<PAGE>
 
[Logo]
CHIREX

ChiRex Inc.
300 Atlantic St., Ste. 402
Stamford, CT 06901
TEL: (203) 351 2300 FAX: (203) 425 9996
Designed and produced by The Artworks Consortium Ltd., Newcastle upon Tyne,
England.
<PAGE>
 
                                    [Logo]
                                    CHIREX

          PATHWAYS TO GROWTH: TECHNOLOGY, MANUFACTURING AND SERVICES
<PAGE>
 
REVENUES (U.S. dollars in thousands)
$88,957
$89,827
$94,100

CORE REVENUES (U.S. dollars in thousands)
$36,103
$48,445
$68,130

GROSS PROFIT (U.S. dollars in thousands)
$12,186
$22,015
$22,660
 
EARNINGS (LOSS) PER SHARE
$(0.10)
$0.37
$0.42
<TABLE> 
<CAPTION> 
Fiscal Year Ended December 31       1995      1996      1997
<S>                              <C>       <C>       <C> 
Total Revenues                   $88,957   $89,827   $94,100
Core Revenues                    $36,103   $48,445   $68,130
  Annual Growth                               34.2%     40.6%
Gross Profit                     $12,186   $22,015   $22,660
  Percent of Total Revenues         13.7%     24.5%     24.1%
Earnings Per Share (Loss)        $ (0.10)  $  0.37   $  0.42
Employees (Year End)                 504       490       578
</TABLE>
(U.S. dollars in thousands, except per share data)
This table summarizes fiscal year proforma unaudited financial data presented in
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
<PAGE>
 
Dudley Production Plant

[PHOTO]

Annan Production Plant

[PHOTO]
<PAGE>
 
                                    [Logo]
                                    CHIREX

ChiRex Inc., a leading contract manufacturing organization serving the
outsourcing needs of the pharmaceutical industry:

 . Supports and enhances in-house development and manufacturing capabilities of
its pharmaceutical and biotechnology customers with broad, fully-integrated
services, including product development and regulatory support.

 . Manufactures pharmaceutical intermediates and active ingredients in its world-
class cGMP manufacturing facilities located in Dudley, Northumberland, England,
and Annan, Scotland.

 . Holds more than 50 patents and patent applications in chiral chemistry.
Serves customers including eight of the ten largest pharmaceutical companies in
the world.

 . Serves customers including eight of the ten largest pharmaeutical compaies in 
the world.

 . Employs more than 575 people in the U.S. and U.K.


                                                                               1
<PAGE>
 
GROWTH
PATHWAYS TO GROWTH
------------------

As outsourcing plays a larger role in the global pharmaceutical industry,
contract manufacturing organizations (CMO) must offer innovative technology,
consistent quality and a broad range of services. For pharmaceutical CMOs, these
are the pathways to growth.

TECHNOLOGY
TECHNOLOGY...
-------------

Two thirds of drugs in development today are chiral. With its extensive
portfolio of classical chemical and proprietary chiral technologies, ChiRex is
focused on manufacturing these complex, high value-added pharmaceuticals. The
Company will continue to expand its technology base to offer its customers
innovative manufacturing solutions.

QUALITY
QUALITY...
----------

Pharmaceutical customers expect superior quality, which ChiRex delivers through
its state-of-the-art manufacturing facilities, technological excellence and
scientific leadership.

SERVICE
SERVICE...
----------

ChiRex offers a full range of manufacturing, development, scaleup, hazards
evaluation and regulatory services. ChiRex plants maintain strict cGMP
compliance while exceeding local environmental regulations for chemical waste.

By following these pathways to growth, --Technology, Quality, Service-- ChiRex
will strengthen its prominent position in pharmaceutical contract manufacturing
and improve its prospects for exploiting the $12 billion global market for
pharmaceutical outsourcing.

2
<PAGE>
 
HIGHLIGHTS
HIGHLIGHTS OF 1997:
-------------------

 . Continued growth of Core Revenues
  
 . Purchased Glaxo Wellcome's cGMP pharmaceutical production facility at
  Annan, Scotland

 . Secured a five year, $450 million contract from
  Glaxo Wellcome

 . Sold ChiRex's acetaminophen business

 . Licensed a kinetic resolution technology for preparing pure enantiomeric
  forms of drug intermediates

TO OUR SHAREHOLDERS
-------------------

During 1997, ChiRex's second year as a public company, we achieved all of our
strategic objectives for the year: improving sales mix by increasing revenues
from higher value-added core products; increasing production capacity through
internal efficiencies as well as via the major acquisition of Glaxo Wellcome's
manufacturing facility at Annan, Scotland; and further enhancing our already
strong technological platform in chiral chemistry.By meeting these objectives we
have positioned ChiRex for exceptional growth over the next several years.

Business Strategy

There are three major components to the ChiRex strategy. First, we intend to be
a leader in the supply chain for the next generation of high-value ethical
products now in development at major and emerging pharmaceutical companies.
Second, we plan to evolve into a full-service contract manufacturing
organization (CMO) that can partner with clients throughout the life cycle of a
product from early clinical development stages through to large-scale commercial
production. Third, we are committed to securing and applying the most cutting-
edge process technologies as they emerge from the laboratories of the leading
innovators in the field, in order to provide state-of-the-art production
quality, cost-efficiency and speed-to-market advantages to our clients.

Our purchase of Glaxo Wellcome's cGMP pharmaceutical chemical manufacturing
facility at Annan supports our business strategy in several ways, by:

 . Positioning ChiRex as a key supplier to one of the world's largest
  pharmaceutical companies, and providing a platform to further develop that
  relationship based on a continuing high level of service and
  reliability.

 . Ensuring ChiRex a large and steadily growing revenue stream into the next
  decade.

 . Giving ChiRex access to the manufacture of a number of new, high-value
  ethical pharmaceutical products.

 . Expanding our production capacity and eliminating the perceived risk
  associated with single-plant dependence.

 . Providing a working template for the development of long-term business
  relationships with other major pharmaceutical companies.

We are pressing ahead with a major investment program to refit two of the three
Annan production buildings, and expect these facilities to undergo validation
during the fourth quarter of 1998 and be operational by year end. The overall
investment goal is to convert the production facilities from dedicated single-
product design to the flexible, general-purpose configuration that is ideally
suited to ChiRex's business.

In the year we agreed to supply Cell Therapeutics Inc. with bulk Lysofylline, a
drug in advanced development for preventing infection and other treatment-
related toxicity in cancer patients undergoing high dose radiation or

                                                                               3
<PAGE>
 
chemotherapy. This agreement represents a significant step in our evolution into
a full-service CMO. While we are primarily manufacturing the product using Cell
Therapeutics' own chemistry, we are also applying our proprietary chiral
chemistry expertise to the production of a key intermediate which will
streamline the process and improve the economics. We view this collaboration as
a model for future agreements within the industry, and as a pathway to being the
preferred supplier for a broad pipeline of new products.

An increasing number of drugs today -- two-thirds of new drugs -- are developed
as single optical isomers. Single-isomer drugs are often up to twice as
effective as their racemic (mixed isomer) counterparts, can have fewer side
effects, and their manufacture usually generates less waste. Producing single-
isomers can be expensive, but with the right chemistry it need not always be so.
We feel our proprietary chemistries can play a pivotal role in meeting the
associated challenges faced by the pharmaceutical industry. In this regard, we
are particularly excited about the latest process technology which we licensed
in March 1997, called Kinetic Resolution.
We expect this novel chemistry to reduce the manufacturing costs for many
single-isomer drugs and intermediates, while solidly positioning ChiRex for the
manufacture of these products.

The Kinetic Resolution technology was discovered by Professor Eric Jacobsen of
Harvard University, a long-time adviser to ChiRex, and the newest member of our
Board of Directors. Prof. Jacobsen brings to the company world-class scientific
expertise, fifteen years experience in the discovery of innovative chemistry and
long-standing consulting relationships with a number of major pharmaceutical
companies. We eagerly look forward to Prof. Jacobsen's guidance in the expansion
of our research & development programs, accelerating our transition to becoming
the preferred manufacturer of the new generation of pharmaceutical chemicals.

ChiRex Infrastructure

We are delighted to confirm the appointment of Professor Sandy McKillop
as Research & Development Director, based at our Dudley site.
This appointment has concluded our search for a high-caliber and experienced
scientist to lead our day-to-day process development activities and closely
coordinate our internal efforts with those of our leading academic advisers.
Prof. McKillop was previously Professor of Chemistry at the University of East
Anglia in the United Kingdom and is an
internationally renowned organic chemist. He has been a member of our Scientific
Advisory Board and has consulted widely within the pharmaceutical industry.

We have embarked on a search for a Chief Operating Officer, a position we feel
is now warranted for a Company of our size and potential. In addition, we intend
to continue strengthening our overall management and technical resources to
fully support our planned growth.

Financial Performance

For 1997, ChiRex achieved gross revenues of $94.1 million, compared with $89.8
million in 1996. Core revenues grew by 41% to $68.1 million from $48.4 million
in 1996. Gross profit at $22.7 million (24.1% of revenues) was slightly ahead of
1996 levels of $22.0 million (24.5% of revenues).
Net income before restructuring expenses was $4.8 million, or $0.42 per share
for 1997, some 19% ahead of 1996 earnings of $4.1 million, or $0.37 per share.

While the year was one of substantial achievement in the strategic development
of the business, the financial results overall, and in the fourth quarter in
particular, were below our goals. This performance was primarily the result of
faster-than-anticipated revenue growth in our core business which created
operating challenges that adversely affected gross profit.
The operating impact on gross profit was exacerbated by the need to make prudent
inventory provisions of $1.2 million at year end. These provisions principally
related to the write-down of the value of stocks of some non-core products,
including phentermine hydrochloride, one of the active ingredients
in the dietary suppressant combined therapy known as "Fen-Phen". Lastly, we
incurred some unanticipated residual expenses following termination of
acetaminophen manufacture in September, including the operation of the Dudley
site biological wastewater treatment plant as this facility adjusted to a
significantly different feed stream.

We believe that many of these growth-related operating issues will be resolved
in 1998 and that gross profit will improve accordingly. Moreover, the sale of
our uncompetitive acetaminophen business in April 1997 reflects our commitment
to eliminating low-margin non-core products. We view this divestment as the
final significant step in positioning ChiRex as a leading CMO focused on high
added-value products.

Looking Forward

The new year promises new and greater opportunities to ChiRex as the Company
follows its pathway to growth in its core business. A top priority in 1998 is to
bring our Annan facility into full operation to support our supply agreement
with Glaxo Wellcome and in anticipation of further new business potential. At
our Dudley site we are aggressively addressing the key operating issues while
simultaneously advancing plans to introduce several additional new products
during the year.

We remain committed to building the finest full-service CMO to capitalize on the
strong outsourcing demand that continues to emerge from the pharmaceutical
industry, and thereby to enhance value for all our shareholders. We will
continue to update you on our progress as we strive to achieve sustained growth
in revenue, earnings and profitability through 1998 and beyond.

Sincerely,

Signature


Alan R. Clark
Chairman and Chief Executive Officer
February 23rd 1998

4
<PAGE>
 
                                   [PHOTOS]

"We have positioned ChiRex for exceptional growth over the next several years by
shifting the sales mix to high value-added products, expanding internal
capacity, acquiring a second manufacturing site and enhancing our already strong
technological platform in chiral chemistry. "

                                                  Alan Clark
                        Chairman and Chief Executive Officer

                                                                               5
<PAGE>
 
MANUFACTURING
MANUFACTURING GROWTH...
-----------------------

ChiRex has enjoyed significant growth as pharmaceutical clients increasingly
outsource their manufacturing. To fulfill the future needs of its customers,
ChiRex must continue to expand its pharmaceutical production capabilities.

ChiRex's most significant addition to manufacturing capacity to date has been
the acquisition of Glaxo's cGMP facility in Annan, Scotland, for approximately
$67 million. Investment in the Annan facility will eventually reach about $90
million. By the end of the fourth quarter of 1998, the site should be
operational, producing some of the products covered by the five year, $450
million agreement with Glaxo.

The first six products to be produced under the Glaxo Wellcome contract include
an intermediate for the AIDS drug 3TC, Lamivudine for treating hepatitis B, and
Vertex 141, another AIDS therapeutic. The Glaxo agreement will bring ChiRex
substantial revenues in 1998, which are expected to increase throughout the term
of the contract.

ChiRex's manufacturing facility in Dudley, Northumberland, England has been the
anchor of the Company's manufacturing base for thirty years. During the past
five years, more than $50 million has been invested in the Dudley site,
including the construction of a $15 million state-of-the-art pilot plant and a
research and development center in 1996. The Dudley plant is one of the world's
largest independent fine chemical manufacturing sites. The plant is inspected by
the U.S. Food and Drug Administration (FDA) and has management systems certified
to ISO 9002 standards. Dudley also complies with UK Integrated Pollution Control
legislation and its products comply with relevant Pharmacopoeias and FDA
requirements.

MANUFACTURING QUALITY
---------------------

ChiRex is equipped to provide a Quality System in full compliance with
regulatory and cGMP requirements. Analytical resources are capable of developing
and operating modern methods of analysis for raw materials, intermediates and
final products.

