS(1)      PER SHARE
                                         DATE OF      OPTIONS   ----------------------     EXERCISE     EXPIRATION
          NAME                PLAN        GRANT        HELD      VESTED      UNVESTED       PRICE         DATE
-------------------------------------------------------------------------------------------------------------------

<S>                       <C>            <C>         <C>         <C>          <C>         <C>           <C>

L. John Polite, Jr.         FSO Plan     7/1/98       25,312      5,062       20,250       $14.72         5/1/04
-------------------------------------------------------------------------------------------------------------------
Thomas F. Patton            FSO Plan     6/1/95       17,437     12,375        5,062       $ 1.98         5/1/01
-------------------------------------------------------------------------------------------------------------------
Edward A. Chod            Equity Plan    7/13/99      33,750      6,750       27,000       $18.11         5/1/05
-------------------------------------------------------------------------------------------------------------------
J. Hord Armstrong, III    Equity Plan    7/13/99      33,750      6,750       27,000       $18.11         5/1/05
-------------------------------------------------------------------------------------------------------------------
--------------------------------
</TABLE>

Note to Non-Employee Directors Option Table:

     (1) These options generally vest over a five year period.


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, 1999, 1998 and
1997 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, 1999
(the "Named Executives").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                                                                              Long Term
                                                             Annual Compensation             Compensation
                                                   --------------------------------------------------------
                                                                                                Awards
                                                                                             --------------
                                                                                               Securities
                                                                              Other Annual     Underlying        All Other
  Name and Principal Position               Year      Salary      Bonus       Compensation       Options       Compensation
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>      <C>         <C>          <C>            <C>               <C>

Dennis M. Jones, Chairman of                1999     $550,008    $150,000      $95,216(1)              0        $32,144(2)
the Board, Director, President              1998     $510,780    $100,000      $     0                 0        $31,614(2)
and Chief Executive Officer                 1997     $400,000    $      0      $     0                 0        $27,280(2)
---------------------------------------------------------------------------------------------------------------------------

G. Andrew Franz, Director,                  1999     $274,992    $150,000      $     0                 0        $ 9,600(3)
Executive Vice President and                1998     $223,228    $ 75,000      $     0           112,500        $ 9,500(3)
Chief Operating Officer                     1997     $175,000    $ 25,000      $     0                 0        $ 9,500(3)
---------------------------------------------------------------------------------------------------------------------------

Judith A. Jones, Director,                  1999     $274,992    $      0           (1)                0        $26,121(4)
Executive Vice President of Corporate       1998     $251,575    $ 75,000      $     0                 0        $14,312(4)
Affairs, Secretary and Treasurer            1997     $220,000    $ 30,000      $     0                 0        $14,103(4)
---------------------------------------------------------------------------------------------------------------------------

Michael T. Bramblett, Director              1999     $274,992    $100,000      $     0                 0        $ 9,600(3)
and Executive Vice President                1998     $251,070    $ 75,000      $     0                 0        $ 9,500(3)
of Business Development                     1997     $220,000    $ 30,000      $     0                 0        $ 9,500(3)
---------------------------------------------------------------------------------------------------------------------------

David A. McLaughlin, Director               1999     $220,000    $ 75,000      $     0                 0        $ 9,600(3)
and Senior Vice President of Operations     1998     $202,948    $ 50,000      $     0            56,250        $ 9,500(3)
                                            1997     $175,000    $ 25,000      $     0                 0        $ 9,500(3)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       28
<PAGE>   30

---------------------------
Notes to Summary Compensation Table:

     (1) Benefits to Mr. and Mrs. Jones which may be deemed to constitute
         reportable "other compensation" aggregated $95,216 during 1999 and
         consisted of $47,958 for (unreimbursed) personal use of the Company's
         airplane, $36,077 for costs related to employees providing domestic
         services at their residence (which is utilized by the Company for
         business-related entertainment and meetings), and $11,181 for
         automobile related expenses. It is expected that during the year 2000
         and future years the costs related to employees providing domestic
         services at the Jones' residence will increase materially since 1999
         costs include certain such personnel for only a three month period.
         Certain of these benefits constitute taxable income to Mr. and Mrs.
         Jones although a portion of the employee costs referred to above are
         deducted by the Company as business-related expenses. In years prior to
         1999, the aggregate of similar benefits enjoyed by Mr. and Mrs. Jones
         did not exceed $30,000 in the aggregate. No other Named Executive
         received any perquisites or other personal benefits which in the
         aggregate exceeded the lesser of either $50,000 or ten percent (10%) of
         the total of annual salary and bonus reported for the Named Executive.

     (2) Consists of a Company contribution to a 401(k) plan ($9,600 in 1999,
         $9,500 in 1998 and $9,500 in 1997) and the dollar value of premiums
         paid by the Company for a split-dollar life insurance policy on Mr.
         Jones, of which $22,544, $22,114 and $17,780 constituted his reportable
         economic benefit in the years 1999, 1998 and 1997, respectively. See
         "Certain Relationships and Related Transactions" in Item 13 below for
         additional information concerning insurance relationships.

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

     (4) Consists of a Company contribution to a 401(k) plan ($9,600 in 1999,
         $9,500 in 1998 and $9,500 in 1997) and the dollar value of premiums
         paid by the Company for a split-dollar life insurance policy on Mrs.
         Jones, of which $16,521, $4,812 and $4,603 constituted her reportable
         economic benefit in the years 1999, 1998 and 1997, respectively. See
         "Certain Relationships and Related Transactions" in Item 13 below for
         additional information concerning insurance relationships.


STOCK OPTIONS AND INCENTIVE AWARDS

The Company's shareholders have approved the adoption of employee stock option
and incentive stock plans which are administered by the Compensation Committee
of the Board of Directors. At December 31, 1999, we had outstanding stock
options for an aggregate of 3,937,088 shares of the Company's common stock at a
weighted average price of $8.73 per share held by 221 employees (including the
options held by the Named Executives as described below) and the four (4)
non-management directors. Our stock option and incentive stock plans permit
"exchange exercises" in which an optionee is permitted to pay the exercise price
of vested options by surrendering previously owned shares of our 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
1999, stock appreciation rights ("SARs") or restricted share grants to any Named
Executive. In addition, none of the Named Executives were granted stock options
by the Company in 1999.

         Aggregate Option Exercises during 1999 and Year End Option Values. The
following table provides information with respect to the stock options exercised
during the fiscal year ended December 31, 1999 and the value as of December 31,
1999 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 our common 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 our common stock at fiscal year end, December 31,
1999.


                                       29
<PAGE>   31

<TABLE>
<CAPTION>

                                                                                                Value of
                               Shares                            Number of                Unexercised In-the-
                              Acquired                    Unexercised Options at            Money Options at
                                On            Value           December 31, 1999             December 31, 1999
                              Exercise      Realized                (#)                           ($)
            Name                (#)            ($)        Exercisable/Unexercisable     Exercisable/Unexercisable
----------------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>           <C>                           <C>

Dennis M. Jones                 0            $0              729,000/486,000           $17,656,380/$11,770,920
----------------------------------------------------------------------------------------------------------------
G. Andrew Franz              50,624       $895,792            22,500/90,000              $451,575/$1,787,450
----------------------------------------------------------------------------------------------------------------
Judith A. Jones                 0            $0              182,250/121,500            $4,414,095/$2,942,730
----------------------------------------------------------------------------------------------------------------
Michael T. Bramblett         60,750       $733,252              0/81,000                    $0/$1,961,820
----------------------------------------------------------------------------------------------------------------
David A. McLaughlin          25,312       $490,040            11,250/45,000              $225,787/$903,150
----------------------------------------------------------------------------------------------------------------
</TABLE>

         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 our employees with a
convenient way to save on a regular and long-term basis and encourages employees
to make and continue careers with us.

