SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549
                                  Form 10-K
       (Mark One)

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

                Fiscal year ended December 31, 1998

                                 OR

       [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

       For the transition period from ___________  to ___________

                Copley Pharmaceutical, Inc.

       (Exact name of registrant as specified in its charter)

                  Delaware                                 04-2514637
(State or other  jurisdiction                 (IRS Employer Identification No.)
of incorporation  or  organization)  


     25 John Road                                                  02021
     Canton, Massachusetts                                      (Zip code)
     (Address of principal executive offices)

                       Commission file number:  0-20126

     Registrant's telephone number, including area code:  (781) 821-6111
     Securities  registered  pursuant to Section  12(b) of the Act:
     None  Securities  registered  pursuant to Section 12(g) of the
     Act:
                       Common Stock, $.01 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                       Yes     X         No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate  market  value,  as of  March  15,  1999,  of  common  stock  held  by
non-affiliates  of the  registrant:  $88,568,678.00,  based on the last reported
sale price on The Nasdaq National Market.

    Number of shares of common stock outstanding on March 15, 1999:  19,216,982

                           DOCUMENTS INCORPORATED BY REFERENCE

The  registrant  intends  to  file a  definitive  Proxy  Statement  pursuant  to
Regulation 14A within 120 days of the year ended December 31, 1998.  Portions of
such Proxy Statement are incorporated by reference in Part III of this report.
<PAGE>

                                     PART 1

                                ITEM 1: BUSINESS

Overview
Copley  Pharmaceutical,  Inc. ("Copley" or the "Company"),  established in 1972,
develops,  manufactures,  markets and  distributes a broad range of multi-source
pharmaceutical    products.    These   products    include    prescription   and
over-the-counter  ("OTC")  drugs and are  available in a variety of dosage forms
consisting of tablets, solutions, suspensions, syrups, elixirs, jellies, creams,
ointments and powders.  The Company's product categories include,  among others,
preparations   for   neoplasms,   endocrine   system  and  metabolic   diseases,
anti-infective agents, central nervous system and sense organ drugs, respiratory
system drugs,  cardiovascular  system drugs,  vitamins and  nutrients,  and skin
preparations.  The  Company  sells its  products  to  prescription  and OTC drug
distributors,   retail  chains,   wholesalers,   hospitals,  health  maintenance
organizations ("HMOs"), other managed care entities and government agencies.
         Multi-source,  or  generic,  drugs  are the  chemical  and  therapeutic
equivalents of brand-name drugs. They are required to meet similar  governmental
standards as  brand-name  drugs and must  receive  Food and Drug  Administration
("FDA")  approval  prior to  manufacture  and  sale.  Multi-source  drugs may be
manufactured   and  marketed  only  if  relevant  patents  (and  any  additional
government-mandated  market exclusivity  periods) have expired.  These drugs are
typically sold under their generic chemical names at prices  significantly below
those of their brand-name equivalents.
         Forward-looking  statements (statements which are not historical facts)
in this report are made  pursuant to the safe harbor  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Investors  are  cautioned  that all
forward-looking  statements,  including  statements  about  product  filings and
approvals,  industry trends,  strategic  initiatives,  raw material supply,  net
sales,  the  Year  2000  issue,  price  erosion,  gross  profit,   research  and
development expenses,  selling, marketing and distribution expenses, general and
administrative  expenses,  capital  expenditures,  recall related and litigation
expenses,  restructuring and other expenses, and interest expense, involve risks
and  uncertainties,  including the risks and  uncertainties  detailed below, and
actual  results  may  differ  significantly  from  those in any  forward-looking
statements.

Generic Drug Market
Generic  pharmaceutical  sales have  increased  significantly  industry wide  in
recent years, and the Company believes that the trend is likely to continue.  In
the next decade,  patents will expire on several  widely  prescribed  brand-name
drugs, creating new market opportunities.
         Industry growth is due in part to an increased awareness and acceptance
among  consumers,   physicians  and  pharmacists  that  generic  drugs  are  the
therapeutic  equivalents of brand-name drugs. Among the factors  contributing to
this  increased  awareness  are the passage of state  legislation  permitting or
encouraging  substitution by pharmacists and the FDA's  publication of a list of
therapeutic  equivalent  drugs,  which provides  physicians and pharmacists with
generic drug alternatives.  In addition,  since generic pharmaceutical  products
are  typically  sold at prices  significantly  below  those of their  brand-name
equivalents,  various  government  agencies  and many  private  managed  care or
insurance  programs encourage the prescribing of generic drugs as a cost-savings
measure in the purchase  of, or  reimbursement  for,  prescription  drugs.  Many
hospitals have  generic-substitution  formularies in place.  Additionally,  drug
chains  and  mail-order  prescription  services  have  shown  a  preference  for
dispensing  generic  drugs and for  distributing  private-label  versions of OTC
drugs. The Company believes that these factors will continue to influence growth
in the market for generic drugs.
                                       2
<PAGE>
Product Development Strategy and Products
The Company's product  development  strategy  emphasizes multiple approaches for
developing  and  marketing new products.  The  Company's  principal  focus is to
obtain FDA approval to market  equivalent  formulations  of  prescription  drugs
through the Abbreviated New Drug Application  ("ANDA") process.  Typically,  the
Company  targets its ANDA's for niche  products  with  limited  competition  and
high-volume  pharmaceutical products.  Additional strategies include introducing
OTC drugs once their brand-name  equivalents are converted from  prescription to
OTC status and marketing  generic  versions of certain drugs now manufactured by
Hoechst   Marion   Roussel,    Inc.   ("HMRI"),    a   subsidiary   of   Hoechst
Aktiengesellschaft,  the  Company's  indirect  51%  fully  diluted  shareholder,
pursuant to the Product  Agreement(Refer  to note J of the Notes to Consolidated
Financial Statements) between Copley and Hoechst Corporation ("HC").