A team establishes validation of analytical methods, manufacturing
equipment and processes, while documentation systems provide assurance of
compliance.

6
<PAGE>
 
"The acquisition of the Annan site by ChiRex has unlocked tremendous
opportunities and an exciting future for this facility. With the ChiRex capital
investment program we will quickly transform the Annan capabilities from
dedicated to flexible manufacture of an expanding value-adding product
portfolio."

                                                    Frank Wright
                                Vice President, Annan Operations

                                                                               7
<PAGE>
 
TECHNOLOGY
TECHNOLOGY GROWTH...
--------------------

Modern pharmaceuticals are complex, expensive, highly regulated products which
present enormous manufacturing challenges. As many as two-thirds of drugs in
development are being introduced as single isomers. Market and regulatory forces
have pushed new product timelines beyond ten years and launch costs above $300
million. Time-to-market is therefore more critical today than ever. Helping our
customers shorten time-to-market through innovative technology and associated
services is a central component of ChiRex's strategy for growth.

Recognizing the commercial significance of chirality, ChiRex has taken the
initiative of licensing in six leading chiral chemical technologies. Developed
by leading researchers, ChiRex's technologies provide a proprietary base for
creating high value intermediates for drug synthesis, often starting from
relatively inexpensive raw materials.

The most recent addition to our chiral chemistry technology platform is a
Kinetic Resolution technique invented by Prof. Eric N. Jacobsen at Harvard
University and licensed in from Harvard. This Kinetic Resolution method permits
facile separation of the two isomeric forms of terminal epoxides. Single isomer
epoxides are very reactive molecules which can be used to manufacture chiral
intermediates and actives. This is more cost effective chemistry than
traditional routes, which frequently require recycling of the unwanted isomer.

ChiRex will seek relationships with its customers that go well beyond simple
supplier-purchaser arrangements. Although ChiRex is and will remain primarily a
contract manufacturing company, more and more of its interaction with customers
involves such issues as scale-up, product development and regulatory issues.
ChiRex views these activities as opportunities to work more closely with
customers and provide a higher quality and breadth of service at reasonable
cost.

ERIC JACOBSEN
-------------

Eric N. Jacobsen, Ph.D., Professor of Chemistry at Harvard University and the
discoverer of kinetic resolution technology recently licensed by ChiRex, brings
unmatched synthetic chemistry expertise to the Company as a member of the Board
of Directors, and the Scientific Advisory Board.

With two patents, 14 awards for scientific excellence and more than 60
publications, Dr. Jacobsen is a recognized innovator in the chiral chemistry
technologies which will fuel the Company's growth.


"Chirality is one of the most intriguing artifacts of nature. No one knows
exactly how or why natural chiral molecules arose only in left- or right-handed
form. I am fortunate to be working at a time in history when harnessing
chirality to provide safer, more effective drugs is becoming a reality."

                                                Eric Jacobsen, Ph.D.
                                  Professor, Department of Chemistry 
                           and Chemical Biology, Harvard University.
                                                 Board of Directors.
                                          Scientific Advisory Board.

8
<PAGE>
 
ChiRex's State-of-the-Art Water For Injection Generation Plant

                                                                               9
<PAGE>
 
EXPERTISE
MANAGEMENT AND TECHNICAL EXPERTISE...
-------------------------------------

World-class technology requires superlative management and technical expertise.
Filling key research and director positions with internationally respected
pharmaceutical chemists assures ChiRex of a high level of technical leadership
and the reputation to attract the best scientists at all levels.

ALEXANDER MCKILLOP
------------------

Alexander ("Sandy") McKillop, Ph.D., D.Sc., a leading chemical researcher and
internationally known consultant, will take ChiRex technology to the next level
as R&D Director. As a respected pharmaceutical chemist, Dr. McKillop has already
begun attracting prestigious technical talent to ChiRex.

Dr. McKillop brings to ChiRex broad-based experience in the discovery and
application of new chemical processes, as well as extensive knowledge of
pharmaceutical product development.

EXPANDED, WORLD-CLASS SERVICES
------------------------------

Manufacturing is ChiRex's core activity and major focus. But as pharmaceutical
companies seek more outsourcing arrangements over the next several years,
ChiRex's relationships with contract partners will become more complex, more
vertically integrated, to reflect the dynamics of the discovery-to-market
phenomenon.

Process development is a logical area for ChiRex to assist its partners. At this
stage in the evolution of a drug, pharmaceutical companies begin to look for the
safest, most efficient, most cost-effective methods of producing clinical-grade
material in large quantities. Traditionally, contract manufacturers have entered
the picture after this critical part of the manufacturing process has been
worked out. With its world-class chemical development technologies, however,
ChiRex can pick up the reins much earlier, perhaps at the discovery stage, to
assure efficient transition from the lab to the clinic to market.

Regulated products represent another challenging area where ChiRex is equipped
to assist its pharmaceutical industry partners. All ChiRex products are
manufactured under strict cGMP protocols and are subject to intense regulatory
scrutiny. As manufacturers of these products, ChiRex is well positioned to work
alongside its customers to satisfy regulatory requirements, including FDA
filings, and further streamline time-to-market.

Expansion of our services and partnering with our customers are critical
components of ChiRex's growth strategy.


"Shortening time-to-market is going to save a lot of money, but the implications
for contract manufacturers are very clear: The whole time line must be
telescoped dramatically."
                
                                                Alexander McKillop, Ph.D.
                                                     Director of Research
                                                         and Development.
                                                    Chairman,  Scientific
                                                          Advisory Board.


"As R&D productivity increases, pharmaceutical companies will recognize that
manufacturing everything in-house is not a serious option. The capacity and
capabilities of good CMOs will have to become part of their supply network."

                                                       David Pulman, Ph.D
                                     Director of International Activities 
                                       Supply. Glaxo Wellcome Operations.


10
<PAGE>
 
"It is imperative that ChiRex sustains production capabilities to meet the
increasingly complex requirements of our customers and to complement these with
excellent analytical, validation, documentation and compliance services."

                                                             David Raynor
                                        Vice President, Dudley Operations

                                                                              11
<PAGE>
 
SERVICE
CHIREX: THE FULL-SERVICE CMO
----------------------------

Development, manufacturing and regulatory compliance constitute core activities
of new drug introduction between discovery and marketing. With its world-class
technical, management and regulatory expertise, ChiRex services its
pharmaceutical industry partners with more than just contract manufacturing. The
Company's product and revenue growth are strong indications that drug companies
are willing to have ChiRex as a partner in their race to the marketplace.

As an elite, full-service CMO partner, ChiRex offers three levels of service:
laboratory scale expertise, pilot plant capabilities and commercial scale
production. A multidisciplinary project team guides products through these
levels, as needed. Process design and development activities revolve around
ChiRex's broad technology base and chiral expertise, including such essentials
as hazards evaluation, in-house engineering design, regulatory support and
secure management of trade secrets.

12
<PAGE>
 
FINANCIAL
CHIREX INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
<TABLE>
<CAPTION>
                                                               Page
<S>                                                    <C>
     
        Management's Discussion and Analysis of Results                 14
        of Operations and Financial Condition

        Reports of Independent Public Accountants                       18

        Consolidated Balance Sheets as of December 31,                  19
        1996 and 1997
        
        Consolidated Statements of Operations for the years             20
        ended December 31, 1995, 1996 and 1997

        Consolidated Statements of Cash Flows for the years             21
        ended December 31, 1995, 1996 and 1997
        
        Consolidated Statements of Stockholders' Equity for             22
        the years ended December 31, 1995, 1996 and 1997
        
        Notes to Consolidated Financial Statements                      23
</TABLE>

                                                                        13
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS and FINANCIAL CONDITION
-----------------------------------------------

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.

INTRODUCTION

ChiRex Inc. is a contract manufacturing organization ("CMO") serving the
outsourcing needs of the pharmaceutical industry through its extensive
pharmaceutical fine chemical manufacturing and process development capabilities
and proprietary technologies. The Company supports and supplements the in-house
development and manufacturing capabilities of its pharmaceutical and
biotechnology customers with a broad range of fully-integrated services,
accelerating the time from drug discovery to commercialization. In 1996 and
1997, the Company manufactured over 50 products at its cGMP manufacturing
facilities in Dudley, England and Annan, Scotland. The Annan facility, acquired
in October 1997, is currently underutilized and is in the process of being
reconfigured into a flexible manufacturing facility. Management has reviewed the
Company's product portfolio and identified certain products it manufactured in
1996 and 1997 as "core products" which the Company believes offer superior long-
term growth potential, higher margins or strategic customer relationship
benefits. The Company intends to phase-out the manufacture of non-core products
which do not meet management's criteria regarding profitability, growth profile
or customer development potential.

In April 1997, the Company disposed of its acetaminophen (paracetamol, an over-
the-counter analgesic) business and in September 1997, the Company ceased
production of acetaminophen. At the time of the disposition, acetaminophen was
the largest volume product manufactured by the Company, representing
approximately 31% of the Company's 1996 pro forma revenues, but was not highly
profitable at the gross margin level. In connection with the disposition of the
business, the Company implemented measures designed to offset the effect on
operating performance. The Company's decision to dispose of its acetaminophen
business followed a strategic review of several alternatives and was based on a
number of factors, including the continued domination of the acetaminophen
business by high volume, low cost manufacturers and the Company's expectation
that the market price of acetaminophen will continue to erode. The disposition
resulted in a pre-tax charge in 1997 of $8.1 million for costs associated with
asset impairment, plant closure, severance and other expenses related to the
disposition of this business net of proceeds received on the disposal. The 
after-tax charge was approximately 6% of stockholders' equity of the Company at
December 31, 1996.

On October 31, 1997, the Company completed the purchase of a Glaxo Wellcome FDA
cGMP pharmaceutical production facility located in Annan, Scotland. The Company
paid approximately $66.8 million ((Pounds)40.0 million) for the facility plus an
additional payment for certain working capital of approximately $1.7 million
((Pounds)1.0 million). As part of the transaction, Glaxo Wellcome awarded the
Company a five-year contract to supply certain pharmaceutical intermediates and
active ingredients with an aggregate sales value of approximately $450 million.
Under the Asset Purchase Agreement, ChiRex purchased all of the buildings, land
and equipment at the 154-acre Annan, Scotland property, encompassing three main
production facilities plus certain working capital. The Company plans to invest
approximately $25 million over two years to accommodate newly contracted
products and to modify the facility for general purpose pharmaceutical fine
chemical manufacturing. Under the Supply Agreement, ChiRex will manufacture up
to ten products at Annan and Dudley. The acquisition has been accounted for as a
purchase and, accordingly, the operating results of the Annan facility have been
included in the Company's consolidated financial statements from the date of
acquisition.

Substantially all of the Company's revenues and expenses are denominated in
Great Britain pounds sterling, and to prepare the Company's financial statements
such amounts are translated into US Dollars at average exchange rates in
accordance with generally accepted accounting principles. The average exchange
rate used to make this translation in 1995, 1996 and 1997 was $1.64, $1.56 and
$1.65 respectively, per (Pounds)1.00. Period-to-period changes in exchange rates
can affect the comparability of the Company's financial statements.

The Company has dedicated internal resources to identify and resolve "year 2000"
compliance issues within computer applications utilized by the Company. The
Company has also engaged external resources and will purchase necessary computer
software and upgrades to become year 2000 compliant. The Company is also
developing and will implement in 1998 a new management information system at its
Annan facility in connection with its business plans for this location. The
Company's long term plan is to implement these systems at the Company's other
locations as soon as feasible.

RESULTS OF OPERATIONS

In order to make the comparison of financial information more meaningful, the
following tables sets forth (i) the historical results of the Company for 1997
adjusted to exclude various restructuring charges resulting from the disposal of
the acetaminophen business, (ii) the historical results of the Company for 1996
and the pro forma 1996 results of the Company, adjusted to exclude various
charges resulting from the Contribution and the Merger (see Notes 1 and 2)
consisting of adjustments to restate inventory at fair value, write-off of
acquired in-process research and development and an expense relating to certain
stock compensation, and (iii) the combined audited operating results of ChiRex,
Holdings and Dudley for 1995. All intercompany transactions requiring
elimination have been eliminated. The pro forma, pro forma as adjusted and
combined financial data set forth in the following tables are not necessarily
indicative of future operations or what the Company's results of operations
would actually have been had the various transactions set forth below occurred
as described. The period-to-period comparisons that follow the tables compare
the pro forma as adjusted and combined results of operations set forth in the
following tables for the periods indicated and not the actual results of
operations of any of the constituent entities.

In 1996, the Company adopted a new cost accounting policy for the manufactured
inventory of Dudley effective as of March 11, 1996, the date of the
Contribution. Under this policy, various indirect and contractual research
expenses (which were previously allocated to inventory) were reclassified as
selling, general and administrative and research and development expenses,
respectively, to more closely conform to industry standards. This new accounting
policy accounted for $5.1 million of the $9.0 million decrease in cost of goods
sold from 1995 to 1996. Accordingly, a comparison of gross margin for such
periods is not meaningful.