To become eligible to participate in the 401(k) Plan, an employee must have
completed 90 days 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.

The Company must make a matching contribution equal to 100% of a Participant's
Elective Contributions not in excess of 6% of a Participant's compensation. In
addition to matching contributions, we may make a discretionary contribution
which is allocated among Participants' accounts in proportion to compensation,
however, no discretionary contributions have been made in the last three years.
Our matching and discretionary contributions are collectively referred to in
this report as "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 or her 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 or her
Elective Contributions in certain hardship circumstances as provided in the
Plan. Elective Contributions and Company Contributions are always 100% vested.

As of January 1, 1999, we had approximately 315 Eligible Employees, including
the Named Executives (Dennis M. Jones, Judith A. Jones, Michael T. Bramblett, G.
Andrew Franz and David A. McLaughlin). During 1999, we made matching
contributions to the 401(k) Plan aggregating $48,000 to the accounts of the
Named Executives and total matching contributions of $733,680 to all
Participants' Accounts.


                                       30
<PAGE>   32

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 our common stock.
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, including audit fees. We have appointed Dennis M. Jones, Judith
A. Jones and G. Andrew Franz as Trustees of the 401(k) Plan. 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.


                                       31
<PAGE>   33

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information regarding the record and
beneficial ownership of the Company's common stock on the indicated date by: (i)
each director or nominee for director and the Named Executives of the Company;
and (ii) all directors or nominees for director and executive officers of the
Company as a group:

<TABLE>
<CAPTION>
                                                                  BENEFICIAL OWNERSHIP AS OF MARCH 1, 2000
                                                         --------------------------------------------------------
                  NAME AND ADDRESS OF                                                      PERCENTAGE OF SHARES
                 BENEFICIAL OWNER (1)                     SHARES BENEFICIALLY OWNED (2)    BENEFICIALLY OWNED (3)
                 --------------------                    ------------------------------   -----------------------
<S>                                                      <C>                               <C>

Dennis M. Jones                                                 5,353,792  (4)                      8.03%
   Chairman of the Board of Directors, Chief
   Executive Officer and President
G. Andrew Franz                                                   611,906  (5) (6)                  0.92%
   Executive Vice President, Chief Operating Officer
   and Director
Judith A. Jones                                                 2,540,107  (7)                      3.81%
   Executive Vice President of Corporate Affairs,
   Secretary, Treasurer and Director
Michael T. Bramblett                                              129,627  (8)                        *
   Executive Vice President of Business Development
   and Director
David A. McLaughlin                                               116,437  (9)                        *
   Senior Vice President of Operations and Director
L. John Polite, Jr.                                                65,812  (10)                       *
   Director
   211 Oldwoods Road
   Franklin Lakes, New Jersey 07417
Edward A. Chod                                                     26,794  (11)                       *
   Director
   10 South Broadway, Suite 2000
   St. Louis, Missouri 63102
Thomas F. Patton, Ph.D.                                            25,312  (12)                       *
   Director
   4588 Parkview Place
   St. Louis, Missouri 63110
J. Hord Armstrong, III                                              9,000  (13)                       *
   Director
   8000 Maryland Avenue, Suite 900
   St. Louis, Missouri 63105
All Directors and Executive Officers                            8,878,787                          13.31%
   as a Group (consisting of nine persons)
</TABLE>

----------------------------------
Notes to Beneficial Ownership Table:
*      Less than one-half of one percent.
(1)    Except as otherwise indicated, the address for each individual named is
       c/o JONES PHARMA INCORPORATED, 1945 Craig Road, St. Louis, Missouri
       63146. Each beneficial owner has sole voting and investment power with
       respect to the shares of the Company's 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, 2000.


                                       32
<PAGE>   34

(3)    The number of shares of the Company's common stock deemed outstanding as
       of March 1, 2000 includes: (i) 65,429,778 shares outstanding as of such
       date, and (ii) shares issuable pursuant to options held by the directors
       and executive officers that are currently exercisable or will become
       exercisable on or before June 1, 2000, by the person or group in
       question.

(4)    Includes 972,000 shares under option rights issued by the Company and
       held by Mr. Jones. Does not include 2,540,107 shares or options held by
       his spouse, Judith A. Jones, with respect to which he disclaims
       beneficial ownership.

(5)    Includes 16,087 shares under option rights issued by the Company, 219,052
       shares owned by Mr. Franz' wife, 83,835 shares held by his wife as
       custodian for the Franz' children, 64,879 shares held by his wife as a
       co-trustee for the benefit of the Franz' children and 31,371 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.

(6)    As a result of call options written and sold by Mr. Franz, an aggregate
       of: (i) 56,250 of the shares reflected as owned by him are subject to
       purchase by third parties as $20 per share under option rights expiring
       March 17, 2000; and (ii) 15,000 of the shares reflected as owned by him
       are subject to purchase by third parties at $20 per share under option
       rights expiring June 16, 2000.

(7)    Includes 243,000 shares under option rights issued by the Company and
       held by Mrs. Jones. Does not include 5,353,792 shares or options held by
       her spouse, Dennis M. Jones, with respect to which she disclaims
       beneficial ownership.

(8)    Includes 25,411 shares held by Mr. Bramblett's wife with respect to which
       he disclaims beneficial ownership.

(9)    Includes 11,250 shares under option rights issued by the Company. As a
       result of call options written and sold by Mr. McLaughlin, an aggregate
       of: (i) 45,000 of the shares reflected as owned by him are subject to
       purchase by third parties at $20.00 per share under option rights
       expiring March 17, 2000; and (ii) 30,000 of shares reflected as owned by
       him are subject to purchase by third parties at $23.33 per share under
       option rights expiring June 16, 2000.

(10)   Includes 10,125 shares under option rights issued by the Company.

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

(12)   Includes 17,437 shares under option rights issued by the Company.

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


PRINCIPAL SHAREHOLDERS

The following table is based upon filings with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended
("Exchange Act"), and reflects those shareholders known to us to hold 5% or more
of the Company's common stock.

<TABLE>
<CAPTION>
                ------------------------------------- ------------------------ ---------------------
                         NAME AND ADDRESS                     SHARES              REPORTED AS OF
                ------------------------------------- ------------------------ ---------------------
                <S>                                     <C>                     <C>

                AMVESCAP PLC
                11 Devonshire Square                    7,906,537 (12.13%)      December 31, 1999
                London EC2M 4YR
                England
                ------------------------------------- ------------------------ ---------------------

                Dennis M. and Judith A. Jones           7,893,899 (11.84%)        March 1, 2000
                1945 Craig Road
                St. Louis, Missouri 63146
                ------------------------------------- ------------------------ ---------------------
</TABLE>


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act, requires our directors and officers, and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the SEC. Directors,
officers and greater than 10% shareholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file.