ANDA-Approved  Drugs:  The Company's core business  remains the  development and
marketing of generic prescription drugs. The Company continues to focus on niche
products that offer a significant  opportunity for the Company but which may not
necessarily  attract larger or numerous  competitors,  either because the market
for such drugs is  relatively  small or because  the  products  employ  extended
release or other complex delivery  systems that are difficult to formulate.  The
Company also focuses on certain high-volume  pharmaceutical  products to respond
to customer demand that suppliers carry a broad array of products.

         Copley is  seeking to expand its  product  line with new  higher-profit
margin  products.  The  Company  has  obtained  a  license  from the  U.S.  Drug
Enforcement  Administration to manufacture  Schedule 2 and Schedule 4 controlled
substances.  In January 1999, the Company  received its first FDA approval of an
ANDA  for a  Schedule  4 drug  product.  The  Company  believes  it  may  have a
competitive  advantage  with respect to these  products  because  relatively few
generic  drug  companies  have  facilities   approved  for  the  manufacture  of
controlled substances.

Prescription to OTC Conversion: The Company believes that a number of drugs will
be  reclassified  from  prescription  to OTC over the next  several  years.  The
Company  also  believes  the OTC market will expand as  consumers  more  readily
choose  self-treatment and as drug companies and health care payers urge the FDA
to accelerate  the approval of OTC products.  The Company has experience in this
marketplace,  having  manufactured  several OTC products,  including  miconazole
nitrate vaginal cream, the generic equivalent of Ortho McNeil's Monistat(R)7 and
two minoxidil topical solution products,  the off-patent versions of Pharmacia &
Upjohn's Rogaine(R).  In addition, the Company believes that private label store
brands will continue to gain market share within the OTC market.

Generic Versions of HMRI Drugs: The Company's Product Agreement with HC afforded
the Company the  opportunity to distribute and market  certain  identified  HMRI
drug products.  The Company has entered into  five year,  renewable contracts to
market  glyburide,  the generic  version of HMRI's  DiaBeta(R),  and  micronized
glyburide,  the  therapeutic  equivalent of Pharmacia & Upjohn's  Glynase(R) and
HMRI's GluBate(R), and pentoxifylline, the generic version of HMRI's Trental(R).
The Company does not expect to distribute and market any additional new products
under the Product Agreement.
         Additionally,  the Company is exploring the  possibility  of developing
new   pharmaceutical   products   of  its  own  under  the   federal   New  Drug
Application ("NDA") process. Also under consideration are alliances with certain
brand-name  drug  companies  to produce  generic  versions  of these  companies'
proprietary   products.   Additional  vitamin  products  and  other  nutritional
supplements also are potential growth areas. Finally, the Company may enter into
collaborative  manufacturing  agreements  with  biotechnology  companies to take
advantage of the Company's high capacity, modern manufacturing facility.
                                       3
<PAGE>
As of March 16, 1999 the Company was marketing the following products:
<TABLE>
<S>                                                  <C>               <S> 
                                                     Number of Dosage
Products                                             Strengths         Brand Name/Company
-----------------------------------------------------------------------------------------------------------------------------------

Preparations for Neoplasms, Endocrine System and Metabolic Diseases
     glyburide tablets                               3                 DiaBeta(R)/Hoechst Marion Roussel, Inc.
     hydrocortisone enema suspension                 1                 Cortenema(R)/Solvay
     hydrocortisone valerate                         3                 Westcort(R)/Westwood-Squibb
     micronized glyburide tablets                    2                 GluBate(R)/Hoechst Marion Roussel, Inc.
                                                                       Glynase(R)/Pharmacia & Upjohn
Anti-Infective Agents
     amantadine HCl syrup                            1                 Symmetrel(R)/Endo
     hydroxychloroquine sulfate tablets              1                 Plaquenil(R)/Sanofi
     mebendazole tablets                             1                 Vermox(R)/Janssen
     miconazole nitrate vaginal cream                1                 Monistat(R) 7/Ortho McNeil