14
<PAGE>
 
<TABLE>
<CAPTION>
Comparative Operating Results
For Years Ended December 31, 1997, 1996 and 1995 (In thousands)
<S>                          <C>             <C>                  <C>               <C>           <C>            <C>
(Unaudited)
                                             ChiRex
1997                                         Inc.                 Adjustment        As Adjusted
-----------------------------------------------------------------------------------------------------------------------------------
Revenues                                    $94,100               $-                    $94,100
Cost of goods sold                           71,440                -                     71,440
------------------------------------------------------------------------------------------------------------------------------------

Gross profit                                 22,660                -                     22,660
Research and development                      3,937                -                      3,937
Selling, general and administrative           9,423                -                      9,423
Goodwill                                      1,164                -                      1,164
Restructuring charges, net of                 8,069            8,069(1)                    -
proceeds
Interest expense, net                         1,052                -                      1,052
------------------------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes              (985)           8,069                      7,084
Benefit (provision) for
 income taxes                                   335           (2,572)(2)                 (2,237)
------------------------------------------------------------------------------------------------------------------------------------

Net income (loss)                         $    (650)         $ 5,497                $     4,847
------------------------------------------------------------------------------------------------------------------------------------


                                                    ChiRex (Holdings)
                                                   Limited January 1,        Pro
                                   ChiRex              1996 thru            Forma         Pro                       Pro Forma
                                     Inc.            March 11, 1996       Adjustments    Forma       Adjustments   As adjusted
------------------------------------------------------------------------------------------------------------------------------------

Revenues                        $   74,615          $    15,212              $-         $89,827        $-            $89,827
Cost of goods sold                  56,508               12,564              (112) (3)   69,184        (1,372)(7)     67,812
------------------------------------------------------------------------------------------------------------------------------------

Gross profit                        18,107                2,648              (112)       20,643         1,372         22,015
Research and development             9,307                  558                 -         9,865        (5,790)(8)      4,075
Selling, general and
 administrative                     13,563                1,300                 -        14,863        (5,611)(9)      9,252
Goodwill                               924                    -               225 (4)     1,149              -         1,149
Interest expense, net                  755                  690              (440)(5)     1,005              -         1,005
------------------------------------------------------------------------------------------------------------------------------------

Income (loss) before income         (6,442)                 100               103        (6,239)        12,773         6,534
taxes
Benefit (provision) for
 income taxes                       (1,867)                 (33)             (108)(6)    (2,008)          (453)(10)   (2,461)
------------------------------------------------------------------------------------------------------------------------------------

Net income (loss)               $   (8,309)         $        67         $      (5)      $(8,247)     $  12,320       $ 4,073
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
<TABLE>
<S>                          <C>             <C>                  <C>               <C>           <C>            <C>
                                                                                        
                                                                          ChiRex
1995                                                                       Inc.         Dudley         Holdings      Combined (11)
------------------------------------------------------------------------------------------------------------------------------------

Revenues                                                               $    2,754  $     51,375        $34,828    $   88,957
Cost of goods sold                                                          1,715        44,220         30,836        76,771
------------------------------------------------------------------------------------------------------------------------------------

Gross profit                                                                1,039         7,155          3,992        12,186
Research and development                                                      595         1,115            651         2,361
Selling, general and administrative                                         2,099         2,156          2,728         6,983
Interest and other (income) expense                                           797          (418)         1,922         2,301
------------------------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes                                          (2,452)         4,302        (1,309)           541
Benefit (provision) for income taxes                                           -          (1,327)          351           (976)
------------------------------------------------------------------------------------------------------------------------------------

Net income (loss) before preferred dividend                           $    (2,452)      $ 2,975       $   (958)      $   (435)
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1) To reverse the effect of the restructuring and asset impairment charge net
of proceeds received on the disposal of the acetaminophen business. 
(2) Tax effect of the adjustment described in note (1) above. 
(3) Increase in depreciation reflecting the increased valuation of ChiRex
Holdings Ltd.'s fixed assets for the period prior to the Contribution.
(4) Increase in amortization of goodwill related to the period prior to the
Contribution. 
(5) Reduction in interest expense related to debt retired in connection with the
Contribution.
(6) Income tax effect of pro forma adjustments, excluding amortization of
goodwill which is not deductible for tax purposes. 
(7) To reverse the effect of the purchase method of accounting step-up of
inventory to fair value at the time of the Contribution.
(8) To reverse the effect of the write-off of research and development expenses
that were in-process at the time of the Contribution.
(9) To reverse the effect of stock compensation charge associated with granting
of stock and options to purchase stock in connection with the Merger.
(10) Tax effect of the adjustment described in note (7) above. 
(11) Reflects the combination of the audited historical operating results of
ChiRex for the year ended December 31, 1995 and the aggregate audited historical
operating results of Holdings and Dudley for the periods from August 10, 1995 to
December 31, 1995 and January 1, 1995 to August 10, 1995, respectively. 

                                                                              15
<PAGE>
 
YEARS ENDED DECEMBER 31, 1996 AND 1997

Revenues of $94.1 million in 1997 increased $4.3 million, or 4.7%, from $89.8
million in 1996. Revenues from core products of $68.2 million, which accounted
for 72.4% of revenues in 1997, increased by $19.7 million or 40.6%, while
revenues from non-core products (excluding acetaminophen) of $6.0, which
accounted for 6.4% of revenues in 1997, decreased by $6.3 million or 51.1%.
Existing core-product revenues increased by $15.6 million, and seven new
products contributed $4.1 million of revenues in 1997. Revenues of $19.2 million
attributable to acetaminophen, which accounted for 20.4% of revenues in 1997,
declined by $8.7 million or 31.1% compared to 1996 due primarily to the disposal
of the business in 1997. License fee and royalty income declined $0.4 million
due to the decline in demand for the products generating such revenue. Product
price changes did not contribute significantly to changes in revenue between the
two periods.

Cost of goods sold increased $3.6 million, or 5.4%, to $71.4 million in 1997. Of
the increase, approximately $1.2 million relates to reserves recorded in 1997
for certain inventory including Phentermine Hydrochloride, one of the active
ingredients in the dietary suppressant combined therapy commonly known as "Fen-
Phen", that was the subject of an FDA action resulting in significantly reduced
demand for the drug. The remainder of the increase can be attributable to the
higher level of sales and the Company's introduction of new products.

Research and development expenses decreased $0.1 million, or 3.4%, to $3.9
million in 1997 from $4.0 million in 1996. Development activity in 1997 remained
at a high level to support new product development. The Company is committed to
improving and expanding its research and development activities including
commercializing its proprietary process technologies.

Selling, general and administrative expenses increased $0.2 million, or 1.9%, to
$9.4 million in 1997. The increase is attributable to approximately $0.4 million
of additional expenses generated at the Annan facility after its acquisition
partly offset by a reduction in fixed costs following changes to the Company's
organizational structure.

Interest expense, net in 1997 of $1.1 million is $0.1 million higher then last
year because lower debt borrowings early in the year as proceeds received from
the Secondary Offering (see Note 2) were used to reduce bank borrowings, were
more then offset by higher borrowing requirements in the fourth quarter of 1997
following the acquisition of the Annan facility which was financed by long-term
borrowings.

Income tax expense was $2.2 million in 1997 (an effective tax rate of 31.6%)
compared to $2.5 million in 1996, an effective tax rate of 37.7%. The effective
tax rate in 1997 is less then 1996 due to the recognition of a $410 thousand
deferred tax benefit resulting from the enactment of a statutory rate reduction
in the UK from 33% to 31% in 1997. The Company's effective tax rate generally
exceeds the statutory rates primarily due to non-deductible amortization of
goodwill.

As a result of the factors described above, the as adjusted net income was $4.8
million in 1997 compared to $4.1 million in 1996.

YEARS ENDED DECEMBER 31, 1995 AND 1996

Revenues of $89.8 million in 1996 increased $0.8 million, or 1.0%, from $89.0
million in 1995. Revenues from core products, which accounted for 55.7% of
revenues in 1996, increased by $13.1 million or 35.3%, while revenues from non-
core products (excluding acetaminophen), which accounted for 13.2% of revenues
in 1996, decreased by $11.1 million or 48.4%. Existing core products revenues
increased by $9.2 million, and seven new products contributed $3.9 million of
revenues. Revenues attributable to acetaminophen, which accounted for 31.1% of
revenues in 1996, declined by $1.2 million compared to 1995 due to lower demand
for product from Sanofi. Product price changes did not contribute significantly
to changes in revenue between the two periods.

Cost of goods sold decreased $9.0 million, or 11.7%, to $67.8 million in 1996
(excluding the fair value of inventory adjustments in 1996) from $76.8 million
in 1995. Of the reduction, $5.1 million was due to the reclassification of
inventory charges as selling, general and administrative expenses and research
and development expenses. The remainder of the reduction was due to the
selective replacement of high-cost non-core products, as well as improved
efficiencies due to continual process improvement and the reduction in fixed
costs following organizational changes in the Company's structure.

Research and development expenses (excluding the write-off of in-process
research and development expenses in 1996) increased $1.7 million, or 70.8%, to
$4.1 million in 1996 from $2.4 million in 1995. Of the increase, $0.9 million
was due to the reclassification of contract research expenses previously
classified as cost of goods sold. The remaining increase was due to higher
expenses of $0.6 million related to increased activity in the pilot plant to
support the new product pipeline and an increase of $0.2 million related to the
cost of additional research chemists.

Selling, general and administrative expenses (excluding stock compensation
charged in 1996) increased $2.3 million, or 32.5%, to $9.3 million in 1996 from
$7.0 million in 1995. The reclassification of inventory charges from cost of
goods sold resulted in an increase of $4.2 million, and non-recurring legal and
consulting fees resulted in an increase of $0.4 million. These increases were
offset by a reduction in fixed costs following organizational changes to the
Company's structure.

Interest expense and other income in 1995 of $2.3 million includes interest
expense of $1.9 million and $0.8 million incurred in connection with the
unconsummated initial public offering of ChiRex America in 1995, offset by other
income of $0.4 million. Interest expense (on a pro forma basis), in 1996
decreased $0.9 million, or 47.7%, from $1.9 million in 1995 to $1.0 million in
1996 as a result of lower borrowing requirements in 1996 due to increased cash
flow from operations and the actual and pro forma effect of the repayment of
debt with proceeds from the Initial Public Offering.

Income tax expense was $2.5 million in 1996 (an effective tax rate of 37.6%)
compared to $1.0 million in 1995. The effective tax rate in 1996 (on a pro forma
basis) exceeds statutory rates primarily due to non-deductible goodwill
associated with the Contribution.

As a result of the factors described above, the pro forma as adjusted net income
was $4.1 million in 1996 compared to a $0.4 million combined loss before
preferred dividend in 1995.

16
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations of $4.3 million in 1997 reflects the overall
profitability of the business prior to the impact of the disposition of the
acetaminophen business less the cash costs of restructuring charges incurred
during 1997. The Company generated $10.5 million in cash from operating
activities before $6.2 million of cash restructuring charges incurred in 1997
related to the disposal of the acetaminophen business. Working capital increased
$7.7 million in 1997 largely due to an increase in accounts receivable in the
fourth quarter.

Cash provided by operations of $12.0 million in 1996 reflects the overall
profitability (prior to non-cash charges) in the period since the consummation
of the Formation Transactions on March 11, 1996. The Company generated $10.7
million in cash from operating activities since that time which was supplemented
by a modest reduction in working capital of $1.3 million from December 31, 1995.
The net cash generated from operations in 1996 of $10.7 million was used for
both capital expenditures and the repayment of long-term debt.

Net cash used in investing activities was $77.5 million in 1997, consisting of
the acquisition of the Annan facility for $69.5 million and $12.1 million in
capacity expansion and maintenance capital expenditures primarily at the
Company's Dudley facility. These expenditures were partly offset by $4.1 million
in proceeds received from the disposal of the acetaminophen business. The
Company plans to invest approximately $25 million over two years to accommodate
newly contracted products and to modify the Annan facility for general purpose
pharmaceutical fine chemical manufacturing.

Net cash used in investing activities was $4.3 million in 1996, consisting of
maintenance capital expenditures.

Net cash generated from financing activities in 1997 was $78.1 million. To
finance the acquisition of the Annan facility and provide for the general cash
requirements of the business, a subsidiary of the Company entered into a senior
secured term-loan and revolving credit agreement in October 1997, with Bankers
Trust Company allowing it to borrow up to (Pounds)62.0 million (approximately
$102.0 million at December 31, 1997) for a five-year period. The credit facility
is comprised of a (Pounds)40.0 million (approximately $65.8 million at December
31, 1997) term loan and a (Pounds)22.0 million (approximately $36.2 million at
December 31, 1997) revolving-credit facility each bearing interest at LIBOR plus
1%. As of December 31, 1997, (Pounds)46.8 million ($77.0 million) was
outstanding under the term loan and revolving credit facility. Contemporaneously
with the new financing, the Company re-paid and terminated its existing
revolving facility with Midland Bank plc. (see Note 7 of Notes to Consolidated
Financial Statements). Other sources of funds generated from financing
activities during 1997 include in February 1997, the Company filed with the
Securities and Exchange Commission to register for the sale by a Former
Affiliate of its 3,489,301 shares of the Company's common stock at $9.50 per
common share (the "Secondary Offering"). The Former Affiliate's shares have been
outstanding since the Initial Public Offering. In connection with the Secondary
Offering, the Company granted the underwriters a 30-day option to purchase up to
523,395 additional shares of the Company's common stock on the same terms as set
forth in the Secondary Offering to cover over allotments. In April 1997, the
underwriters exercised their option and the Company issued 523,395 shares of its
common stock and received proceeds of $4.2 million net of associated expenses.
The Company also received $1.1 million in proceeds from the exercise of stock
options during 1997.