                                       33
<PAGE>   35

To our knowledge, based solely on review of the copies of such forms received by
us and written representations from certain reporting persons that no Forms 5 or
other reports were required for those persons, we believe that, during the
fiscal year ended December 31, 1999, our directors, officers and greater than
10% beneficial owners complied with all applicable filing requirements.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Life Insurance Relationships. Pursuant to agreements between us and the
trustees of irrevocable insurance trusts, we pay the premiums associated with
life insurance on the lives of Dennis M. Jones and Judith A. Jones as
"split-dollar" coverage. Under such agreements, the trusts own the policies and
we pay the premiums on the policies. Upon the death of the insureds, or in the
event of an earlier termination of the policies, we are entitled to recover the
aggregate amount of the premiums paid and we hold security interests in such
policies to the extent of premiums paid. The insurance trusts may terminate the
"split-dollar" arrangement with respect to any policy at any time upon
reimbursement to us of the aggregate amount of premiums paid with respect to
such policy. As an inducement to us to provide such coverage under the policies
issued in 1997 and 1998, Mr. and Mrs. Jones or certain beneficiaries of the
insurance trusts have guaranteed to us that we will recover the full amount of
premiums paid with respect to such policies. We are prohibited from borrowing
against such policies without the consent of the insureds.

The aggregate face amount of such "split-dollar" insurance coverage is
$73,500,000. Annual premiums paid during 1999 on such policies were
approximately $1,553,000.

In addition to such "split-dollar" insurance, in 1998 we purchased "key
employee" insurance policies on the joint lives of Mr. and Mrs. Jones in
policies having an aggregate death benefit of $40,000,000. The policies
represent a combination of term and whole life intended to provide for level
premium expense to us aggregating approximately $865,000 per year.
Contemporaneously with the purchase of these policies, we entered into an
agreement with Mr. and Mrs. Jones (individually and as the trustees of their
respective revocable trusts holding shares of our common stock). Pursuant to
such agreement, at the time of the death of the second to die of Mr. or Mrs.
Jones, their estates or the successor trustees of their trusts or any
beneficiary of such trust receiving a distribution of shares of our common stock
is given the option to require us to repurchase such shares. The purchase price
applicable to any such repurchase will equal the average closing price for such
stock for the ten days preceding the date of death giving rise to the option.

The option may only be exercised by notice given not earlier than seven nor
later than eight months after the date of death giving rise to the option and
any resulting repurchase shall be made within twenty days after the end of the
eight month period. The agreement limits our obligation to effect such
repurchases to the amount of the insurance proceeds received by us pursuant to
the policies. We may not borrow against any cash values in the policies or
cancel the insurance without the consent of Mr. and Mrs. Jones. Mr. and Mrs.
Jones have agreed with us that in the event of any termination of the policies
under circumstances in which we do not recover in full our premium costs, they
will reimburse such unrecovered costs to us. We believe that such insurance and
the application of the proceeds to the repurchase of shares of our common stock
as provided in the agreement, will work to reduce any negative impact on us and
the market for our common stock arising from the deaths of Mr. and Mrs. Jones.

         Related Party Transactions. Edward A. Chod, a director, is an officer
and a shareholder in the law firm of Greensfelder, Hemker & Gale, P.C., which
has served as our outside counsel since 1982. The amount of legal fees paid by
us to Greensfelder, Hemker & Gale, P.C. during the fiscal year ended December
31, 1999 did not exceed five percent (5%) of such firm's gross revenues for its
applicable fiscal year.


                                       34
<PAGE>   36

                                     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 38.

         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 38.

         3. Exhibits:

            (3.1)   Amended and Restated Certificate of Incorporation of the
                    Company dated June 5, 1997 (incorporated by reference from
                    Exhibit 3.1 to Form 8-K dated June 10, 1997).

            (3.2)   Certificate of Amendment to Restated Certificate of
                    Incorporation dated May 20, 1998 (incorporated by reference
                    from Exhibit 3(i) to Form 8-K dated May 20, 1998).

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

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

            (10.1)  The Company's 1989 Incentive Stock Option Plan (incorporated
                    by reference from Exhibit 10.1 to 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 Exhibit 10.2 to 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)  Licensing Agreement dated August 31, 1995 between the
                    Company and Eli Lilly & Company is (incorporated by
                    reference from Exhibit 2.1 to Form 8-K dated September 15,
                    1995).

            (10.6)  Manufacturing Agreement dated August 31, 1995 between the
                    Company and Eli Lilly & Company (incorporated by reference
                    from Exhibit 2.2 to Form 8-K dated September 15, 1995).


                                       35
<PAGE>   37

            (10.7)  License Agreement dated March 18, 1996, between the Company
                    and Eli Lilly and Company (incorporated by reference from
                    Exhibit 2.1 to Form 8-K dated March 18, 1996).

            (10.8)  Manufacturing Agreement dated March 18, 1996, between the
                    Company and Eli Lilly and Company (incorporated by
                    reference from Exhibit 2.2 to Form 8-K dated March 18,
                    1996).

            (10.9)  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).

            (10.10) Asset Purchase Agreement dated as of June 27, 1997, between
                    the Company and SmithKline Beecham Corporation (incorporated
                    by reference from Exhibit 2.1 to Form 8-K dated July 8,
                    1997).

            (10.11) Supply Agreement dated as of June 27, 1997, between the
                    Company and SB Pharmco Puerto Rico (incorporated by
                    reference from Exhibit 2.2 to Form 8-K dated July 8,
                    1997).

            (10.12) Asset Purchase Agreement dated March 17, 1998 by and among
                    Twin Laboratories, Inc., Bronson Laboratories, Inc., the
                    Company and JMI-Phoenix (incorporated by reference from
                    Exhibit 2.1 to Form 8-K dated May 15, 1998).

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

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

            (27.1)  Financial Data Schedule. (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.


                                       36
<PAGE>   38

                                   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 PHARMA INCORPORATED

                                              By: /s/ Dennis M. Jones
                                                  ------------------------------
                                                  Dennis M. Jones, President
                                                  DATE:  MARCH 17, 2000


         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 Officer and Director            March 17, 2000
--------------------------------
Dennis M. Jones


/s/ G. Andrew Franz                      Executive Vice President, Chief Operating Officer and      March 17, 2000
--------------------------------         Director
G. Andrew Franz


/s/ Judith A. Jones                      Executive Vice President, Secretary, Treasurer and         March 17, 2000
--------------------------------         Director (Principal Financial and Accounting Officer)
Judith A. Jones

/s/ Michael T. Bramblett                 Executive Vice President of Business Development and       March 17, 2000
--------------------------------         Director
Michael T. Bramblett


/s/ David A. McLaughlin                  Senior Vice President of Operations and Director           March 17, 2000
--------------------------------
David A. McLaughlin


/s/ Edward A. Chod                       Director                                                   March 17, 2000
--------------------------------
Edward A. Chod


--------------------------------         Director                                                   March __, 2000
L. John Polite, Jr.


--------------------------------         Director                                                   March __, 2000
Thomas F. Patton, Ph.D.


--------------------------------         Director                                                   March __, 2000
J. Hord Armstrong, III

</TABLE>


                                       37
<PAGE>   39


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

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

Consolidated balance sheets as of December 31, 1998 and 1999                                 F-2

Consolidated statements of income for the years ended December 31, 1997,
 1998 and 1999                                                                               F-3

Consolidated statements of stockholders' equity for the years ended December 31,
1997, 1998 and 1999                                                                          F-4

Consolidated statements of cash flows for the years ended December 31, 1997,
1998 and 1999                                                                                F-5

Notes to consolidated financial statements                                                   F-6

Consolidated schedule for the years ended December 31, 1997, 1998 and 1999:

         II.  Valuation and qualifying accounts                                              F-26
</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.