Central Nervous System and Sense Organ Drugs
     diclofenac sodium delayed-release tablets       3                 Voltaren(R)/Novartis
     doxepin HCl oral solution                       1                 Sinequan(R)/Pfizer
     ethosuximide syrup                              1                 Zarontin(R)/Parke-Davis
     fluphenazine HCl concentrate oral solution      1                 Prolixin(R)/Apothecon
     fluphenazine HCl elixir                         1                 Prolixin(R)/Apothecon
     haloperidol oral solution                       1                 Haldol(R)/McNeil
     methazolamide tablets                           2                 Neptazane(R)/Storz-Lederle
     naproxen tablets                                3                 Naprosyn(R)/Roche
     prochlorperazine maleate tablets                2                 Compazine(R)/SmithKline Beecham
     thioridazine HCl oral solution                  1                 Mellaril(R)/Novartis
     thiothixene HCl oral solution                   1                 Navane(R)/Pfizer
     valproic acid syrup                             1                 Depakene(R)/Abbott

Respiratory System Drugs
     bromatapp extended release ("ER") tablets       1                 Dimetapp Extentabs(R)/Whitehall Robins
     clemastine fumarate syrup                       1                 Tavist(R)/Novartis
     doxylamine succinate tablets                    1                 Unisom(R)/Pfizer
     R-tannate pediatric suspension                  1                 Rynatan(R)/Wallace
     R-tannate tablets                               1                 Rynatan(R)/Wallace

Prescription Vitamins and Nutrients
     B-complex vitamins plus tablets                 1                 Berocca(R)Plus/Roche
     fluoride tablets                                1                 Luride(R)/Colgate
     multivitamins with fluoride tablets             2                 Poly-Vi-Flor(R)/Mead Johnson
     multivitamins with fluoride & iron tablets      2                 Poly-Vi-Flor(R)with Iron/ Mead Johnson
     potassium chloride ER tablets                   1                 Slow-K(R)/Summit
     prenatal plus iron tablets                      1                 Stuartnatal(R)Plus/Wyeth-Ayerst
     Prenatal Optima(R)                              1                 Prenate Ultra(R)/Sanofi
     prenatal Rx tablets                             1                 Natalins(R)Rx/Mead Johnson
     sodium fluoride drops                           1                 Luride(R)/Colgate

Cardiovascular System Drugs
     amiodarone hydrochloride                        1                 Cordarone(R)/Wyeth-Ayerst
     captopril tablets                               4                 Capoten(R)/Bristol-Myers Squibb
     diltiazem HCl tablets                           4                 Cardizem(R)/Hoechst Marion Roussel, Inc.
     guanabenz acetate tablets                       2                 Wytensin(R)/Wyeth-Ayerst
     nadolol tablets                                 3                 Corgard(R)/Bristol-Myers Squibb
     pentoxifylline tablets                          1                 Trental(R)/Hoechst Marion Roussel,Inc.
     procainamide HCl ER tablets                     3                 Procan(R) SR/Monarch
     quinidine sulfate ER tablets                    1                 Quinidex Extentabs(R)/Robins
                                       4
<PAGE>
                                                     Number of Dosage
Products                                             Strengths         Brand Name/Company
-----------------------------------------------------------------------------------------------------------------------------------

Skin Preparations
     clobetasol propionate cream                     1                 Temovate(R)/Glaxo-Wellcome
     clobetasol propionate ointment                  1                 Temovate(R)/Glaxo-Wellcome
     lidocaine HCl jelly                             1                 Xylocaine(R)/Astra
     minoxidil topical solution 2% for men           1                 Rogaine(R)/Pharmacia & Upjohn
     minoxidil topical solution 2% for women         1                 Rogaine(R)/Pharmacia & Upjohn
     silver nitrate solution                         1                 silver nitrate
     tretinoin                                       1                 Retin-A(R)/Ortho Dermatological

Digestive and Genito-Urinary System Drugs
     cholestyramine powder                           1                 Questran(R)/Bristol-Myers Squibb
     cholestyramine light                            2                 Questran Light(R)/Bristol-Myers Squibb

Oral and Dental Agents
     acidulated phosphate fluoride oral rinse        1                 Phos-Flur(R)/Colgate

Diagnostic Substances
     copper sulfate solution                         1                 copper sulfate
</TABLE>
Except for Copley,  Bromatapp,  and Prenatal Optima, all brand names, trademarks
or registered trademarks appearing in this report are the property of others.

For the year ended  December 31, 1998,  preparations  for  neoplasms,  endocrine
system and metabolic diseases and cardiovascular system drugs (which consists of
both  manufactured and distributed  products) and  anti-infective  agents (which
consists only of manufactured  products) accounted for 31.9%, 22.1% and 16.8% of
net sales, respectively.  For the year ended December 31, 1997, preparations for
neoplasms,  endocrine system and metabolic  diseases and  cardiovascular  system
drugs  (which  consists  of both  manufactured  and  distributed  products)  and
anti-infective  agents and central  nervous  system and sense organ drugs (which
consists only of manufactured  products)  accounted for 35.9%,  12.2%, 20.7% and
10.5%  of net  sales,  respectively.  For the  year  ended  December  31,  1996,
preparations  for  neoplasms,  endocrine  system and metabolic  diseases  (which
cosists of both manufactured and distributed products) and anti-infective agents
and  central  nervous  system and sense  organ  drugs  (which  consists  only of
manufactured  products)  accounted  for  36.8%,  22.8% and  10.6% of net  sales,
respectively.  No other single therapeutic  category accounted for more than 10%
of the Company's net sales during these periods.