Net cash used in financing activities in 1996 was $7.1 million, consisting of
$94.0 million used for the redemption of stock and the repayment of debt
existing at the time of the Merger and Contribution, $3.6 million of net
borrowings (after exchange rate effect) and $83.3 million provided by the
Initial Public Offering (see Note 2 of Notes to Consolidated Financial
Statements). On August 1, 1996, the Company converted its existing long-term
debt to a revolving facility with Midland Bank plc. This credit facility allowed
a maximum borrowing limit of (Pounds)10.5 million ($18.0 million as of December
31, 1996), renewable every two years, at an interest rate of LIBOR plus 1.25%
and a commitment fee of 0.375%.

The Company expects to satisfy its cash requirements, including the requirements
of its subsidiaries, through internally generated cash and borrowings. As of
December 31, 1997, approximately $30.4 million of cash and borrowings were
available for immediate use, if required.

FOREIGN CURRENCY

For 1995, 1996 and 1997, net sales of the Company's products outside the United
States totaled approximately $85 million, $82 million and $89 million,
representing 96%, 92% and 94% of the Company's net sales for those years. The
Company currently expects that sales of its products outside the United States
will continue to be a substantial percentage of its net sales.

The Company believes it has a natural cash currency hedge because its operating
expenses and revenues tend to be denominated in matched currencies. Also the
Company has partly offset foreign currency-denominated assets with foreign
currency-denominated liabilities.

Financial results of the Company could be adversely or beneficially affected by
fluctuations in foreign exchange rates. Fluctuations in the value of foreign
currencies will affect the US dollar value of the Company's net investment in
its foreign subsidiaries, with related effects included in a separate component
of stockholders' equity. Operating results of foreign subsidiaries will be
translated into US dollars at average monthly exchange rates.

In addition, the US dollar value of transactions based in foreign currency also
fluctuates with exchange rates. The Company expects that the largest foreign
currency exposure will result from activity in Great Britain pounds sterling,
German marks and Dutch guilders.

                                                                              17
<PAGE>
 
REPORTs OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------

To the Stockholders and Board of Directors of ChiRex Inc.:

We have audited the accompanying consolidated balance sheets of ChiRex Inc. (a
Delaware corporation) and its subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1996 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ChiRex Inc. and its
subsidiaries as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1997, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 4, 1998


To the Stockholders and Board of Directors of ChiRex Inc.:

We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of ChiRex Inc. (formerly SepraChem Inc.) for
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, of operations and cash flows of ChiRex Inc. for the year 
ended December 31, 1995 in conformity with generally accepted accounting 
prinicples.

COOPERS & LYBRAND LLP.
Boston, Massachusetts
February 9, 1996
<PAGE>
 
ChiRex Inc.
CONSOLIDATED BALANCE SHEETS
as of december 31, 1996 and 1997
--------------------------------
(dollars in thousands except per-share amounts)

<TABLE>
<CAPTION>
                                                                                        1996            1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>
ASSETS
---------------------------------------------------------------------------------------------------------------
Current assets:
     Cash                                                                           $    291       $  5,347
     Trade and other receivables                                                      12,764         18,811
     Inventories                                                                      23,350         23,225
     Other current assets                                                              4,448          3,774
---------------------------------------------------------------------------------------------------------------
     Total current assets                                                             40,853         51,157
Property, plant and equipment, net                                                    61,349        120,755
Intangible assets, net (Note 1)                                                       28,604         27,564
Other assets (Note 2)                                                                                 3,591
---------------------------------------------------------------------------------------------------------------
Total Assets                                                                        $130,806       $203,067
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable                                                               $ 11,421       $  8,763
     Accrued expenses                                                                  9,232         11,587
     Current portion of long-term debt (Note 7)                                         --            7,311
     Income taxes payable (Note 4)                                                     2,383            348
     Deferred income taxes (Note 4)                                                    2,369           --
---------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                        25,405         28,009
Long-term debt (Note 7)                                                                3,933         69,675
Deferred income taxes (Note 4)                                                         7,411          7,955
Deferred income                                                                        3,989          4,333
Contingencies (Note 6)                                                                  --             --
---------------------------------------------------------------------------------------------------------------
     Total Liabilities                                                                40,738        109,972
---------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 1 and 2):
     Preferred Stock ($.01 par value, 4,000,000 shares authorized;
         none issued and outstanding in 1996 and 1997)
     Common stock ( $.01 par value, 30,000,000 shares authorized; 10,933,735
         and 11,792,990 issued and outstanding at December 31, 1996 and 1997)            109            118
     Additional paid-in capital                                                       95,479        100,788
     Accumulated deficit                                                             (10,761)       (11,411)
     Cumulative translation adjustment                                                 5,241          3,600
---------------------------------------------------------------------------------------------------------------
     Total Stockholders' Equity                                                       90,068         93,095
---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity                                          $130,806        $203,067
---------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
 
ChiRex Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 and 1997 
----------------------------------------------------
(in thousands except per-share amounts)

<TABLE> 
<CAPTION>
                                                                                           1995        1996        1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>            <C>         <C>
Revenues:
     Product sales                                                                      $  1,854    $ 73,440      93,362
     License fee and royalty income                                                          900       1,175         738
------------------------------------------------------------------------------------------------------------------------
     Total revenues                                                                        2,754      74,615      94,100
------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
     Cost of goods sold (Note 11)                                                          1,715      56,508      71,440
     Research and development                                                                595       3,517       3,937
     Selling, general and administrative (Note 10)                                         2,099       8,876      10,587
     Restructuring charge, net of proceeds from disposition of
       Acetaminophen business (Note 2)                                                        --          --       8,069         
     Write-off of in-process research and development (Note 2)                                --       5,790          --
     Stock compensation charge (Note 2)                                                       --       5,611          --
------------------------------------------------------------------------------------------------------------------------
     Total operating expenses                                                              4,409      80,302      94,033
------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                                   (1,655)     (5,687)         67
Interest expense, net (Note 7)                                                                --         755       1,052
Other expenses (Note 8)                                                                      797          --          --
-------------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                                                  (2,452)     (6,442)       (985)
Benefit (provision) for income taxes (Note 4)                                                 --      (1,867)        335
-------------------------------------------------------------------------------------------------------------------------
Net loss                                                                                 $(2,452)    $(8,309)      $(650)
-------------------------------------------------------------------------------------------------------------------------
Net loss per common share (Note 1):
         Basic net loss per common share                                                 $ (0.70)    $ (0.88)     $(0.06)
         Diluted net loss per common share                                               $ (0.70)    $ (0.88)     $(0.06)

Weighted average shares outstanding for basic and diluted net loss per common share        3,521       9,485      11,407
-------------------------------------------------------------------------------------------------------------------------
</TABLE> 

The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
 
CHIREX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(in thousands)

<TABLE>
<CAPTION>
                                                                                          1995       1996       1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>       <C>        <C>
Cash flows from operating activities:
         Net loss                                                                       $(2,452)  $ (8,309)  $   (650)
         Adjustments to reconcile net loss to cash provided by
           operating activities:
           Depreciation & amortization                                                      148      8,371     10,062
           Impairment charge (Note 2)                                                         -          -      7,743
           Loss on sale of assets                                                             -          -         30
           Proceeds from sale of acetaminophen (Note 2)                                       -          -     (7,159)
           Benefit for deferred income taxes                                                  -     (1,468)      (495)
           Provision for doubtful accounts                                                   70        434          -
           Write-off of in-process research and development (Note 2)                          -      5,790          -
           Stock compensation charge (Note 2)                                                 -      5,611          -
           Changes in assets and liabilities:
               Trade and other receivables                                                   22     (1,970)    (6,500)
               Inventories                                                                   (6)      (855)     2,749
               Other current assets                                                      (1,053)       973        947
               Other assets                                                                   -          -       (500)
               Accounts payable and accrued expenses                                          -      1,101       (562)
               Income taxes payable                                                           -      1,614     (1,929)
               Deferred income                                                                -        682        517
-----------------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) operations                                       (3,271)    11,974      4,253
-----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
         Proceeds on sale of assets (Note 2)                                                  -          -      4,100
         Purchase of assets and transaction costs (Note 2)                                    -          -    (69,495)
         Capital expenditures                                                                 -     (4,290)   (12,067)
-----------------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                                                -     (4,290)   (77,462)
-----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
         Borrowings on term-loan and revolving credit facility, net                           -          -     77,983
         Proceeds from the issuance of common stock                                          11     83,149      4,180
         Proceeds from exercise of stock options                                              -        136      1,138
         (Payments) borrowings on revolving line of credit, net                               -      3,588     (3,772)
         Deferred financing costs                                                             -          -     (1,404)
         Repayment of subordinated note                                                       -    (53,534)         -
         Redemption of common stock                                                           -    (40,472)         -
         Investment by Former Affiliate                                                   3,261          -          -
-----------------------------------------------------------------------------------------------------------------------
         Net cash provided from (used in) financing activities                            3,272     (7,133)    78,125
-----------------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                                       -       (261)       140
-----------------------------------------------------------------------------------------------------------------------
Net increase in cash                                                                          1        290      5,056
Cash at beginning of period                                                                   -          1        291
-----------------------------------------------------------------------------------------------------------------------
Cash at end of period                                                                   $     1   $    291   $  5,347
-----------------------------------------------------------------------------------------------------------------------

Supplemental Cash Flow Information (Note 9):
Cash paid for:
         Interest, net of amounts capitalized                                           $     -   $    755   $  1,241
         Income taxes                                                                   $     -   $  1,081   $  1,647
-----------------------------------------------------------------------------------------------------------------------
</TABLE> 

The accompanying notes are an integral part of the consolidated financial 
statements
<PAGE>
 
CHIREX INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 and 1997 
----------------------------------------------------
(in thousands)

<TABLE>
<CAPTION>
                                                                Additional     Acc-       Investment      Cumulative      Total 
                                              Common Stock        Paid-In    umulated      By Former      Translation  Stockholders'

                                           Shares      Amount     Capital     Deficit      Affiliate      Adjustment      Equity
------------------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>         <C>      <C>          <C>          <C>             <C>          <C> 
Balance at December 3l, 1994                    -      $    -   $        -   $      -     $   1,873       $        -   $    1,873
Net loss                                        -           -            -     (2,452)            -                -       (2,452)
Issuance of common stock                    8,000          80        1,793          -        (1,873)               -            -
Proceeds under common stock plans              15           -           10          -             -                -           10
Investment by Former Affiliate                  -           -        3,261          -             -                -        3,261
------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995                8,015          80        5,064     (2,452)            -                -        2,692
Exchange of ChiRex Inc. shares
         for ChiRex America shares         (4,519)        (45)          45          -             -                -            -
Issuance of common stock, net              10,414         104      125,065          -             -                -      125,169
Redemption of common stock                 (3,091)        (31)     (40,441)         -             -                -      (40,472)
Net loss                                        -           -            -     (8,309)            -                -       (8,309)
Effect of stock compensation charge            25           -        5,611          -             -                -        5,611
Options exercised                              90           1          135          -             -                -          136
Translation adjustment                          -           -            -          -             -            5,241        5,241
------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1996               10,934         109       95,479    (10,761)            -            5,241       90,068
Net loss                                        -           -            -       (650)            -                -         (650)
Issuance of common stock, net                 524           5        4,175          -             -                -        4,180
Options exercised                             335           4        1,134          -             -                -        1,138
Translation adjustment                          -           -            -          -             -           (1,641)      (1,641)
------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1997               11,793      $  118   $  100,788   $(11,411)    $       -       $    3,600   $   93,095
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

ChiRex Inc. (the"Company") was incorporated in December 1995 and, effective
March 11, 1996, merged with SepraChem Inc. ("SepraChem"), a chiral chemistry
business owned by the same stockholders as the Company (the Merger), and
acquired the business of Crossco (157) Limited ("Crossco"), including its
wholly-owned subsidiary Sterling Organics Limited, a pharmaceutical fine
chemical manufacturer located in Dudley, England. Simultaneously, Crossco,
Sterling Organics Limited and SepraChem changed their names to ChiRex (Holdings)
Limited ("Holdings"), ChiRex Limited ("Limited"), and ChiRex America, Inc.
("ChiRex America"), respectively. Limited is a wholly-owned subsidiary of
Holdings, and Holdings and ChiRex America are wholly-owned subsidiaries of the
Company. During 1997 Limited changed its name to ChiRex (Dudley) Limited
("Dudley") and a new wholly-owned subsidiary of Holdings, ChiRex (Annan) Limited
("Annan"), was formed.

SepraChem was established in November 1994 as a wholly-owned subsidiary of
Sepracor Inc. (the"Former Affiliate"). SepraChem manufactured and sold fine
chemical intermediates and bulk active pharmaceuticals to pharmaceutical
companies worldwide. SepraChem also leased pharmaceutical separation modules to
a company in Japan. Effective January 1, 1995, in exchange for 7,999,999 shares
of common stock, the Former Affiliate transferred to SepraChem the
pharmaceutical fine chemical manufacturing business of the Former Affiliate.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated. 