                                       38

<PAGE>   40


                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
JONES PHARMA INCORPORATED

We have audited the accompanying consolidated balance sheets of JONES PHARMA
INCORPORATED as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of JONES
PHARMA INCORPORATED at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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
January 31, 2000


                                                                             F-1
<PAGE>   41


                            JONES PHARMA INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
          (In thousands of dollars except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                DECEMBER 31
                                                                         1998                 1999
                                                                -------------------------------------------
<S>                                                             <C>                        <C>
   ASSETS
   Current assets:
     Cash and short-term investments                                   $122,745             $111,003
     Marketable securities                                                    -               63,228
     Accounts receivable, less allowance for doubtful accounts
       of $977 in 1998 and $1,543 in 1999                                19,069               15,915
     Inventories                                                          7,492               11,587
     Deferred income taxes                                                3,342                3,555
     Other                                                                1,329                1,522
                                                                -------------------------------------------
   Total current assets                                                 153,977              206,810
   Intangible assets:
     Distribution systems, trademarks, and licenses                      66,805               66,577
     Restrictive covenants and other intangibles                          7,647                7,647
     Goodwill                                                             4,034                4,034
                                                                -------------------------------------------
                                                                         78,486               78,258
     Less accumulated amortization                                       12,160               15,457
                                                                -------------------------------------------
   Net intangible assets                                                 66,326               62,801

   Net property, plant, and equipment                                    23,692               24,509
   Other assets                                                           4,783                6,345
                                                                -------------------------------------------
   Total assets                                                        $248,778             $300,465
                                                                ===========================================

   LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
     Accounts payable and accrued expenses                             $  9,951             $ 11,257
     Income taxes payable                                                 1,771                4,469
                                                                -------------------------------------------
   Total current liabilities                                             11,722               15,726

   Deferred income taxes                                                  4,386                5,135

   Stockholders' equity:
     Preferred stock, $.01 par value, 5,000,000 shares
       authorized, no shares issued or outstanding                            -                    -
     Common stock, $.04 par value; 75,000,000 shares
       authorized, 65,155,973 issued and outstanding in
       1999; 64,797,700 issued and outstanding in 1998                    2,592                2,606
     Contributed capital                                                109,599              111,711
     Retained earnings                                                  120,479              165,381
     Accumulated other comprehensive loss                                     -                  (94)
                                                                -------------------------------------------
   Total stockholders' equity                                           232,670              279,604
                                                                -------------------------------------------
   Total liabilities and stockholders' equity                          $248,778             $300,465
                                                                ===========================================
</TABLE>

   See accompanying notes.


                                                                             F-2


<PAGE>   42


                            JONES PHARMA INCORPORATED

                        CONSOLIDATED STATEMENTS OF INCOME
               (In thousands of dollars except per share amounts)

<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31
                                                    1997                 1998                 1999
                                           ----------------------------------------------------------------

<S>                                              <C>                  <C>                  <C>
Sales from continuing operations                 $ 88,781             $103,414             $132,544
Cost of sales                                      25,430               23,839               25,077
                                           ----------------------------------------------------------------
Gross profit                                       63,351               79,575               107,467

Selling, general, and administrative expenses:
     Selling                                       14,415               16,825               19,123
     General and administrative                     7,499                8,534               10,361
     Research and development                           -                  117                1,343
     Amortization                                   3,357                3,665                3,538
     Nonrecurring charges                               -               10,500                    -
                                           ----------------------------------------------------------------
Total selling, general, and
   administrative expenses                         25,271               39,641               34,365
                                           ----------------------------------------------------------------

Operating income from continuing
   operations                                      38,080               39,934               73,102

Other income (expense):
   Interest income                                  2,562                5,086                7,193
   Interest expense                                  (238)                (215)                   -
   Miscellaneous                                       (9)                  12                 (187)
                                           ----------------------------------------------------------------
                                                    2,315                4,883                7,006
                                           ----------------------------------------------------------------
Income before taxes from continuing
   operations                                      40,395               44,817               80,108
Provision for income taxes                         15,351               21,250               31,164
                                           ----------------------------------------------------------------
Income from continuing operations                  25,044               23,567               48,944
                                           ----------------------------------------------------------------

Income from discontinued operations (net
   of taxes)                                        6,926               18,768                    -
                                           ----------------------------------------------------------------
Net income                                       $ 31,970             $ 42,335             $ 48,944
                                           ================================================================

Earnings per share:
   Basic:  Continuing operations                 $   0.39             $   0.36             $   0.75
           Discontinued operations                   0.11                 0.29                    -
                                           ================================================================
                                                 $   0.50             $   0.65             $   0.75
                                           ================================================================
   Diluted:Continuing operations                 $   0.38             $   0.36             $   0.73
           Discontinued operations                   0.11                 0.28                    -
                                           ================================================================
                                                 $   0.49             $   0.64             $   0.73
                                           ================================================================
</TABLE>

See accompanying notes.


                                                                             F-3


<PAGE>   43


                            JONES PHARMA INCORPORATED

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 1997, 1998, and 1999
          (In thousands of dollars except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                               ACCUMULATED
                              NUMBER OF SHARES                                                    OTHER
                            -------------------   PREFERRED  COMMON   CONTRIBUTED   RETAINED  COMPREHENSIVE            COMPREHENSIVE
                            PREFERRED    COMMON     STOCK     STOCK     CAPITAL     EARNINGS      LOSS       TOTAL         INCOME
                            --------------------------------------------------------------------------------------------------------
<S>                         <C>        <C>        <C>        <C>       <C>          <C>        <C>          <C>        <C>
Balance at December 31, 1996    -      28,435,451  $   -     $1,137    $108,582     $ 52,200   $    -       $161,919        $     -
Three-for-two Common Stock
   split declared July 13,
   1999                         -      14,217,726      -        569        (569)           -        -              -              -
Three-for-two Common Stock
   split declared February      -      21,326,588      -        853        (853)           -        -              -              -
   3, 2000
Exercise of stock options       -         505,629      -         19         677            -        -            696              -
Shares tendered in payment
   of option price              -         (22,910)     -          -        (340)           -        -           (340)             -
Tax benefits associated
   with the exercise of
   nonqualified stock
   options                      -               -      -          -         287            -        -            287              -
Return of escrowed shares       -          (6,059)     -          -         (87)           -        -            (87)             -
Net income                      -               -      -          -           -       31,970        -         31,970         31,970
Cash dividend declared -
   common stock ($.042 per
   share)                       -               -      -          -           -       (2,719)       -         (2,719)             -
                             -------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                        $31,970
                                                                                                                            ========
Balance at December 31, 1997    -      64,456,425      -      2,578     107,697       81,451        -        191,726        $     -

Exercise of stock options       -         350,867      -         14       1,549            -        -          1,563              -
Shares tendered in payment
   of option price              -          (9,592)     -          -           -            -        -              -              -
Tax benefits associated
   with the exercise of
   nonqualified stock
   options                      -               -      -          -         353            -        -            353              -
Net income                      -               -      -          -           -       42,335        -         42,335         42,335
Cash dividend declared -
   common stock ($.051per
   share)                       -               -      -          -           -       (3,307)       -         (3,307)             -
                             -------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                        $42,335
                                                                                                                            ========
Balance at December 31, 1998    -      64,797,700      -      2,592     109,599      120,479        -        232,670        $     -