Research and Development
For the years ended December 31, 1998, 1997 and 1996, the Company incurred $11.0
million,   $11.7  million  and  $13.7   million  of  research  and   development
expenditures, respectively. The Company believes that this level of research and
development  spending as a percentage  of  manufacturing  net sales  exceeds the
generic pharmaceutical industry average.
         The Company's research and development  activities consist primarily of
developing  new  multisource  drug  products and  improving  existing  products'
manufacturing   processes.  The  development  time  for  new  prescription  ANDA
products,  including formulation,  bioequivalence and stability testing followed
by the FDA  approval  process,  averages  from  three to five  years.  The costs
associated with establishing and operating research and development laboratories
for analytic chemistry and formulations,  conducting biostudies,  complying with
FDA  procedures,  completing  scale-up and process  development and hiring,
employing and training  technical and scientific staff members have increased in
recent years. The Company intends to focus its research and development  efforts
on ANDA filings with the greatest commercial viability.

                                       5
<PAGE>
Marketing and Distribution
The Company markets its products to  approximately  250 customers.  For the year
ended December 31, 1998, 44.4% of net sales were to drug  wholesalers,  33.0% to
retail chains, 21.4% to multi-source  distributors of the Company's prescription
drugs  and the  remaining  1.2% to  government  agencies,  hospitals  and  HMOs.
Included in  wholesaler  and  multi-source  distributor  net sales are  indirect
contract  sales  negotiated by the Company with  non-warehousing  retail chains,
retail buying groups,  hospitals,  and managed care entities.  The Company sells
its products under its own "Copley" label and through private label arrangements
with  multi-source  distributors.  For the year ended  December  31,  1998,  one
customer that purchased both manufactured and distributed products accounted for
10.8% of total net sales and no other single  customer  accounted  for more than
10% of the  Company's  net sales.  The Company does not believe that the loss of
any one customer would have a material adverse effect on the Company's  business
or operations.
         Customer  service  activities  are an  integral  part of the  Company's
marketing  operations.  The Company uses its best  efforts to maintain  adequate
inventories,  make timely  delivery of its  products and provide  technical  and
other service support to its customers.

Backlog Orders
The net dollar  amount of  backlog  orders for the  Company's  manufactured  and
distributed  products as of December 31, 1998 was approximately  $1.5 million as
compared with $1.8 million as of December 31, 1997. The Company's backlog orders
consist of those  orders  received  by the Company but which the Company had not
shipped by the later of two business days following  receipt of the order or the
customers' requested due date. Although these orders are subject to cancellation
without penalty,  management  expects to fill  substantially  all of such orders
within the current fiscal year.

Raw Materials
The active  pharmaceutical  ingredient  raw  materials  essential  to  the
Company's  business  are  purchased  primarily  from U.S.  distributors  of bulk
pharmaceutical  chemicals  manufactured  abroad.  Arrangements  with foreign raw
material  suppliers  are subject to risk,  including the  applicability  of FDA,
customs and other United States or foreign  governmental  statutes,  regulations
and clearances, the imposition of export and import duties, political and social
instability,  the Year 2000 issue, (Refer to Item 7. Management's Discussion and
Analysis of Financial  Condition and Results of  Operations)  possible  currency
fluctuations  and  restrictions  on the  transfer  of funds.  In  addition,  the
European  Community  regulatory  action  to  extend  the  exclusivity  period of
patented  pharmaceuticals,  which is  subject  to  implementation  by the member
countries,  may make it  increasingly  difficult to obtain certain raw materials
prior to the expiration of the applicable European patents.
         Since the FDA's drug application process requires  specification of raw
material  suppliers,  if raw materials from a specified  supplier were to become
unavailable,  the Company  would be required to file a supplement to its product
filing  and  revalidate  the  manufacturing  process  using  the new  supplier's
materials.  This could cause a delay of several months in the manufacture of the
drug  involved and the  consequent  loss of potential  revenue and market share.
When practicable,  the Company attempts to qualify two raw material suppliers in
all ANDA's if a second source is available.