The financial statements of the Company combine the historical results of ChiRex
America for the three years ended December 31, 1997 with the results of ChiRex
Inc. from the date of incorporation. The results of Holdings and Dudley are
included from the date of their acquisition on March 11, 1996 and the results of
Annan from the date of its incorporation.

The January 1, 1995 exchange discussed above has been treated as a transfer
between entities under common control and therefore the financial statements
present the assets, liabilities, revenues and expenses of the transferred
business at the Former Affiliate's historical cost at the date of transfer.
Operating losses from inception of SepraChem through January 1, 1995 have been
recorded as a reduction in the net balance advanced to SepraChem by the Former
Affiliate. SepraChem entered into various agreements wherein the Former
Affiliate agreed to provide certain services and facilities to SepraChem in
accordance with terms described in Note 10.

REVENUE RECOGNITION

PRODUCT SALES

Product sales represent the invoiced value of goods and services, excluding
value added tax, supplied in the normal course of business. Revenues are
recognized as services are provided or goods are shipped.

The cost of specific equipment required to implement a new custom synthesis
process for a customer is incurred by the Company and included in fixed assets.
An engineering premium is sometimes charged to applicable customers, either by
installments or by an increment to the unit sales price, to recover an agreed
upon element of these costs. These revenues are generally recognized on a
systematic basis over the life of the project at the same rate as the
depreciation on the related fixed assets. The difference between amounts
invoiced during the year and revenue earned is accounted for as deferred income.

LICENSE FEE AND ROYALTY INCOME

License fee and royalty income is recognized as amounts become due based on
contract terms.

UK GOVERNMENT GRANTS

UK government grants for capital expenditures are credited to a deferred grant
account when received and are recognized as an offset to depreciation expense
over the expected useful life of the related property, plant and equipment.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

STOCK BASED COMPENSATION PLANS

The Company applies Accounting Principles Board Opinion No. 25,"Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its stock-based compensation plans. Accordingly, no accounting recognition
is given to stock options granted at fair market value until they are exercised.
Upon exercise, net proceeds, including tax benefits realized, will be credited
to equity. If stock options are granted for less than fair market value, the
difference between the exercise price and the fair market value at the date of
the grant is charged to earnings as a compensation expense over the period in
which the employee vests in the options.

INCOME TAXES

The Company accounts for income taxes in accordance with the liability method as
prescribed by Statement of Financial Accounting Standards (SFAS) No.
109,"Accounting for Income Taxes". The Company recognizes deferred income taxes
based on future tax consequences of differences between the financial statement
basis and the tax basis of assets and liabilities, calculated using enacted tax
rates in effect for the year in which the differences are expected to be
reflected in the tax return.

NET LOSS PER COMMON SHARE

In 1997 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 128,"Earnings Per Share" ("SFAS No. 128"). This statement
establishes the standards for computing and presenting earnings per share and
applies to entities with publicly-held common stock or potential common stock.
This statement replaces the presentation of primary earnings (loss) per share
with a presentation of basic earnings (loss) per share and also requires a dual
presentation of basic and diluted earnings (loss) per share on the face of the
statement of operations. 

Basic loss per common share was computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the year.
Since the effect of the assumed exercise of stock options of 391,000 shares,
420,000 shares and 581,000 shares in 1995, 1996 and 1997, respectfully, are 
anti-dilutive, basic and diluted loss per share as presented on the statement of
operations are the same.

Upon adoption of SFAS No. 128, the Company's reported loss per common share for
1996 was restated. There was no effect on net loss per common share for prior
periods.
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)


INVENTORIES

Inventories are stated at the lower of cost or market value and include
materials, labor and manufacturing overhead. The components of inventories are
as follows:

                            1996       1997
                            (in thousands),
--------------------------------------------
Raw materials              $6,176    $8,688
Work in progress            6,158     6,608
Finished goods             11,016     7,929
--------------------------------------------
  Total                   $23,350   $23,225
--------------------------------------------

PROPERTY, PLANT AND EQUIPMENT, NET

The costs of capital additions and improvements are capitalized, while
maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings 40 years; machinery and
equipment 3 to 13 years.

Property, plant and equipment consists of the following:

                            1996       1997
                            (in thousands),
--------------------------------------------
Land                      $ 1,146   $ 6,037
Buildings                   9,307    27,347
Machinery and equipment    59,709   104,509
--------------------------------------------
                           70,162   137,894
Less accumulated 
  depreciation             (8,813)  (17,139)
--------------------------------------------
                           $61,349 $120,755
--------------------------------------------

Depreciation expense was $148,000, $7,447,000 and $8,898,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.

OTHER CURRENT ASSETS

At December 31, 1996 and 1997, other current assets consist primarily of prepaid
expenses and other miscellaneous non-trade receivables.

INTANGIBLE ASSETS

Intangible assets primarily relate to the excess cost over the fair value of net
assets of Holdings and Dudley acquired on March 11, 1996. This intangible asset
is being amortized using the straight-line method over 25 years. Accumulated
amortization at December 31, 1996 and 1997 was $924,000 and $2,088,000,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers combined un-discounted cash flows of Holdings
and Dudley in assessing the recoverability of this asset. If impairment has
occurred, any excess of carrying value over fair value would be recorded as a
loss. 

FOREIGN CURRENCY

The accounts of the Company's UK subsidiaries are recorded in their functional
currency, Great Britain pounds sterling, and are translated into US dollars
using year-end exchange rates for assets and liabilities and average exchange
rates during the year for revenues and expenses. Resulting translation
adjustments are reflected as a separate component of stockholders' equity titled
cumulative translation adjustment. Foreign currency transaction gains and losses
are included in the accompanying statement of operations and are not material
for the three years presented.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and a balance due under a term loan and revolving
line of credit. Their respective carrying amounts in the accompanying balance
sheet approximate fair value due either to the short-term nature of the balances
or in the case of the term loan and revolving line of credit because the
interest rate is variable.

USE OF ESTIMATES

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

ACCOUNTING FOR LONG LIVED ASSETS

The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS
121),"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" in 1996. SFAS 121 requires that long-lived assets be
reviewed for impairment by comparing the fair value of the assets with their
carrying amount. Any write-downs are to be treated as permanent reductions in
the carrying amount of the assets

ENVIRONMENTAL COSTS

Liabilities for costs relating to environmental and remedial work which must be
performed to comply with Her Majesty's Inspector of Pollution and other
environmental guidelines are recorded when it is probable that obligations have
been incurred and the amounts can be reasonably estimated.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130,"Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components. Components of comprehensive income are net income and
all other non-owner changes in equity such as the change in the cumulative
translation adjustment. This statement requires that an enterprise: (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
balance sheet. This statement is effective for the Company's financial
statements issued for the year ended December 31, 1998. Reclassification of
financial statements for earlier periods provided for comparative purposes will
be required.

SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131,"Disclosures About Segments of an
Enterprise and Related Information". This statement establishes the standards
for reporting information about segments in annual and interim financial
statements. The statement introduces a new model for segment reporting,
the"management approach". The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure - any
manner in which management desegregates a company. This statement is effective
and will be adopted for the Company's financial statements for the year ended
December 31, 1998 and requires the restatement of previously reported segment
information for all periods presented.

2. SIGNIFICANT TRANSACTIONS

PURCHASE OF ANNAN, SCOTLAND MANUFACTURING SITE

On October 31, 1997, the Company through its Annan subsidiary completed the
purchase of Glaxo Wellcome's FDA cGMP pharmaceutical production facility located
in Annan, Scotland. The Company paid approximately $66.8 million ((Pounds) 40.0
million) for the facility plus an additional payment for certain working capital
of approximately $1.7 million ((pound)1.0 million).

As part of the transaction, Glaxo Wellcome awarded the Company a five-year
contract to supply certain pharmaceutical intermediates and active ingredients
with an aggregate sales value of approximately $450 million.

Under the Asset Purchase Agreement, ChiRex purchased all of the buildings, land
and equipment at the 154-acre Annan, Scotland property, encompassing three main
production facilities plus certain working capital. Under the Supply Agreement,
ChiRex will continue to manufacture most of the products currently made at
Annan. The Company plans to invest approximately $25 million over
<PAGE>
 
two years to accommodate newly contracted products and to modify the facility
for general purpose pharmaceutical fine chemical manufacturing. The acquisition
has been accounted for as a purchase and, accordingly, the operating results of
the Annan facility have been included in the Company's consolidated financial
statements from the date of acquisition. The total purchase price including
expenses of the transaction was allocated to the assets purchased. This
allocation is subject to adjustment upon finalization of the purchase price
allocation

To finance the acquisition and provide for the general cash requirements of the
business, Holdings entered into a senior secured term-loan and revolving credit
agreement (see Note 7).

The following table presents pro forma revenues, net loss and basic and diluted
loss per common share for the Company assuming the incorporation of the Company,
the merger with ChiRex America and the acquisition of Holdings and Dudley (see
below) occurred on January 1, 1995, and the acquisition of the Annan facility
occurred on January 1, 1996 as follows:

                                 1995     1996     1997
-----------------------------------------------------------
Revenues                        $88,957  $118,864 $113,411
Net loss                        (13,330)  (10,276)  (1,163)
Net loss per common share:
 Basic and diluted net loss
  per common share                (3.79)    (1.08)   (0.10)
-----------------------------------------------------------

The pro forma results are not necessarily indicative of future operations or the
actual results that would have occurred had the incorporation of the Company,
the merger with ChiRex America and the acquisition of Holdings and Dudley been
made at the beginning of 1995, and the acquisition of the Annan facility been
made at the beginning of 1996.

SALE OF ACETAMINOPHEN BUSINESS AND RESTRUCTURING CHARGE

In April 1997, the Company sold it acetaminophen business and related
intellectual property to Rhone-Poulenc Chimie S. A., a French pharmaceutical
company, for net proceeds of approximately $7.1 million ((pound)4.3 million), of
which $4.1 million ((pound)2.5 million) was received during 1997 with the
balance being received over the next three years. Amounts due from Rhone-Poulenc
Chimie of $3.4 million ((pound)2.1 million) at December 31, 1997, are reflected
in other current assets and other assets on the balance sheet and have been
discounted at a market interest rate. Under terms of the agreement, ChiRex
continued to manufacture acetaminophen for the purchaser pursuant to a supply
agreement for a period after the sale to effect a seamless transfer of
customers. The Company ceased manufacture of acetaminophen in September 1997.

In connection with the disposal of the acetaminophen business, the Company
recorded an asset impairment and restructuring charge totaling $7.7 million to
write down the equipment associated with the acetaminophen business to their net
realizable value and to provide for severance and other costs of $7.5 million
due to the elimination of employees involved with the manufacture and support of
the acetaminophen business. As of December 31, 1997, approximately $1.3 million
of the restructuring charge remains in accrued expenses on the balance sheet for
future obligations associated with the divestiture of the Acetaminophen
business.

SECONDARY PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK

On February 26, 1997, the Company filed with the Securities and Exchange
Commission to register for the sale by the Former Affiliate of its 3,489,301
shares of the Company's common stock at $9.50 per common share (the "Secondary
Offering"). In connection with the Secondary Offering, the Company granted the
underwriters a 30-day option to purchase up to 523,395 additional shares of the
Company's common stock on the same terms as set forth in the Secondary Offering
to cover over allotments. In April 1997, the underwriters exercised their option
and the Company issued 523,395 shares of its common stock and received proceeds
of $4,180,000 net of associated expenses.

INITIAL PUBLIC OFFERING, ACQUISITION AND MERGER

On March 11, 1996, the Company completed the sale of 6,675,000 shares of its
common stock, pursuant to an underwritten initial public offering (the Initial
Public Offering). Concurrent with the Initial Public Offering, ChiRex America
was contributed to the Company in exchange for the issuance of 3,520,889 shares
of common stock of the Company through a merger with and into a newly formed and
wholly-owned subsidiary of the Company. In conjunction with the merger certain
executives and directors of ChiRex America received stock and or stock options
of the Company with an intrinsic value totaling $5,611,000. Such amount has been
recorded as a compensation charge and an increase to additional paid in capital
in the accompanying financial statements.

Immediately prior to the Initial Public Offering, the equity share capital of
Holdings, a private company incorporated in England and the sole shareholder of
Dudley, was re-capitalized. Concurrent with the closing of the Initial Public
Offering, the shareholders of Holdings contributed to the Company all of the
outstanding newly re-capitalized equity share capital of Holdings in exchange
for 3,739,206 shares of common stock of the Company and promissory notes of the
Company (the"Notes"). As part of this contribution, all redeemable preferred
shares of Holdings were exchanged for a promissory note of the Company (the"Loan
Stock Note"). As a result of these transactions the Company holds all of the
outstanding share capital of Holdings which in turn holds all the outstanding
share capital of Dudley. Certain shares held by the original shareholders of
Holdings, the Notes and the Loan Stock Note were redeemed by the Company
concurrently with, and using the proceeds from, the Initial Public Offering.

The acquisition of Holdings and Dudley by the Company was accounted for using
the purchase method of accounting and their results of operations are included
in the accompanying financial statements from the date of acquisition. The cost
of this acquisition exceeded the estimated fair value of the acquired net assets
by $29,528,000, which is being amortized over 25 years. Allocation of the
purchase price for this acquisition was based on estimates of fair value of net
assets, including purchased in-process research and development costs which was
written off immediately following the acquisition of $5,790,000.