Exercise of stock options       -         388,730      -         14       1,406            -        -          1,420              -
Shares tendered in payment
   of option price              -         (30,457)     -          -           -            -        -              -              -
Amortization of unearned
   compensation                 -               -      -          -          74            -        -             74              -
Tax benefits associated
   with the exercise of
   nonqualified stock
   options                      -               -      -          -         632            -        -            632              -
Net income                      -               -      -          -           -       48,944        -         48,944         48,944
Cash dividend declared -
   common stock ($.062 per
   share)                       -               -      -          -           -       (4,042)       -         (4,042)             -
Net unrealized losses on
   marketable securities,
   net of tax                   -               -      -          -           -            -      (94)           (94)           (94)
                             -------------------------------------------------------------------------------------------------------
Comprehensive income                                                                                                        $48,850
                                                                                                                            ========
Balance at December 31, 1999    -      65,155,973  $   -     $2,606    $111,711     $165,381   $  (94)      $279,604
                             ===============================================================================================
</TABLE>

See accompanying notes.


                                                                             F-4
<PAGE>   44


                            JONES PHARMA INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands of dollars)

<TABLE>
<CAPTION>

                                                    YEAR ENDED DECEMBER 31
                                                1997         1998         1999
                                              --------    ---------    ---------
<S>                                           <C>         <C>          <C>
OPERATING ACTIVITIES
Net income                                    $ 31,970    $  42,335    $  48,944
Noncash adjustments:
   Depreciation                                  2,148        1,938        2,592
   Amortization of intangible assets             3,963        3,665        3,538
   Amortization of deferred compensation             -            -           74
   Provision for uncollectibles                    809         (219)         566
   Pretax gain on sale of discontinued
     operations                                      -      (30,616)           -
   Nonrecurring charge                               -       10,500            -
   Deferred income taxes                            43       (2,435)         536
   Other non cash items, net                         -            -          935
   Loss on sale of assets                           31            -          170
   Change in assets and liabilities, net
     of effects from acquisitions:
        Accounts receivable                     (6,196)      (5,200)       2,588
        Inventories                             (2,604)        (193)      (4,095)
        Other assets                             1,445       (3,474)      (1,755)
        Accounts payable and accrued
          expenses                              (1,341)       5,320        1,306
        Income taxes payable                     1,450          321        2,698
                                              --------    ---------    ---------
Net cash from operating activities              31,718       21,942       58,097

INVESTING ACTIVITIES
Purchase of marketable securities                    -            -      (63,228)
Additions to property, plant, and equipment     (5,566)      (2,333)      (4,049)
Proceeds from sale of assets                       276            3           60
Purchases of intangible assets in product
   line acquisitions, net of seller
   financing                                   (22,800)           -            -
Proceeds from sale of discontinued
   operations                                        -       55,000            -
                                              --------    ---------    ---------
Net cash from (used for) investing
   activities                                  (28,090)      52,670      (67,217)

FINANCING ACTIVITIES
Repayment of long-term debt                     (3,000)           -            -
Payments of cash dividends                      (3,279)      (3,307)      (4,042)
Proceeds from exercise of stock options            356        1,563        1,420
                                              --------    ---------    ---------
Net cash used for financing activities          (5,923)      (1,744)      (2,622)
                                              --------    ---------    ---------
Increase (decrease) in cash and
    short-term investments                      (2,295)      72,868      (11,742)
Cash and short-term investments,
    beginning of year                           52,172       49,877      122,745
                                              --------    ---------    ---------
Cash and short-term investments,
    end of year                               $ 49,877    $ 122,745    $ 111,003
                                              ========    =========    =========
</TABLE>

See accompanying notes.


                                                                             F-5

<PAGE>   45


                            JONES PHARMA INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (In thousands of dollars except share and per share amounts)

1. BASIS OF PRESENTATION

DISCONTINUED OPERATIONS

On March 16, 1998, the Board of Directors of JONES PHARMA INCORPORATED ("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 $55,000
cash on the April 30, 1998 closing date. A gain on the sale, of approximately
$17,000, net of taxes of approximately $13,500, has been recorded in the 1998
results. 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 sales
associated with the discontinued operations approximate $11,901 for the period
January 1, 1998 to April 30, 1998 (the sale date). For the year ended December
31, 1997, net sales associated with the discontinued operations approximated
$36,249.

STOCK SPLITS

On July 13, 1999 and again on February 3, 2000, the Board of Directors declared
three-for-two stock splits effected in the form of stock dividends. The
financial statements, including stock options, share data, per share data, and
market prices, have been retroactively adjusted to reflect both of these stock
splits.

2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION

The Company is engaged in the manufacturing and marketing of pharmaceuticals to
retail pharmacies and hospitals. A significant portion of the Company's sales
are through wholesale drug distributors, which in turn supply product to
pharmacies and hospitals. Three wholesale customers individually accounted for
19 percent, 18 percent, and 16 percent of 1999 consolidated sales. No one
customer accounted for more than 10 percent of the Company's consolidated
sales in 1998 or 1997.



                                                                             F-6

<PAGE>   46



                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION (CONTINUED)

The Company's most significant products include:

<TABLE>
<CAPTION>
                                       1997                      1998                      1999
                             ------------------------- ----------------------------------------------------
                               PRODUCT    PERCENT OF     PRODUCT    PERCENT OF   PRODUCT     PERCENT OF
                                SALES       SALES         SALES        SALES      SALES        SALES
                             ------------------------- ----------------------------------------------------

<S>                           <C>        <C>            <C>        <C>          <C>         <C>
  Thrombin products              $18,623       21%         $17,252       17%     $33,663        25%
  Levoxyl                        $21,023       24%         $25,683       25%     $32,773        25%
  Tapazole                       $17,943       20%         $24,127       23%     $26,507        20%
  Cytomel/Triostat               $ 4,441        5%         $ 8,551        8%     $13,582        10%
</TABLE>

The Company's only source of supply for thrombin products is from GenTrac, Inc.,
a wholly owned subsidiary of the Company, and the only source of supply for
Levoxyl is from JMI-Daniels Pharmaceuticals, Inc., a wholly owned subsidiary of
the Company. The Company obtains various raw material components relating to
thrombin products and Levoxyl from sole sources. The Company's suppliers of
Tapazole, Cytomel/Triostat, and Brevital also obtain various raw material
components from sole sources.

The Company currently relies on Eli Lilly and Company ("Lilly") for the
manufacture of Brevital and Tapazole. In connection with the acquisitions of
Brevital (on August 31, 1995) and Tapazole (on March 18, 1996), the Company
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. In the event of any interruption in the supply of
either product 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 could have a material adverse
effect on the Company's business, financial condition, and results of
operations.



                                                                             F-7

<PAGE>   47


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION (CONTINUED)

Cytomel is manufactured for the Company by Schering Canada, Inc. (Schering)
under rights and obligations which were respectively assigned to, and assumed
by the Company in connection with the acquisition of Cytomel from SmithKline
Beecham Corporation (SKB) on June 30, 1997. Schering's obligation to continue
to manufacture Cytomel for the Company expires in December 2000. The
Company is currently negotiating with Schering to extend the manufacture of
Cytomel for the Company beyond December 2000. The failure to negotiate such  an
extension, however, could have a material adverse effect on the Company's
business, financial condition, and results of operations.