Competition
The Company  competes with the original  manufacturers  of brand-name drugs that
continue to be produced  after  patent  expirations,  brand-name  pharmaceutical
companies that manufacture  generic  versions of their own drugs,  other generic
manufacturers  and  manufacturers  of  therapeutically  similar  drugs  that may
compete with the  Company's  drugs.  The  principal  competitive  factors in the
generic  pharmaceutical  industry  are the ability to introduce  equivalents  of
brand-name drugs promptly after patent expiration,  continuity of supply, price,
product quality, breadth of product line, customer service and reputation.
         A number of the Company's competitors,  including generic divisions and
subsidiaries of large brand-name  pharmaceutical  companies,  have substantially
greater resources to devote to product development,  manufacturing and marketing
than the Company. The industry is characterized by rapid technological  advances
and by the frequent introduction of new products.  The Company's competitors may
develop their products more rapidly or complete the regulatory  approval process
sooner,  and  therefore  market  their  products  earlier.  New drugs and future
developments  in alternative  drug delivery  technologies  or other  therapeutic
techniques may provide therapeutic or cost advantages to competing products.
         In  general,  the  brand-name  companies  have  sought  broader  patent
protection,  attempting  to cover  delivery  systems,  formulations,  production
methods,  and  indications  in addition to patenting  the active  pharmaceutical
ingredient. The branded drug industry also is making increased efforts to extend
patent  protection for its products by developing  derivative drugs, such as new
dosage levels or new  formulations.  The Company would be adversely  affected if
derivative  products were to emerge for the widely prescribed drugs scheduled to
lose patent protection in the next few years.
                                      6
<PAGE>
         Although  generic  pharmaceuticals  typically  cannot be sold until all
applicable  patents have expired,  the  Waxman-Hatch  Act permits a generic drug
manufacturer to claim that a patent is invalid,  unenforceable or non-infringed.
These  efforts by generic  drug  manufacturers  to challenge  patents  typically
result  in  patent-infringement  suits by  brand-name  producers.  If a  generic
company is the first to successfully  challenge a patent, it is able to market a
generic  version  prior to the  expiration  of the  patent  and may be awarded a
180-day  exclusivity  period  before  any  other  generic  manufacturer  will be
approved for marketing. The Company has undertaken two such challenges (Refer to
Note K of the Notes to Consolidated Financial  Statements),  and may pursue more
in the future.  The Company cannot make assurances that these challenges will be
successful.
         Some  brand-name  competitors  try to prevent or discourage  the use of
generic equivalents through litigation and negative public relations  campaigns.
Some have  bundled  the sale of  generic  and  patented  products  and also have
introduced  generic  versions  of  their  own  branded  products  prior  to  the
expiration of the patents for such drugs, which has resulted in a greater market
share for these companies following expiration of the applicable patents. Others
have undertaken  generic  production  joint ventures or alliances with competing
generic drug manufacturers.
         The Company is witnessing a  consolidation  of its customers,  as chain
drug stores and wholesalers merge or consolidate.  In addition,  a number of the
Company's  customers have  instituted  source  programs that limit the number of
suppliers of generic  pharmaceutical  products  carried by that  customer.  As a
result of these developments, there is heightened competition among generic drug
producers  for the business of this smaller and more  selective  customer  base.
Adding to these  pressures,  managed care  companies  sometimes have limited the
number of vendors authorized to fill prescriptions, and there has been growth in
the market share of mail-order prescription services,  which typically deal only
with a limited number of drug suppliers.

Expiration of Governance Agreement
In connection with HC's  acquisition of a majority of the Company's  outstanding
stock in 1993,  the  Company  and HC entered  into a  Corporate  Governance  and
Standstill  Agreement (as amended, the "Governance  Agreement").  The purpose of
the  Governance  Agreement was to provide  limited  protections  to the minority
shareholders  by restricting  certain actions HC would otherwise be legally able
to take as the holder of a majority of the Company's  stock. On October 8, 1998,
the Governance  Agreement expired by its terms, with the exception of certain of
the  protections  that will  continue in force.  Refer to "Item 7.  Management's
Discussion and Analysis of Financial  Condition and Results of Operations" for a
more detailed discussion.