DISSOLUTION OF INNOVA PHARMACEUTICALS SRL (INNOVA)

During 1995, ChiRex America agreed to form a fifty percent owned joint venture,
InNova Pharmaceuticals SRL ("InNova") with Dabur India Limited (Dabur) to
manufacture semi-synthetic paclitaxel. InNova did not carry out any significant
operations during 1996 or 1995.

During 1996, the Company agreed with Dabur to dissolve InNova. Both the Company
and Dabur recognized significant changes in the generic drug market, and in
particular in the market for paclitaxel, sufficient to enable each company to
exploit its own position of strength within the market, without the need for a
joint venture.

InNova was never capitalized and it was mutually agreed between the Company and
Dabur, that each partner would expense costs that it had incurred on InNova's
behalf. Such costs incurred by the Company relate substantially to research and
development.

3. EMPLOYEE BENEFIT PLANS

STOCK-BASED COMPENSATION PLANS

CHIREX INC. STOCK OPTION PLANS

In December 1995, the Company adopted an incentive stock-based compensation plan
which permits the grant of up to 1,500,000 shares of the Company's common stock
(the"1995 Plan") and in February 1997 the Company adopted an incentive
stock-based compensation plan which permits the grant of up to 2,000,000 shares
of the Company's common stock (the"1997 Plan"). The 1995 Plan and 1997 Plan
allow for the grant of a variety of stock and stock-based awards as determined
by the compensation committee of the Company's Board of Directors (the
Compensation Committee), including stock, restricted stock, stock options, stock
appreciation rights or performance based shares. The option recipients and the
terms of options granted under the 1995 Plan and 1997 Plan are determined by the
Compensation Committee. Options granted generally vest ratably over a five-year
period from the date of grant and expire after seven to ten years from the date
of grant. In some instances, vesting for certain stock options may be
accelerated due to achievement of specific events determined by the Compensation
Committee at the date of the grant.
<PAGE>
 
Typically, options are immediately exercisable upon vesting. Non-qualified stock
options may be granted at any price determined by the Compensation Committee,
although incentive stock options must be granted at an exercise price not less
than the fair market value of the Company's common stock on the date of the
grant.

The Company also has a directors' stock option plan, adopted in December 1995
and amended in February 1997, which permits the grant of up to 100,000 options
to purchase shares of the Company's common stock to outside directors. Options
granted under this plan generally vest ratably over a five-year period from the
date of grant and expire after seven to ten years from the date of grant.

To date, all options from the Company's incentive stock option plans and
directors stock option plan have been granted at fair market value, except for
stock options granted in conjunction with the Merger, which are discussed below.

In conjunction with the Merger, the Compensation Committee granted 458,821 stock
options to certain directors and employees of ChiRex America at an exercise
price of $1.48 per option, when the fair market value per share of common stock
was $13.00 which resulted in a compensation charge of $5,286,000. In addition,
immediately prior to the Merger, ChiRex America granted an employee 56,911
shares of common stock in ChiRex America in consideration for services
performed. This stock grant resulted in a compensation charge of $325,000. These
shares were converted into 25,000 shares of common stock of the Company at the
time of the Merger. A summary of stock option activity under the ChiRex Inc.
plans in 1996 and 1997 is summarized as follows:


                                          Weighted          Average
                                          Number            Exercise
                                          of Shares         Price
---------------------------------------------------------------------
  1996
---------------------------------------------------------------------
Options outstanding beginning of period                   - $ -
Granted                                     941,822              6.38
Exercised                                   (90,331)             1.51
Lapsed/Canceled                                (750)            11.00
---------------------------------------------------------------------
Options outstanding end of period           850,741             $6.89
---------------------------------------------------------------------
Options exercisable                         554,490             $4.66
---------------------------------------------------------------------
Options available for grant                 658,178
---------------------------------------------------------------------
Weighted average fair value of options
    granted during period                                       $7.35
---------------------------------------------------------------------
    1997
---------------------------------------------------------------------
Options outstanding beginning of period     850,741             $6.89
Granted                                     902,350             11.23
Exercised                                  (334,566)             3.23
Lapsed/Canceled                             (43,730)            13.30
---------------------------------------------------------------------
Options outstanding end of period         1,374,795            $10.43
---------------------------------------------------------------------
Options exercisable                         342,067             $8.33
---------------------------------------------------------------------
Options available for grant               1,800,308
---------------------------------------------------------------------
Weighted average fair value of options
    granted during period                                       $3.62
---------------------------------------------------------------------
A summary of the status of the Company's stock options at December 31, 1997 is
as follows:
                                           Weighted
                                           Average          Weighted
                                           Remaining        Average
      Range of Exercise      Number        Contractual      Exercise
            Prices           of Shares        Life            Price
     ----------------------------------------------------------------
        $1.48 -  $1.48       95,760        6.9 years         $1.48
         9.75 -  13.00    1,226,035        7.1 years         10.69
        20.38 -  21.75       53,000        6.8 years         20.66
     ----------------------------------------------------------------
        $1.48 - $21.75    1,374,795        7.0 years        $10.43
     ----------------------------------------------------------------

CHIREX AMERICA STOCK OPTION PLANS

In 1994 and 1995, the stock option plans of ChiRex America provided for the
grant of both incentive stock options and non-statutory stock options to
officers, directors, and key employees of and consultants to the Company. A
total of up to 960,000 and 240,000 shares of common stock of ChiRex America were
contingently issuable upon the exercise of options granted under the 1994 and
1995 Plans, respectively.

In November 1994, options to purchase 960,000 shares of common stock were
granted under the 1994 Plan. These options vested over a five-year period and
had an exercise price of $2.40, determined to be the then current fair market
value by the ChiRex America Board of Directors (the"ChiRex America Board"). In
August 1995, these options were repriced at an exercise price of $.65,
determined to be the then current fair market value by the ChiRex America Board.
In August 1995, the ChiRex America Board also authorized a change in the vesting
provisions of these options such that 20% of options previously granted became
immediately vested. In October 1995, 60,000 options under the 1994 Plan were
canceled and 15,000 shares were exercised. As of December 31, 1995, options for
314,692 shares were exercisable.

In January 1995, options to purchase 134,500 shares of common stock were granted
under the 1995 Plan. These options vested over a five-year period and had an
exercise price of $2.40, determined to be the then current fair market value by
the ChiRex America Board. In August 1995, these options were repriced at an
exercise price of $.65, determined to be the then current fair market value by
the ChiRex America Board. In August 1995, the ChiRex America Board also
authorized a change in the vesting provisions of these options such that 20% of
options previously granted became immediately vested. As of December 31, 1995,
options for 26,900 shares were exercisable. No shares had been exercised under
this Plan as of December 31, 1995.

The 1994 Director Option Plan (the"Director Plan") provides for the granting of
non-statutory stock options to directors of ChiRex America who were not officers
or employees. A total of up to 100,000 shares of common stock were authorized to
be issued under the Director Plan therein. The exercise price per share equaled
the fair market value of a share of common stock on the date on which the option
is granted. Options granted under the Director Plan vested over a five-year
period.

In November 1994 and January 1995, options to purchase 15,000 and 10,000 shares
of common stock, respectively, were granted under the Director Plan at an
exercise price of $2.40, determined to be the then current fair market value by
the ChiRex America Board. A total of 75,000 options remained available for grant
at December 31, 1995. In August 1995, these options were repriced at an exercise
price of $.65 determined to be the then current fair market value by the ChiRex
America Board. In August 1995, the ChiRex America Board also authorized a change
in the vesting provisions of these options such that 20% of options previously
granted became immediately vested. As of December 31, 1995, options for 5,000
shares were exercisable. No shares had been exercised under this Plan as of
December 31, 1995.

At the date of the Merger all outstanding options of ChiRex America were
exchanged for 458,821 options of the Company as discussed above.

1995 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1995 Employee Stock Purchase Plan (the"Purchase Plan") was adopted
by the Board of Directors of the Company on December 20, 1995 and became
effective on March 11, 1996. The Purchase Plan authorizes the issuance of up to
a total of 480,000 shares of common stock to participating employees. All US
employees and certain UK employees are eligible to participate in the Purchase
Plan, subject to certain limitations. 

The Purchase Plan is effective for a three year term, and includes six plan
periods (Plan Period), which are each six month increments. Eligible employees
may authorize payroll deductions between 1% and 10% of gross wages, limited to a
pre-determined percentage of an employee's annual gross wages. At the end of
each Plan Period the amounts accumulated under the Purchase Plan by employees
will be used to purchase shares of common stock of the Company at 85% of the
fair value of common stock at either the first day or the last day of the Plan
Period, whichever is lower. The Purchase Plan provides for six Plan Periods of
80,000 shares each. Shares not
<PAGE>
 
purchased during a Plan Period will be eligible for purchase in subsequent Plan
Periods. Currently no eligible employees participate in this plan.

UK EMPLOYEE STOCK PURCHASE PLAN

Substantially all of the Company's full-time UK employees at its Dudley facility
are eligible to participate in a employee stock purchase plan approved by Inland
Revenue. Under this plan, employees obtain the right to purchase a
pre-determined number of shares at 85% of the fair market value at the beginning
of the plan period. Shares are purchased through pre-determined payroll
deductions which may not exceed a pre-determined maximum dollar amount. These
funds accumulate in a savings account in the name of the employee over a three
year period, at the end of which such savings may be used to purchase the
allocated shares.

PRO FORMA STOCK-BASED COMPENSATION PLAN EXPENSE

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123,"Accounting for Stock-Based
Compensation," which sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply APB 25 in accounting for its stock-based
compensation plans. Had compensation cost for awards in 1996 and 1997 under the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates consistent with the method set forth under

SFAS No. 123, the effect on the Company's net loss and net loss per common share
would have been as follows:


                                                         1996           1997
                                                        (in thousands, except
                                                          per-share amounts)
------------------------------------------------------------------------------
Net loss:
    As reported                                         $(8,039)        $(650)
    Pro forma                                            (9,001)       (1,442)
Basic and diluted net loss per common share:
    As reported                                          $(0.88)       $(0.06)
    Pro forma                                             (0.95)        (0.13)
------------------------------------------------------------------------------

The resulting pro forma compensation expense may not be representative of the
amount to be expected in future years as pro forma compensation expense may vary
based upon the number of options granted.

The pro forma net loss and pro forma net loss per common share presented above
have been computed assuming no tax benefit. The effect of a tax benefit has not
been considered since a substantial portion of the stock options granted are
incentive stock options and the Company does not anticipate a future deduction
associated with the exercise of these stock options. In addition, any benefit
from deductibility of non-qualifying stock options is subject to the Company's
realization of net operating loss carryforwards.

The fair value of each option grant is estimated on the grant date using the
Black-Scholes options-pricing model with the following weighted-average
assumptions:

                                                       1996          1997
------------------------------------------------------------------------------
Volatility                                              30%           30%
Risk-free interest rate                                6.2%          6.0%
Expected dividend payout                                  -             -
Expected life of options                           10 years       7 years
------------------------------------------------------------------------------

The Black-Scholes option-pricing 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-pricing models require the input of highly
subjective assumptions including 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.

Information related to the fair value of stock option grants under the ChiRex
America stock option plans has not been quantified due to the fact that all such
options were canceled in exchange for the options issued on March 11, 1996.

At December 31, 1996 and 1997, the Company had reserved 658,178 and 1,800,308
unissued shares of its common stock for possible issuance under the stock-based
compensation plans.

DEFINED BENEFIT PENSION PLAN

The Company's UK subsidiary has a defined benefit pension plan covering
substantially all of its full-time employees. Benefits are based on a percentage
of eligible earnings for each year of service from the date of employment. The
Company's funding policy is to make contributions within a range required by
applicable regulations. Eligible employees are required to contribute 3% of
their current earnings under the plan. The participants also have the ability to
voluntarily contribute up to an additional 12% of their current earnings.