Triostat is currently manufactured for the Company by SB Pharmco, an affiliate
of SKB, pending transfer of manufacture to a successor. The Company
selected a new third-party manufacturer as a successor to SB Pharmco and the
Company negotiated satisfactory terms for future supply of this product. The
Company anticipates contract arrangements with this manufacturer will be
finalized by July 2000, concurrently with anticipated receipt of site-change
approval from the Food and Drug Administration (FDA). The failure to complete
this alternative manufacturing arrangement in a timely manner 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 JMED and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

CASH AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. All cash and
short-term investments are stated at cost, which approximates fair value.


                                                                             F-8

<PAGE>   48


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MARKETABLE SECURITIES

The Company accounts for its investments using Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". This standard requires that certain debt and equity
securities be adjusted to market value at each balance sheet date. Unrealized
market value gains and losses are recorded in accumulated other comprehensive
income.

Management determines the proper classification of investments in obligations
with fixed maturities at the time of purchase and reevaluates such designations
as of each balance sheet date. At December 31, 1999, all securities covered by
SFAS No. 115 were designated as available-for-sale and classified in the
consolidated balance sheet as current assets. Accordingly, these securities are
stated at market value, with unrealized gains and losses recorded in accumulated
other comprehensive income. Realized gains and losses on the sale of
investments, as determined on a specific identification basis, are included in
the consolidated statement of income. There were no realized gains and losses on
the sale of investments in the year ended December 31, 1999.

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:

<TABLE>
<CAPTION>
               ASSET CATEGORY                                         ESTIMATED USEFUL LIFE
------------------------------------------------------- -----------------------------------------------------

<S>                                                                  <C>
     Buildings and improvements                                             15-40 years
     Equipment and furniture                                                 5-15 years
     Automobiles                                                              5 years
</TABLE>


                                                                             F-9

<PAGE>   49


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

<TABLE>
<CAPTION>
                    ASSET CATEGORY                                        ESTIMATED USEFUL LIFE
--------------------------------------------------------------- -------------------------------------------

<S>                                                                      <C>
     Distribution systems, trademarks, and licenses                             5-30 years
     Restrictive covenants and other intangibles                                5-10 years
     Goodwill                                                                  25-40 years
</TABLE>

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 adjusted for expected changes in operating
results.

To the extent such projections indicate that the undiscounted operating income
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.

In June 1998, the Company recorded a noncash accounting charge related to an
impairment of certain under-performing long-lived assets. As a result of the
Company's strategic review process of its product lines and related intangible
assets, the Company determined that a portion of the goodwill associated with
certain lower-margin pharmaceutical products had been impaired. The revised
carrying value of the respective goodwill was calculated on the basis of
discounted estimated future cash flows and resulted in a noncash, after-tax
charge of $10,500, or $.16 per share. This nonrecurring charge, which has been
reported as a separate line item in selling, general, and administrative
expenses in the accompanying 1998 consolidated statement of income, has no
impact on the Company's 1998 cash flow or its ability to generate cash flow in
the future.



                                                                            F-10

<PAGE>   50


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLE ASSETS (CONTINUED)

The Company believes the remaining carrying amounts of its intangible assets at
December 31, 1999 are recoverable and 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 certain unused pharmaceuticals. At December 31, 1998 and 1999, the
Company maintained reserves of $3,150 and $2,873, respectively, for product
rebates, returns, and discounts.

RESEARCH AND DEVELOPMENT ACTIVITIES

The costs associated with the development, testing, and approval of
pharmaceutical products are expensed as incurred.

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 Financial Accounting Standards Board (FASB) SFAS
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.

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.


                                                                            F-11

<PAGE>   51


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation.

4. INVESTMENT SECURITIES

Investment securities have been classified in the December 31, 1999 consolidated
balance sheet according to management's intent. The carrying amount of
securities and their approximate fair values at December 31, 1999 were as
follows:

<TABLE>
<CAPTION>
                                                             GROSS            GROSS
                                           AMORTIZED       UNREALIZED      UNREALIZED          FAIR
  in thousands of dollars                     COST           GAINS           LOSSES           VALUE
  --------------------------------------------------------------------------------------------------

<S>                                       <C>             <C>             <C>              <C>
     U.S. Government obligations          $10,581             $ -          $   (9)          $10,572
     Municipal obligations                 22,353               -            (123)           22,230
     Corporate bonds                       30,447              21             (42)           30,426
                                        ============================================================
     Total                                $63,381             $21          $ (174)          $63,228
                                        ============================================================
</TABLE>

Contractual maturities of marketable debt securities at December 31, 1999 were
as follows:

<TABLE>
<CAPTION>
                                                              AMORTIZED          FAIR
  in thousands of dollars                                        COST           VALUE
  -------------------------------------------------------------------------------------

<S>                                                          <C>              <C>
     Due in one year or less                                  $40,928          $40,916
     Due after five years                                      22,453           22,312
                                                           ============================
     Total                                                    $63,381          $63,228
                                                           ============================
</TABLE>


                                                                            F-12

<PAGE>   52



                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

4. INVESTMENT SECURITIES (CONTINUED)

The difference between amortized cost and market value of $153 (less deferred
taxes of $59) was recorded as an other comprehensive loss within stockholders'
equity as of December 31, 1999.

At December 31, 1999, approximately $92,470 of available-for-sale securities
with original maturities of 90 days or less were included in cash and short-term
investments. The market value of these securities approximates cost, and the
cost of investments sold is determined by the specific identification method. A
portion of short-term investments are comprised of variable auction rate
securities that provide for optional or early redemption within five weeks and
the contractual maturities are generally greater than twelve months.

5. ACQUISITIONS

CYTOMEL AND TRIOSTAT

On June 30, 1997, the Company acquired two products, Cytomel and Triostat, from
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 supply of both Cytomel and Triostat.



                                                                            F-13


<PAGE>   53


                            JONES PHARMA INCORPORATED

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
          (In thousands of dollars except share and per share amounts)

6. EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                           1997               1998               1999
                                                  ----------------------------------------------------------
<S>                                                    <C>                <C>                <C>
Numerator for basic and diluted earnings per share:
   Income from continuing operations                   $    25,044        $    23,567        $    48,944
   Income from discontinued operations                       6,926             18,768                  -
                                                  ----------------------------------------------------------
                                                       $    31,970        $    42,335        $    48,944
Denominator:
  Denominator for basic earnings per
   share-weighted average shares                        64,308,573         64,632,755         64,936,030
  Effect of dilutive stock options                       1,495,868          1,355,598          1,735,102
                                                  ==========================================================
Denominator of diluted earnings per share               65,804,441         65,988,353         66,671,132
                                                  ==========================================================

Earnings per share:
  Basic:     Continuing operations                     $      0.39        $      0.36        $      0.75
             Discontinued operations                          0.11               0.29                  -
                                                  ==========================================================
                                                       $      0.50        $      0.65        $      0.75
                                                  ==========================================================

  Diluted:   Continuing operations                     $      0.38        $      0.36        $      0.73
             Discontinued operations                          0.11               0.28                  -
                                                  ==========================================================
                                                       $      0.49        $      0.64        $      0.73
                                                  ==========================================================


</TABLE>








                                                                            F-14
<PAGE>   54
                           JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)

          (In thousands of dollars except share and per share amounts)