Government Regulation
Pharmaceutical  manufacturers are subject to extensive regulation by the federal
government,  principally  the FDA and,  to a lesser  extent,  by state and local
governments.  The Federal Food, Drug and Cosmetic Act and other federal statutes
and regulations govern or influence the testing, manufacture,  safety, labeling,
storage, record keeping, approval, advertising, promotion, sale and distribution
of  pharmaceutical  products.  Noncompliance  with applicable  requirements  can
result in fines,  recall or seizure of products,  total or partial suspension of
production and/or  distribution,  refusal of the government to enter into supply
contracts or to approve NDA or ANDAs and criminal prosecution.  The FDA also has
the  authority  to revoke  previously  granted  drug  approvals.  Changes in FDA
procedures  have  increased  the time and  expense  involved in  obtaining  ANDA
approvals and in complying  with the FDA's current Good  Manufacturing  Practice
("cGMP") standards.  The ANDA drug development and approval process now averages
approximately three to five years.
         FDA approval is required before each dosage form of any new drug can be
marketed.  Applications  for FDA approval must contain  information  relating to
bioequivalency,   product  formulation,   raw  material  suppliers,   stability,
manufacturing processes, packaging, labeling and quality control. FDA procedures
require  full-scale  manufacturing  equipment to be used to produce test batches
for FDA approval.  Validation of manufacturing processes also is required by the
FDA  before a  company  can  market  new  products.  The FDA  conducts  pre- and
post-approval   reviews  and  plant   inspections  to  implement   these  rules.
Supplemental  filings for approval to transfer  products from one  manufacturing
site to another may be under review for a year or more, and certain products may
only be approved for transfer if new  bioequivalency  studies are done.  The FDA
also has increased  the number of regular  inspections  to determine  compliance
with its cGMP standards.
          The  Waxman-Hatch  Act of 1984 extended  the  established  abbreviated
application procedure for obtaining FDA approval for generic forms of brand-name
drugs  originally  marketed  before 1962 which are  off-patent  or whose  market
exclusivity has expired.  This Act also provides market  exclusivity  provisions
that could  preclude the  submission or delay the approval of a competing  ANDA.
One such  provision  allows  a  five-year  market  exclusivity  period  for NDAs
involving new chemical  compounds and a three-year market exclusivity period for
new drug applications (including different dosage forms) containing new clinical
investigations  essential  to  the  approval  of  the  application.  The  market
exclusivity provisions apply equally to patented and non-patented drug products.
Another  provision may extend patents for up to five years as  compensation  for
reduction of the  effective  life of the patent as a result of time spent by the
FDA reviewing a drug  application.  Patents may also be extended pursuant to the
terms of the Uruguay Round Agreements Act.
                                       7
<PAGE>
         In recent years there have been an increasing number of attempts to use
federal  legislation  to extend the patent life of various drugs beyond the term
permitted under current statutes. These efforts have included attempts to attach
to other legislation  narrowly focused  amendments  intended to protect specific
products. Although the generic drug industry thus far has been mostly successful
in defeating these attempts at extending the monopoly of brand-name  drugs,  the
Company  could be  adversely  impacted if future  legislation  is enacted  which
extends the patent  exclusivity  of a number of drugs that are  expected to come
off- patent in the coming years.
         The Generic Drug  Enforcement  Act of 1992  establishes  penalties  for
wrongdoing  in  connection  with the  development  or  submission  of an ANDA by
authorizing the FDA to permanently or temporarily debar companies or individuals
from  submitting or assisting in the submission of an ANDA, to temporarily  deny
approval  and suspend  applications  to market  multi-source  drugs and to debar
individuals  from working in the industry.  The FDA may suspend the distribution
of all drugs approved or developed in connection with certain  wrongful  conduct
and  also  has  authority  to  withdraw   approval  of  an  ANDA  under  certain
circumstances.  The FDA can also  significantly  delay the approval of a pending
NDA or ANDA under its "Fraud,  Untrue Statements of Material Facts, Bribery, and
Illegal  Gratuities  Policy."  Manufacturers  of drugs must also comply with the
FDA's cGMP standards or risk  sanctions such as the suspension of  manufacturing
or the  seizure of drug  products  and the FDA's  refusal to approve  additional
ANDAs.
         Products  marketed  outside the United States that are  manufactured in
the United States are subject to various  export  statutes and  regulations,  as
well as regulation by the country in which the products are to be sold.
         Medicaid,   Medicare   and  other   legislation   or  programs   govern
reimbursement levels, including requiring that all pharmaceutical  manufacturers
rebate  to  individual  states a  percentage  of  their  revenues  arising  from
Medicaid-reimbursed   drug  sales.   The   required   rebate  for  generic  drug
manufacturers  is  currently  11% of the average  net sales  price for  products
marketed under ANDAs. For products marketed under NDAs, including the glyburide,
micronized   glyburide   and   pentoxifylline   distributed   by  the   Company,
manufacturers  are  required to rebate the greater of 15.1% of average net sales
price or the difference between average net sales price and the lowest net sales
price during a specified  period.  The Company  believes that the federal and/or
state governments may continue to enact measures in the future aimed at reducing
the cost of drugs to the public.  The Company  cannot predict the nature of such
measures or their impact on the Company's profitability.
         The  Company  also is  governed  by  federal,  state and local  laws of
general applicability,  such as laws regulating working conditions. In addition,
the Company is subject,  as are  manufacturers  generally,  to various  federal,
state and local environmental  protection laws and regulations,  including those
governing the discharge of material into the  environment.  Compliance with such
environmental  provisions  is not  expected  to have a  material  effect  on the
earnings,  cash  requirements  or  competitive  position  of the  Company in the
foreseeable  future.  However,  changes to or compliance with such environmental
provisions  could  have a  material  effect  on  the  Company's  earnings,  cash
requirements and competitive position.

Personnel
As of  February  28,  1999,  the  Company  had  410  full-time  and 5  part-time
employees.  Of these,  176 were  involved  in  production,  75 in  research  and
development,  68 in  quality  affairs,  43 in  administration, 38 in  facilities
maintenance and engineering, and 15 in sales and marketing.