Net periodic pension costs included the following components:
<TABLE>
<CAPTION>
                                                                        1996           1997
                                                                           (in thousands),
---------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
Service cost                                                          $ 2,008         $ 2,298

Interest cost on projected benefit obligation                           3,217           3,826

Return of plan assets                                                  (3,878)         (7,470)

Amortization of unrecognized obligation                                  (332)          2,260
---------------------------------------------------------------------------------------------
Net periodic pension cost                                             $ 1,015         $   914
---------------------------------------------------------------------------------------------

The funded status of the Company's defined benefit pension plan is
as follows:

                                                                        1996           1997
                                                                           (in thousands),
---------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:

     Vested benefits                                                  $40,869         $48,927

     Non-vested benefits                                                    -               -
---------------------------------------------------------------------------------------------
     Accumulated benefit obligation                                    40,869          48,927

Effect of projected future salary increases                             5,501           4,254
---------------------------------------------------------------------------------------------
Projected benefit obligation                                           46,370          53,181

Plan assets at fair value                                              54,817          58,662
---------------------------------------------------------------------------------------------
Projected benefit obligation less than plan assets                      8,447           5,481

Unrecognized net (gain) loss                                           (2,544)            594

Initial unrecognized net obligation                                    (5,450)         (4,892)
---------------------------------------------------------------------------------------------
     Prepaid pension costs                                            $   453         $ 1,183
---------------------------------------------------------------------------------------------
</TABLE>

Significant actuarial assumptions used to determine the net periodic pension
costs during 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
                                                                       1996            1997
---------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>
Discount rate                                                          8.5%               8.0%

Rate of increase in salary level                                       6.0%               6.0%

Expected long-term rate of return on assets                            9.0%               9.0%
---------------------------------------------------------------------------------------------
</TABLE>

                                       27


<PAGE>
 
4. INCOME TAXES

Prior to 1996 the predecessor entity, ChiRex America, was in a net operating
loss position for both financial reporting and tax purposes; thus no detailed
analysis of income taxes is presented for these periods. The components of loss
before benefit (provision) for income taxes for the years ended December 31,
1996 and 1997 are as follows :
<TABLE>
<CAPTION>
                                                               1996             1997
                                                                   (in thousands),
-----------------------------------------------------------------------------------------
<S>                                                          <C>               <C>
Domestic                                                      $(5,832)           $   724

Foreign                                                          (610)            (1,709)
-----------------------------------------------------------------------------------------
Total                                                         $(6,442)           $  (985)
-----------------------------------------------------------------------------------------
</TABLE>

The components of the benefit (provision) for income taxes for the years ended
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                  1996                  1997
                                                                      (in thousands),
----------------------------------------------------------------------------------------------
<S>                                                             <C>                   <C>
Current benefit (provision) for income taxes:

     Federal                                                       $     -              $    -

     State                                                               -                (205)

     Foreign                                                        (2,530)                 45
----------------------------------------------------------------------------------------------
                                                                    (2,530)               (160)
----------------------------------------------------------------------------------------------
Deferred benefit for income taxes:

     Federal                                                             -                  10

     State                                                               -                   -

     Foreign                                                           663                 485
----------------------------------------------------------------------------------------------
                                                                       663                 495
----------------------------------------------------------------------------------------------
Total benefit (provision) for income taxes                         $(1,867)              $ 335
----------------------------------------------------------------------------------------------
</TABLE>

The benefit (provision) for income taxes in the accompanying statements of
operations for the periods ended December 31, 1996 and 1997 is different from
the benefit calculated by applying the statutory federal income tax rate of 34%
to the loss before income taxes due to the following:
<TABLE>
<CAPTION>
                                                                        1996            1997
                                                                           (in thousands),
---------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
Benefit for income taxes at statutory rate                             $ 2,190          $ 335

Effect of change in UK statutory tax rate                                    -            410

US net operating loss carryforwards                                          -            202

Foreign tax rate differential                                               61            (43)

State income taxes, net of federal tax benefit                               -           (135)

Non-deductible amortization of goodwill                                   (314)          (396)

Valuation allowance on US tax net operating
     loss carryforwards and stock compensation                          (1,953)             -

Non-deductible research and development expenses                        (1,811)             -

Other, net                                                                 (40)           (38)
-----------------------------------------------------------------------------------------------
Benefit (provision) for income taxes                                   $(1,867)         $ 335
-----------------------------------------------------------------------------------------------
</TABLE>

Deferred income tax assets and liabilities reflected in the accompanying balance
sheet consist of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
                                                                           1996         1997
                                                                            (in thousands),
------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Deferred income tax assets:

     US net operating loss carryforwards and
      stock compensation                                                $ 1,953         $ 2,023

     Reserves and other accruals                                          1,227           2,025

     Accrued pensions                                                     1,394           1,057

     Other, net                                                             130             112

     Valuation allowance                                                 (1,953)         (2,186)
-------------------------------------------------------------------------------------------------
     Total deferred tax assets, net                                       2,751           3,031
-------------------------------------------------------------------------------------------------

Deferred income tax liabilities:

     Depreciation and other basis differences                            (9,780)         (9,300)
-------------------------------------------------------------------------------------------------
     Total deferred tax liabilities                                      (9,780)         (9,300)
-------------------------------------------------------------------------------------------------
Net deferred tax liabilities                                            $(7,029)        $(6,269)
</TABLE>

At December 31, 1996 and 1997, the Company had US federal and state tax net
operating loss carryforwards of approximately $4.0 million and $6.0 million,
respectively. Of the total tax net operating loss carryforwards, $646,000 and
$3,419,000 in 1996 and 1997, respectively, represent the tax benefit of
disqualifying dispositions and the exercise of non-qualified stock options. The
tax benefit related to disqualifying dispositions and exercise of non-qualified
stock options has been fully reserved for through a valuation allowance due to
the uncertainty of realization. If this tax benefit is realized or if the
valuation allowance is reduced in future periods, the tax benefit will be
recorded in additional paid-in capital. The remaining tax net operating loss
carryforwards of $3,312,000 and $2,532,000 in 1996 and 1997, respectively, have
been fully reserved for through a valuation allowance since the Company is
uncertain if it will generate future taxable income sufficient to realize the
deferred tax benefit.

A provision has not been made for US taxes on undistributed earnings of $3.5
million of the Company's UK subsidiary that could be subject to taxation if
remitted to the US because the Company currently plans to keep these amounts
permanently reinvested.

5. COMMITMENTS

The Company leases equipment and executive office and warehouse space under
various operating arrangements. The accompanying statement of operations
includes expenses from operating leases of $148,000 in 1996 and $748,000 in
1997. Future minimum lease payments due under non-cancelable operating leases
net of non-cancelable sub-lease rental income at December 31, 1997 are $674,000
in 1998; $456,000 in 1999; $280,000 in 2000; $257,000 in 2001; $141,000 in 2002;
and $79,000 thereafter. Total future minimum net lease payments are $1,887,000.

6. CONTINGENCIES

The Company is involved in various legal proceedings incidental to the conduct
of its business. While it is not possible to determine the ultimate disposition
of these proceedings, the Company believes that the outcome of such proceedings
will not have a material adverse effect on the financial position or results of
operations of the Company.

In late 1996, Phenomenex Inc. filed a proceeding before the US Patent and
Trademark Office's Trademark Trial and Appeal Board, formally opposing the
Company's attempt to register the ChiRex name for "single isomer chiral
intermediate chemical compounds and active ingredients for use in the
manufacture of pharmaceuticals." In December 1997, the Company reached a final
agreement with Phenomenex to discharge their opposition to the Company's
registration of the ChiRex trademark on terms favorable to the Company and for
Phenomenex to assign certain trademark rights to the Company.

                                       28
<PAGE>
 
7. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY

In August 1996, Holdings entered into a revolving credit facility agreement with
a major UK clearing bank secured by certain assets of the Company, including
real estate assets. This facility allowed a maximum borrowing of (Pounds)10.5
million (approximately $18.0 million at December 31, 1996), renewable every two
years, at an interest rate of LIBOR plus 1.25% and a commitment fee of 0.375%.
The LIBOR rate could be fixed by the Company for a period from one to twelve
months. As of December 31, 1996 the Company had drawn down the equivalent of
$3.9 million of this facility. The Company's repaid all outstanding borrowings
and terminated this facility in October 1997 upon signing of a new credit
facility (see below).

To finance the acquisition of the Annan facility (see Note 2) and provide for
the general cash requirements of the business, Holdings entered into a senior
secured term-loan and revolving credit agreement on October 29, 1997, with
Bankers Trust Company allowing it to borrow up to (Pounds)62 million
(approximately $102 million at December 31, 1997) for a five-year period. The
credit facility is comprised of a (Pounds)40 million (approximately $66 million
at December 31, 1997) term loan and a (Pounds)22 million (approximately $36
million at December 31, 1997) revolving-credit facility each bearing interest at
LIBOR plus 1% (8.4% at December 31, 1997). The term-loan facility is repayable
in nine equal semi-annual installments beginning on December 31, 1998 and also
provides for annual mandatory pre-payments from excess cashflow as defined in
the credit agreement. The maximum borrowings under the revolving-credit facility
step-down by (Pounds)3.0 million (approximately $4.9 million at December 31,
1997) at both December 31, 2000 and 2001 and terminates on December 31, 2002. At
December 31, 1997, (Pounds)6.8 million ($11.2 million) in advances were
outstanding under the revolving-credit facility. Borrowings under the credit
facility are secured by the real and personal property of and guaranteed by the
Company and its subsidiaries. The credit agreement contains normal and customary
financial covenants and limitations on indebtedness, dividends, capital
expenditures, repurchase of common stock and certain other transactions.
Management believes that the Company is in compliance with all terms and
covenants of the credit facility.

Long-term debt is comprised of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
                                                                                1996          1997
                                                                                 (in thousands),
----------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>
Revolving credit facility                                                          $   -    $11,186

Term loan                                                                              -     65,800

Revolving credit line                                                              3,933          -
-----------------------------------------------------------------------------------------------------
Total debt                                                                         3,933     76,986

Less current portion of long-term debt                                                 -      7,311
-----------------------------------------------------------------------------------------------------
Long-term debt                                                                    $3,933    $69,675
-----------------------------------------------------------------------------------------------------
</TABLE>

The Company has classified all of the outstanding borrowings under the
revolving-credit line and revolving-credit facility as long-term at December 31,
1996 and 1997 because borrowings are not re-payable within one year as of the
balance sheet date.

Long-term debt maturities during the next five years as of December 31, 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
 
<S>                                                    <C>
1998                                                    $ 7,311

1999                                                     14,622

2000                                                     14,622

2001                                                     14,622

2002                                                     25,808
----------------------------------------------------------------
Total                                                   $76,986
----------------------------------------------------------------
</TABLE>
Interest costs incurred during 1996 and 1997 were $755,000 and $1,397,000,
respectively. Interest costs totalling $150,000 were capitalized in 1997.

8. OTHER EXPENSES
In 1995, ChiRex America recorded a charge of $797,000 representing costs
relating to an offering of securities that was not completed.

9. NON-CASH INVESTING AND FINANCING ACTIVITIES

As discussed in Note 2, ChiRex America was contributed to the Company in
exchange for the issuance of 3,520,889 shares of common stock through a merger
with and into a newly formed wholly-owned subsidiary of the Company on March 11,
1996. The net assets contributed by ChiRex America were recorded at historical
cost basis of $3,123,000.

In addition, as discussed in Note 2, the shareholders of Holdings contributed to
the Company all outstanding equity capital of Holdings for 3,739,206 shares of
common stock and promissory notes of the Company. Certain of the shares were
repurchased and all of the promissory notes were repaid with the proceeds from
the Initial Public Offering. The net assets of Holdings were initially recorded
at its purchase price of $48,610,000.

10. AGREEMENTS WITH FORMER AFFILIATE

ChiRex America and the Former Affiliate entered into the following agreements
which were effective with the closing of the Initial Public Offering except for
the Technology Transfer and License Agreement which was effective between ChiRex
America and the Former Affiliate as of January 1, 1995.

TECHNOLOGY TRANSFER AND LICENSE AGREEMENT

Under the Technology Transfer and License Agreement the Former Affiliate granted
to ChiRex America an exclusive, royalty-free perpetual right and license to use
and practice the ChiRex Technologies licensed and sub-licensed thereunder (the
"Licensed Technologies") on a worldwide basis in a field (the "Company field")
described as the development, manufacture, use and sale of pharmaceutical
intermediaries, active ingredients, agrichemicals, flavors, fragrances and other
chemicals and compounds.

Pursuant to the terms of the Technology Transfer and License Agreement, ChiRex
America is permitted to use the Former Affiliate's improvements to the Licensed
Technologies on a non-exclusive basis in the Company field. Similarly, the
Former Affiliate is allowed to use ChiRex America's improvements to the Licensed
Technologies with respect to the development, manufacture, use, and sale of the
compounds outside of the Company field. Furthermore, ChiRex America agreed not
to use improvements to the Licensed Technologies jointly developed or acquired
by the Former Affiliate and ChiRex America outside the Company field, and the
Former Affiliate agreed not to use such improvements in the Company field.

The term of this agreement ends on December 31, 1998, unless either party
exercises its option to terminate such agreement on six months written notice
after the date on which the Former Affiliate's ownership of the outstanding
voting stock of the Company first drops below 20% (see Note 2). The termination
of the agreement shall not affect ChiRex America's ability to continue using the
Licensed Technologies in the Company field, ChiRex America's ability to continue
using improvements developed by the Former Affiliate during the term of such
agreements in the Company field or the Former Affiliate's ability to continue
using improvements developed by ChiRex America during the term of such agreement
outside the Company field.

CONTRACT MANUFACTURING AGREEMENT

Pursuant to the terms of the Contract Manufacturing Agreement, upon ChiRex
America's request, the Former Affiliate may sell various commercial products to
ChiRex America and provide related services to the Company, in connection with
procuring supplies and raw materials, invoicing and warehousing.
The Former Affiliate's price for those products shall be its cost plus 25% per
unit. However, if the Former Affiliate is unwilling or unable to supply these
products, then ChiRex America shall be provided access to the Former Affiliate's
manufacturing plant and equipment to manufacture such products. The Former
Affiliate will warrant that its products conform to the agreed-upon
specifications and that they are manufactured in compliance with cGMP or other
relevant regulations promulgated by the FDA. The term of this agreement is until
December 31, 2001, and is subject to automatic extensions of one year each
unless either party, in its sole discretion, decides to block further

                                       29
<PAGE>
 
extensions. In addition, each of ChiRex America and the Former Affiliate has the
option to terminate this agreement on twelve months written notice after the
date on which the Former Affiliate's ownership of the outstanding voting stock
of ChiRex America first drops below 20% (see Note 2).