7. SUPPLEMENTAL CASH FLOW INFORMATION

The following is a summary of supplemental cash flow information:

<TABLE>
<CAPTION>

                                                       1997                1998               1999
                                                 -----------------------------------------------------------
<S>                                              <C>                      <C>                <C>
Interest paid                                         $   259             $   215            $     0
Income taxes paid                                     $15,998             $22,798            $27,000

</TABLE>

8. INVENTORIES

Inventories at December 31, 1998 and 1999, are comprised of the following:

<TABLE>
<CAPTION>
                                                       1998                1999
                                                 ------------------------------------
<S>                                              <C>                      <C>

Raw materials                                         $ 2,239             $ 2,563
Work-in-process                                           506               1,460
Finished goods                                          4,747               7,564
                                                 ------------------------------------
                                                      $ 7,492             $11,587
                                                 ====================================

</TABLE>

9. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31, 1998 and 1999, are as follows:

<TABLE>
<CAPTION>

                                                       1998                  1999
                                                 ------------------------------------
<S>                                              <C>                      <C>

Land                                                  $ 2,068             $ 2,068
Buildings and improvements                             11,608              10,819
Equipment and furniture                                16,526              18,083
Automobiles                                               590                 616
Projects in process                                       128               2,312
                                                 ------------------------------------
                                                       30,920              33,898
Less accumulated depreciation                           7,228               9,389
                                                 ------------------------------------
                                                      $23,692             $24,509
                                                 ====================================

</TABLE>


                                                                            F-15
<PAGE>   55
                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


10. OFFICERS' LIFE INSURANCE

Included in other assets at December 31, 1998 and 1999 are amounts totaling
$3,435 and $5,666, respectively, related to life insurance policies on the lives
of certain key executive officers. The beneficiaries of the policies are the
Company or trusts created by the insureds. The Company pays the annual premiums
on these policies and has guarantees from the insureds (or the beneficiaries of
their trusts) to make the Company whole to the extent that the cash surrender
values of the policies are less than the aggregate premiums paid by the Company.

In connection with two of the life insurance policies with total insurance value
of $40,000, the Company has entered into a stock redemption agreement with the
insureds whereby, upon the death of both insureds, the Company may be required
to use the proceeds from the life insurance policies to purchase shares of the
insureds' Company common stock. The obligation to redeem the stock is at the
discretion of the then holders of the insureds' common shares. The redemption
price is based on the average closing price of the shares on the last ten
trading days immediately preceding the death of the second to die.

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 1998 and 1999, are
comprised of the following:

<TABLE>
<CAPTION>
                                                       1998                1999
                                                 ------------------------------------
<S>                                              <C>                      <C>

Trade payables                                        $ 2,662             $ 3,495
Sales rebates, returns, and discounts                   3,150               2,873
Compensation                                            1,389               1,732
Reserves for discontinued operations                    1,266               1,070
Site transfer costs                                       654                 554
Royalties                                                 457                 471
Administration fees                                       196                 346
Research and development                                   --                 300
Other                                                     177                 416
                                                 ------------------------------------
                                                      $ 9,951             $ 11,257
                                                 ====================================
</TABLE>


                                                                            F-16
<PAGE>   56

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


12. 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, 1998 and
1999, are as follows:

<TABLE>
<CAPTION>
                                                                           1998                1999
                                                                --------------------------------------------
<S>                                                             <C>                           <C>
Deferred tax liabilities:
   Depreciation and amortization                                          $ 4,386             $ 5,135

Deferred tax assets:
   Accrued sales rebates, returns, and discounts                            1,499               1,392
   Deferred compensation on stock options                                      87                  87
   Unicap adjustment on inventory                                             209                 264
   Allowance for doubtful accounts                                            353                 487
   Accrued expenses                                                           757                 408
   Other                                                                      437                 917
                                                                --------------------------------------------
                                                                            3,342                3,555
                                                                --------------------------------------------
Net deferred tax liabilities                                              $ 1,044              $ 1,580
                                                                ============================================

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

                                                       1997                1998                1999
                                                 -----------------------------------------------------------
<S>                                              <C>                      <C>                 <C>
Current:
   Federal                                            $14,206             $19,166             $27,979
   State                                                1,050               1,862               2,583
                                                 ------------------------------------------------------------
Total current                                          15,256              21,028              30,562

Deferred:
   Federal                                                 93                 202                 541
   State                                                    2                  20                  61
                                                 ------------------------------------------------------------
Total deferred                                             95                 222                 602
                                                 ------------------------------------------------------------
                                                      $15,351             $21,250             $31,164
                                                 ============================================================
</TABLE>

                                                                            F-17
<PAGE>   57

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


12. INCOME TAXES (CONTINUED)

The provision for income taxes from discontinued operations in 1997 and 1998 of
$4,244 and $13,537, 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>
                                                       1997                 1998                1999
                                                 -----------------------------------------------------------

<S>                                              <C>                       <C>                 <C>
U.S. federal statutory tax rate                       35.0%                35.0%               35.0%
State income taxes, net of federal tax
   benefit                                             1.7%                 2.6%                3.2%
Other, net                                             1.3%                 9.8%                0.7%
                                                 ----------------------------------------------------------
                                                      38.0%                47.4%               38.9%
                                                 ==========================================================
</TABLE>

The effective tax rate in 1998 reflects the nondeductibility of certain
nonrecurring accounting charges.

13. 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, 1998 and 1999, there were no shares of
preferred stock designated or outstanding.


                                                                            F-18
<PAGE>   58
                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


14. 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, 1999, options for 1,949,030 shares of
common stock are available for future grant. A total of 3,937,088 options to
purchase common stock are outstanding under these plans at December 31, 1999, of
which 1,353,081 are currently exercisable. Included in the outstanding options
under these plans are options to purchase 1,518,750 shares of common stock that
have been granted to certain officers of the Company under time accelerated
stock option agreements. The options 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.

The incentive stock plans 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 1997, 1998, and 1999, was as follows:

<TABLE>
<CAPTION>

                                                       1997                 1998                1999
                                                 -----------------------------------------------------------

<S>                                              <C>                       <C>                 <C>
Outstanding options, January 1                        3,204,776            3,372,021           4,417,427
Exercised                                              (505,629)            (347,040)           (388,947)
Granted                                                 939,375            1,561,725             320,925
Cancelled                                              (266,501)            (169,279)           (412,317)
                                                 ----------------------------------------------------------
Outstanding options, December 31                      3,372,021            4,417,427           3,937,088
                                                 ==========================================================
Weighted average price of options
  outstanding, January 1                                 $ 4.29               $ 7.03              $ 8.17
                                                 ==========================================================

Weighted average price of options exercised              $ 1.38               $ 3.08              $ 5.12
                                                 ==========================================================

  Weighted average price of options granted              $14.41               $10.03              $16.49
                                                 ==========================================================

  Weighted average price of options cancelled            $10.75               $13.06              $12.40
                                                 ==========================================================

  Weighted average price of options
    outstanding, December 31                             $ 7.03                $8.17              $ 8.73
                                                 ==========================================================