SUPPLY AGREEMENT

Pursuant to the terms of the Supply Agreement, the Former Affiliate is required
to purchase all of its needs with respect to Improved Chemical Entities
("ICE's") pharmaceutical active ingredients from ChiRex America, however, the
Former Affiliate may buy such ingredients from other sources if; (i) the price
which ChiRex America charges to the Former Affiliate for such ingredients is
greater than 115% of the price charged by comparable suppliers for the same
ingredient; (ii) ChiRex America does not accept a firm order placed by the
Former Affiliate for such ingredient with a requested delivery date at least 12
months after the Former Affiliate placed such order; or (iii) such ingredient
previously delivered by ChiRex America was repeatedly found not to conform to
the agreed-upon specifications; or (iv) of ChiRex America failed to deliver the
active ingredients by the agreed upon dates (unless such failure is beyond the
Company's control). The price charged by ChiRex America for any products
manufactured for the Former Affiliate pursuant to the Supply Agreement is cost
plus 25%. The term of the agreement is until December 31, 2001, and is subject
to automatic extensions of one year each unless either party, in its sole
discretion, elects not to extend the agreement.

CONTRACT RESEARCH AGREEMENT

Under the Contract Research Agreement, either party may provide scientific
research and experimental development services to the other party. Such services
may include procuring supplies and materials used in performing such services,
providing scientific and technical personnel and equipment in order to perform
such services and contracting with specialized third parties in connection with
such services. The party rendering such services shall charge for those services
110% of the sum of: (i) the salaries of its employees who are directly engaged
in performing such services, (ii) an allocation of overhead directly related to
those services equal to 65% of the amount set forth in (i) above, (iii) any
other direct expenditures related to those services, including the cost of
materials, the costs of leased equipment and expenditures directly undertaken on
behalf of the party receiving such services; and (iv) any payments to third
parties in connection with those services. Under the Contract Research
Agreement, each of ChiRex America and the Former Affiliate shall own the
intellectual property rights that they each conceive. Pursuant to the terms of
the Contract Research Agreement, the conceiving party, however, grants to the
other party an exclusive, perpetual, worldwide license, with the right to grant
sublicenses, with respect to use and practice of those rights in a designated
field (for ChiRex America, in the Company field; for the Former Affiliate,
outside the Company field) for a reasonable royalty to be negotiated between the
parties. Intellectual property rights conceived jointly by the parties shall be
owned jointly. The Company has agreed not to use or license such jointly owned
rights outside the Company field, and the Former Affiliate has agreed not to use
or license such rights in the Company field. The term of this agreement is until
December 31, 1997, and shall be subject to automatic extensions of one year
unless either party, in its sole discretion, decides to block further
extensions. In addition, either party shall have the option to terminate this
agreement on twelve (12) months written notice after the date on which the
Former Affiliate's ownership of the outstanding voting stock of ChiRex America
first drops below 20% (see Note 2).

11. RELATED PARTY TRANSACTIONS

In 1996 and 1997 the Company has incurred $158,000 and $346,000, respectively,
to the Former Affiliate under the Technology Transfer and License Agreement for
legal expenses and has received $609,000 and $460,000, respectively, in license
royalty income.

Prior to January 1, 1996 certain facilities and support services of ChiRex
America, including administrative support, were provided by the Former
Affiliate. For these facilities and services, ChiRex America, was charged
approximately $220,000 for the year December 31, 1995. This charge represents an
allocation of ChiRex America's proportionate share of the Former Affiliate's
overhead costs using formulas which the management of ChiRex America believed
were reasonable based upon the use of such facilities and services. In
developing the formulas for these allocations, management of ChiRex America
recognized the fact that the incremental costs for the ChiRex America's
facilities and administrative support services were lower than separate or
independent alternatives. All costs of ChiRex America during 1995, including
payroll costs, were paid by the Former Affiliate.

In 1995 and prior, ChiRex America purchased equipment from an affiliate of the
Former Affiliate, at prices based upon a pricing agreement between the affiliate
and ChiRex America. Under this agreement, the equipment which was leased or sold
to third parties by ChiRex America was purchased at cost plus a 25% margin. The
value of these purchases was approximately $476,000 for the year ended December
31, 1995.

ChiRex America sold certain pharmaceutical compounds to the Former Affiliate in
1995 and 1996. Total revenue from these transactions amounted to $344,000 in
1995 and $38,600 in 1996. In 1995 ChiRex America purchased certain compounds at
cost plus a 20% margin from a wholly-owned subsidiary of the Former Affiliate.
The total cost of goods sold related to those purchases was $434,000.

12. SIGNIFICANT CUSTOMERS

In 1997 the Company's four largest customers accounted for approximately 76% of
total revenues. Sanofi S.A. ("Sanofi"), Glaxo Wellcome plc, Rohm and Haas
Company ("Rohm and Haas") and Smithkline Beecham plc ("Smithkline") accounted
for approximately 36%, 17%, 13% and 10%, respectively, of the Company's 1997
revenues. In 1996 the Company's three largest customers accounted for
approximately 66% of total revenues. Sanofi, SmithKline and Rohm and Haas
accounted for approximately 36%, 19% and 11%, respectively, of the Company's
1996 revenues. In 1995 two customers represented 62% and 11% of revenues.

13. GEOGRAPHICAL INFORMATION

The Company is engaged in one business segment, the development, manufacture and
marketing of pharmaceutical fine chemicals. The following table shows data for
the Company by geographical area.
<TABLE>
<CAPTION>
                                                                           1995         1996         1997
                                                                                  (in thousands)
----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>          <C>
     United States                                                       $ 2,754     $  6,296     $  5,423

     Europe                                                                    -       63,072       85,601

     Other                                                                     -        5,247        3,076
----------------------------------------------------------------------------------------------------------
                                                                         $ 2,754     $ 74,615     $ 94,100
----------------------------------------------------------------------------------------------------------

Income (loss) before non-recurring charges and provision for income taxes:

     United States                                                       $(2,452)    $    947     $  1,065

     Europe                                                                    -        5,631        5,654

     Other                                                                     -          340          365
----------------------------------------------------------------------------------------------------------
                                                                         $(2,452)    $  6,918     $  7,084
----------------------------------------------------------------------------------------------------------

Identifiable assets :

     United States                                                       $ 2,692     $  1,117     $  1,195

     Europe                                                                    -      126,938      201,872
----------------------------------------------------------------------------------------------------------
                                                                          $2,692     $128,055     $203,067
----------------------------------------------------------------------------------------------------------

In general, sales are denominated in Great Britain pounds sterling.
</TABLE>

                                       30
<PAGE>
 
14. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY (UNAUDITED)

The common stock was initially offered to the public on March 5, 1996 at a price
of $13.00 per share. The common stock is listed and traded on The Nasdaq Stock
Market's National Market ("Nasdaq") under the symbol "CHRX." The following table
sets forth for the periods indicated the high and low sales prices of the common
stock as reported by Nasdaq.
<TABLE>
<CAPTION>
                                                                                      High       Low
------------------------------------------------------------------------------------------------------
1996:
<S>                                                                                  <C>       <C>
     First Quarter (from March 5)                                                    $13.25    $  9.50
     Second Quarter                                                                   13.25      10.00
     Third Quarter                                                                    13.38       7.88
     Fourth Quarter                                                                   13.50       9.50
1997:                                                                                              
     First Quarter                                                                   $13.25     $ 9.50
     Second Quarter                                                                   12.75       9.88
     Third Quarter                                                                    25.50      11.63
     Fourth Quarter                                                                   26.25      16.63 
------------------------------------------------------------------------------------------------------
</TABLE>

The Company has never declared or paid cash dividends on its capital stock. The
Company currently intends to retain any future earnings for use in the Company's
business and, therefore, does not anticipate paying cash dividends in the
foreseeable future.
<TABLE>
<CAPTION>
15. QUARTERLY INFORMATION (UNAUDITED)
                                                                                  Quarter Ended
(in thousands except per-share amounts)                     March 31         June 30    September 30  December 31
---------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>          <C>           <C>
1996
Revenues                                                     $  7,599         $21,976        $20,562      $24,478
Gross profit                                                    1,897           5,033          4,930        6,247
Stock compensation and write-off of in-process R & D           11,401 (a)           -              -            -
Net income (loss)                                             (10,922)            358            980        1,275
Net income (loss) per common share:
     Basic                                                   $  (2.12)        $  0.03        $  0.09      $  0.12
     Diluted                                                 $  (2.12)        $  0.03        $  0.09      $  0.11
Weighted average shares outstanding                             5,158          10,909         10,910       10,912
---------------------------------------------------------------------------------------------------------------------
1997 (c)
---------------------------------------------------------------------------------------------------------------------
Revenues                                                     $ 26,506         $20,157        $21,605      $25,832
Gross profit                                                    5,835           6,050          5,286        5,489
Restructuring charges, net of proceeds                              -          (6,599) (b)         -       (1,470) (b)
Net income (loss)                                               1,198          (2,698)         1,600         (750)
Net income (loss) per common share:
     Basic                                                   $   0.11         $ (0.24)       $  0.14      $ (0.06)
     Diluted                                                 $   0.11         $ (0.24)       $  0.13      $ (0.06)
Weighted average shares outstanding                            10,944          11,352         11,534       11,786
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Write off of research and development expenses at the date of the
Contribution and a stock compensation charge associated with the granting of
stock options at the time of the Merger.

(b) Restructuring and fixed asset impairment charge net of proceeds received on
the sale of the acetaminophen business.

(c) Certain amounts have been reclassified to be consistent with the full-year
presentation on the Statement of Operations.

                                       31
<PAGE>
 
CORPORATE INFORMATION

BOARD OF DIRECTORS
------------------
Alan R. Clark, Chairman and Chief Executive Officer, ChiRex Inc.
Michael A. Griffith, Chief Financial Officer and Secretary, ChiRex Inc.
Dirk Detert, Ph.D., Former General Manager of Wellcome GmbH
Elizabeth M. Greetham, Portfolio Manager
     Weiss, Peck, & Greer Investments
Eric N. Jacobsen, Ph.D., Professor of Chemistry, Harvard University
W. Dieter Zander, Managing Director, Arnhold and S. Bleichroeder

CORPORATE OFFICERS
------------------
Alan R. Clark, Chairman and Chief Executive Officer
Michael A. Griffith, Chief Financial Officer and Secretary
Beth P. Hecht, General Counsel
Roger B. Pettman, Ph.D., Vice President, Sales and Marketing
David F. Raynor, Vice President, Dudley Operations
J. Graham Thorpe, Ph.D., Vice President, Business Development
John E. Weir, Vice President, Treasurer
Frank J. Wright, Vice President, Annan Operations

SCIENTIFIC ADVISORY BOARD
-------------------------
Alexander McKillop, Ph.D., Chairman
Stephen Buchwald, Ph.D., Massachusetts Institute of Technology
Eric N. Jacobsen, Ph.D., Harvard University
J. Bryan Jones, Ph.D., University of Toronto
Roger B. Pettman, Ph.D., ChiRex Inc.
William H. Pirkle, Ph.D., University of Illinois
K. Barry Sharpless, Ph.D., The Scripps Research Institute

ANNUAL MEETING
--------------
The 1998 Annual Meeting of Shareholders will be held on April 15, 1998, at the
Company's headquarters in Stamford, Connecticut.

SEC FORM 10-K
-------------
A copy of the Company's Form 10-K filed with the Securities
and Exchange Commission may be obtained by contacting the Company at its
Stamford, Connecticut headquarters.

INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
Arthur Andersen LLP, One International Place, Boston, MA 02110

OUTSIDE GENERAL COUNSEL
-----------------------
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue,
New York, New York 10019

TRANSFER AGENT
--------------
Boston EquiServe, L.P., Shareholders Services Division, 150 Royall Street,
Canton, Massachusetts 02021 Phone: (781) 575-2559

INVESTOR RELATIONS
------------------
ChiRex Inc., Investor Relations Department, 300 Atlantic Street, Suite 402,
Stamford, CT 06901 Phone: (203) 351-2300
Homepage: http://www.chirex.com
or-
Feinstein Kean Partners Inc., Douglas MacDougall, 245 First Street, 14th Floor,
Cambridge, Massachusetts 02142 Phone: (617) 577-8110 email:
doug_macdougall@fkpi.com

SAFE HARBOR STATEMENT
---------------------
Statements in this annual report that are not strictly historical are `forward
looking' statements as defined in Section 27A of the Securities Act and 21E of
the Exchange Act. These forward-looking statements involve risks and
uncertainties, including, but not limited to, product development and market
acceptance risks, product manufacturing risks, the impact of competitive
products and pricing, the results of current and future licensing and other
collaborative relationships, the results of financing efforts, developments
regarding intellectual property rights and litigation, risks of product non-
approval or delays or post-approval reviews by the FDA or foreign regulatory
authorities, and other risks identified in the Company's filings with the
Securities and Exchange Commission.

                                       32