</TABLE>


                                                                            F-19
<PAGE>   59

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


14. STOCK OPTION PLANS (CONTINUED)

Outstanding options at December 31, 1999 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, 1999:                                1,353,081            $ 6.62              $ 1.29-$18.11
Outstanding options vesting in:
    2000                                                830,228            $ 8.19              $ 1.29-$18.11
    2001                                                830,963            $ 9.24              $ 4.74-$18.11
    2002                                                522,233            $11.98              $ 4.74-$18.11
    2003                                                354,083            $11.01              $ 4.74-$18.11
    2004                                                 46,500            $16.40              $13.17-$18.00
                                                  ------------------
                                                      3,937,088
                                                  ==================
</TABLE>


Pro forma information regarding net income and earnings per share is required by
SFAS 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 1997, 1998,
and 1999, respectively: risk-free interest rates of 5.52 percent, 5.21 percent,
and 6.57 percent; a dividend yield of .3 percent, .35 percent, and .35 percent;
volatility factors of the expected market price of the Company's common stock of
 .610 percent, .609 percent, and .594 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-20
<PAGE>   60
                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


14. 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>

                                                       1997                 1998                1999
                                                 -----------------------------------------------------------

<S>                                              <C>                       <C>                 <C>
Pro forma net income                                  $30,727              $40,873             $46,371
                                                 ========================================== ================
Pro forma earnings per share - diluted                $   .47              $   .62             $   .70
                                                 ========================================== ================
</TABLE>

15. 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 1997, 1998, and 1999 were
approximately $614, $669, and $734, respectively.

16. LEASE COMMITMENTS

In 1999 the Company initiated leasing automobiles for the Company's field sales
force which calls upon office and hospital based physicians and other healthcare
providers. Rental expense related to these operating leases was $225 in 1999.
This table shows approximate future minimum lease commitments under
noncancellable leases at December 31, 1999:

<TABLE>

                <S>                          <C>

                2000                               $  600
                2001                                  600
                2002                                  300
                                              ================
                                                   $1,500
                                              =================

</TABLE>


                                                                            F-21
<PAGE>   61

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)

17. CONTINGENCIES AND COMMITMENTS

At December 31, 1999, the Company carried product liability coverage of $20,000
per occurrence and $20,000 in the aggregate on a "claims made" basis and carried
excess coverage of $10,000 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 more than two thousand five hundred
multi-defendant lawsuits involving the manufacture and sale of dexfenfluramine,
fenfluramine, and phentermine. Although the Company has not at any time
manufactured dexfenfluramine, fenfluramine, or phentermine, the Company was a
distributor of a generic phentermine product, and, after the acquisition of
Abana Pharmaceuticals, was a distributor of Obenix, its branded phentermine
product. The plaintiffs in these cases claim injury as a result of ingesting a
combination of these weight-loss drugs and are seeking compensatory and punitive
damages as well as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories including but not
limited to, product liability, strict liability, negligence, breach of warranty,
and misrepresentation. These suits have been filed in various jurisdictions
throughout the United States, and in each of these suits, the Company is one of
many defendants, including manufacturers and other distributors of these drugs.

The Company denies any liability incident to the distribution of Obenix or its
generic phentermine product and intends to pursue all defenses available to it.
The Company has tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending the Company in these suits. The
lawsuits are in various stages of litigation, 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, or results of operations.




                                                                            F-22
<PAGE>   62

                            JONES PHARMA INCORPORATED
             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


17. 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 (NDAs). 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 Company expects
to comply with the NDA requirement. Research and development expense of
approximately $1.3 million in 1999 was incurred with respect to the NDA approval
process.

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 1997, 1998, and 1999 was approximately $1,358, $1,744,
and $1,661, respectively.


                                                                            F-23
<PAGE>   63

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


18. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

                    1998                        FIRST           SECOND          THIRD           FOURTH
                                           -----------------------------------------------------------------
<S>                                        <C>                 <C>             <C>             <C>

  Net sales from continuing operations         $23,743         $26,675         $26,387         $26,609
  Gross profit                                  18,071          20,304          20,362          20,838

  Income from continuing operations              7,265          (1,986)          8,652           9,636
  Income from discontinued operations            1,218          17,550               -              -
                                           -----------------------------------------------------------------
  Net income                                   $ 8,483         $15,564         $ 8,652         $ 9,636

  Earnings per share:
  Basic:  Continuing operations                $  0.11         $ (0.03)        $  0.13         $  0.15
          Discontinued operations                 0.02            0.27               -               -
                                           -----------------------------------------------------------------
                                               $  0.13         $  0.24         $  0.13         $  0.15

  Diluted:Continuing operations                $  0.11         $ (0.03)        $  0.13         $  0.15
          Discontinued operations                 0.02            0.27               -               -
                                           -----------------------------------------------------------------
                                               $  0.13         $  0.24         $  0.13         $  0.15
  Stock prices:
    High                                       $ 17.94         $ 16.72         $ 15.81         $ 16.78
    Low                                        $ 15.53         $ 12.83         $  9.22         $ 11.61


                    1999                        FIRST           SECOND          THIRD           FOURTH
                                           -----------------------------------------------------------------

  Net sales from continuing operations         $29,477         $31,286         $34,538         $37,243
  Gross profit                                  22,893          26,129          27,807          30,638

  Income from continuing operations              9,776          11,587          12,547          15,034
  Income from discontinued operations                -               -               -              -
                                           -----------------------------------------------------------------
  Net income                                   $ 9,776         $11,587         $12,547         $15,034

  Earnings per share:
  Basic:  Continuing operations                $  0.15         $  0.18         $  0.19         $  0.23
          Discontinued operations                    -               -               -              -
                                           -----------------------------------------------------------------
                                               $  0.15         $  0.18         $  0.19         $  0.23

  Diluted:Continuing operations                $  0.15         $  0.17         $  0.19         $  0.22
          Discontinued operations                    -               -               -               -
                                           -----------------------------------------------------------------
                                               $  0.15         $  0.17         $  0.19         $  0.22
  Stock prices:
    High                                       $ 16.14         $ 17.58         $ 22.90         $ 30.83
    Low                                        $ 11.68         $ 13.63         $ 15.81         $ 17.66

</TABLE>

                                                                            F-24
<PAGE>   64

                            JONES PHARMA INCORPORATED

             Notes to Consolidated Financial Statements (continued)
          (In thousands of dollars except share and per share amounts)


19. IMPACT OF YEAR 2000 (UNAUDITED)

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The costs
associated with ensuring the Company was Year 2000 ready were, for the most
part, planned capital expenditures and budgeted internal staffing expenses. The
total capital expenditures related to these system upgrades and/or replacements
associated with the Company's installation of an Enterprise Reporting System
approximate $1.5 million, of which $1.0 million has been capitalized and
$500,000 has been expensed as incurred. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.


                                                                            F-25
<PAGE>   65

                            JONES PHARMA INCORPORATED

                 Schedule II - Valuation and Qualifying Accounts


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

Year ended December 31, 1999
Reserves and allowances deducted from
  asset accounts:
    Allowance for doubtful accounts                $   977         $  643          $(77)             $ 1,543
                                               ==================================================================

    Accumulated amortization of intangibles        $12,160         $3,538          $(241)            $15,457
                                               ==================================================================

Year ended December 31, 1998
Reserves and allowances deducted from
  asset accounts:
    Allowance for doubtful accounts                $ 1,196         $  580          $(799)            $   977
                                               ==================================================================

    Accumulated amortization of intangibles        $ 8,503         $3,665          $(8)              $12,160
                                               ==================================================================

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        $ 5,175         $3,357          $(29)             $ 8,503
                                               ==================================================================

</TABLE>

                                                                            F-26