                               ITEM 2: PROPERTIES

The Company  operates three  facilities in the Greater Boston area,  including a
251,000  square  foot  manufacturing  facility in Canton,  Massachusetts,  which
houses research and development,  regulatory and quality affairs, production and
corporate offices.  The Canton facility is owned by the Company,  which financed
its initial  acquisition  and  construction  through the issuance of  Industrial
Development  Revenue  Bonds,  and is subject to a lien in favor of a  commercial
lender. Refer to Note G of the Notes to Consolidated  Financial Statements.  The
Company  owns and  operates a 12,000  square  foot  manufacturing  site in South
Boston.  In 1996,  the Company  entered into a five-year  lease with a five-year
renewal option for a 68,000 square foot warehousing and distribution facility in
Dedham, Massachusetts for both manufactured and distributed products.

                            ITEM 3: LEGAL PROCEEDINGS

The information  required under this item is incorporated herein by reference to
the Company's Note K of the Notes to Consolidated  Financial Statements included
herewith.

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

No matters were  submitted to a vote of security  holders  during the last three
months of the year ended December 31, 1998.
                                       8
<PAGE>
                                     PART II
                ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
                           RELATED SHAREHOLDER MATTERS

The  Company's  common stock is quoted on The NASDAQ  National  Market under the
symbol  "CPLY." The following  table sets forth the range of quarterly  high and
low bid  information  for the common stock for the years ended December 31, 1997
and 1998:

Year Ended December 31, 1997           High     Low
--------------------------------------------------------------------------------
First Quarter                          $9.63    $6.50
Second Quarter                          8.63     4.63
Third Quarter                           8.13     5.75
Fourth Quarter                          8.88     5.30

Year Ended December 31, 1998           High     Low
--------------------------------------------------------------------------------
First Quarter                          $8.25    $6.00
Second Quarter                          7.00     5.58
Third Quarter                          11.38     5.50
Fourth Quarter                         10.50     6.00


As of March 15, 1999, there were approximately 225 shareholders of record and at
least 3,550 beneficial holders. The Company has never paid cash dividends on its
common stock.  The agreement  governing  the  Company's  long-term  indebtedness
contains  prohibitions  on the  payment of cash  dividends.  The  Company has no
intention of paying dividends in the foreseeable future.

                         ITEM 6: SELECTED FINANCIAL DATA

The  information  set forth  below  should be read in  conjunction  with Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  and  the  Consolidated  Financial  Statements  and  Notes  thereto
included in this Report on Form 10-K. The Consolidated  Statements of Operations
Data  for  the  years  ended  December  31,  1998,  1997,  1996,  1995  and  the
eleven-month   period   ended   December  31,  1994  are  derived  from  audited
consolidated financial statements. The Consolidated Statement of Operations Data
for the year ended  December 31, 1994 is unaudited  and is presented  solely for
comparative purposes.

<TABLE>
<S>                                                  <C>         <C>          <C>           <C>          <C>         <C>
                                                                                                                     Eleven-month
                                                                                                                     period ended
                                                                        Years ended December 31,                     December 31,
(In thousands, except per share data)                1998         1997        1996          1995         1994        1994
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales                                            $133,497     $121,483    $123,461      $142,158     $120,348(c) $113,973(c)
Gross profit                                           32,880       29,655      29,430        41,269 (b)   52,177      48,318
Operating expenses:
     Research and development                          11,025       11,672      13,682        13,299        9,938       9,057
     Selling, general and administrative               10,624       11,870      19,635 (a)    16,324       15,319      14,170
     Recall related and litigation                        773        3,687      12,343        17,830        4,691       2,766
Income (loss) from operations                          10,458        2,426     (16,230)       (6,184)      22,229      22,325
Net income (loss)                                       7,068          564     (12,673)(a)    (2,543)(b)   15,109(c)   15,007(c)
Diluted earnings (loss)
     per share                                       $   0.37     $   0.03    $   (.66)(a)  $   (.13)(b) $    .78(c) $    .78(c)
Diluted weighted average
     common shares outstanding                         19,246       19,222      19,081        18,977       19,309      19,273
Balance Sheet Data:
Working capital                                      $ 71,126    $  60,144    $ 48,210     $  59,426    $  56,704    $ 56,704
Total assets                                          155,365      145,744     151,727       155,245      152,662     152,662
Long-term debt                                          4,500        4,800       5,100         5,400        5,700       5,700
Total shareholders' equity                            108,304      100,881     100,131       112,524      112,683     112,683
</TABLE>
(a)  Includes  $3.5  million  ($2.1  million  after  taxes;  $0.11 per share) of
restructuring expenses.
(b)  Includes  $2.5  million  ($1.5  million  after  taxes;  $0.08 per share) of
albuterol materials  inventory  write-offs incurred as a result of the Company's
decision  not to  reintroduce  this  product.
(c) Includes  approximately  $2.0 million ($1.2 million  after taxes;  $0.06 per
share) of higher than  anticipated albuterol product returns.
                                       9
<PAGE>
            ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Overview
Forward-looking  statements  (statements which are not historical facts) in this
report are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.  Investors are cautioned that all forward-looking
statements,  including statements about product filings and approvals,  industry
trends,  strategic  initiatives,  raw material supply,  the Year 2000 issue, net
sales, price erosion, gross profit, research and development expenses,  selling,
marketing  and  distribution  expenses,  general  and  administrative  expenses,
capital expenditures,  recall related and litigation expenses, restructuring and
other expenses, and interest expense, involve risks and uncertainties, including
the risks and  uncertainties  detailed  below,  and  actual  results  may differ
significantly from those in any forward-looking statements.
     The  Company  reported  net  income  of $7.1  million  or $0.37  per  share
(diluted) for the year ended  December 31, 1998.  Net sales for 1998 were $133.5
million, an increase of 9.9% from 1997 net sales of $121.5 million.  New product
launches in the fourth  quarter,  led  primarily  by  amiodarone  hydrochloride,
contributed  to the increase in net sales.  Price  erosion  slowed in 1998,  but
prices were still lower causing revenue to decrease 6.2% or $ 7.5 million. Gross
margin  improved in 1998 to 24.6% from 24.4% in 1997.  A favorable  sales mix of
higher margin  manufactured  products  contributed to this  increase.  Operating
expenses of $21.6 million, excluding restructuring and litigation related items,
were 7.4% below 1997 levels. Key events during 1998 included:

o        Six product launches, including amiodarone hydrochloride.
o        Hiring of key executive personnel.


<TABLE>
<S>
Net Sales
<S>                                        <C>            <C>              <C>                     <C>
                                           Year ended                      Year ended              Year ended
                                           December 31,                    December 31,            December 31,
(In millions)                              1998           Change           1997                    1996
--------------------------------------------------------------------------------------------------------------
Manufactured products                      $  74.8         5.6%            $  70.9                 $  79.2
Distributed products                          58.7        15.9%               50.6                    44.3
--------------------------------------------------------------------------------------------------------------
         Net sales                         $ 133.5         9.9%            $ 121.5                 $ 123.5
--------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales for 1998 were $133.5 million,  an increase of 9.9% from 1997 net sales
of  $121.5  million.   Sales  volumes  of  existing   products  along  with  the
introduction of several new manufactured  products helped offset continued price
erosion.
         In  1998  the  Company   introduced  six  new  manufactured   products:
hydrocortisone valerate, the off-patent version of Westwood-Squib's Westcort(R);
Prenatal  Optima(R),  the  off-patent  version  of  Sanofi's  Prenate  Ultra(R);
amiodarone hydrochloride, the off-patent version of Wyeth-Ayerst's Cordarone(R);
tretinoin,   the  off-patent  version  of  Ortho  Dermatological's   Retin-A(R);
cholestyramine light, the off-patent version of Bristol-Myers  Squibb's Questran
Light(R); and minoxidil topical solution 2% for women, the off-patent version of
Pharmacia & Upjohn's Rogaine(R).
         Net sales for 1997 were  $121.5  million,  a decrease  of 1.6% from the
1996 net sales of $123.5  million.  Sales  volumes  of  existing  products  were
essentially  flat, with price erosion of existing products slightly greater than
revenue increases from new products.
<TABLE>
<S>                                        <C>            <C>              <C>                     <C>
Gross Profit
                                           Year ended                      Year ended              Year ended
                                           December 31,                    December 31,            December 31,
(In millions)                              1998           Change           1997                    1996
--------------------------------------------------------------------------------------------------------------
Manufactured products                      $20.2          11.4%            $18.2                   $15.0
As a % of manufactured products net sales   27.0%                           25.6%                   18.9%
--------------------------------------------------------------------------------------------------------------
Distributed products                       $12.7          10.1%            $11.5                   $14.4
As a % of distributed products net sales    21.6%                           22.7%                   32.5%
--------------------------------------------------------------------------------------------------------------
Gross profit                               $32.9          10.9%            $29.7                   $29.4
As a % of net sales                         24.6%                           24.4%                   23.8%
--------------------------------------------------------------------------------------------------------------
</TABLE>
                                       10
<PAGE>
The Company's  gross profit  increased to $32.9 million,  or 24.6% of net sales,
for the year ended December 31, 1998 as compared to $29.7  million,  or 24.4% of
net sales,  for the same period in 1997.  The increase in gross profit  resulted
primarily from the higher margins realized on the new products introduced in the
fourth quarter, a more favorable manufacturing plant utilization and a favorable
sales mix of higher margin  manufactured  products.  Manufactured  product gross
profit increased to 27.0% of manufactured net sales as compared to 25.6% for the
same period in 1997.  Distributed  product  gross  profit  decreased to 21.6% of
distributed  net sales from 22.7% in 1997 because the  introduction of the lower
margin  pentoxifylline was available for a full twelve months during the current
year.
         For the year ended  December  31,  1997,  the  Company's  gross  profit
increased to $29.7 million or 24.4% of net sales,  as compared to $29.4 million,
or 23.8% of net sales for the same period in 1996.  Manufactured  product  gross
profit increased to 25.6% of manufactured net sales as compared to 18.9% for the
same period in 1996, the increase was primarily due to cost reductions resulting
from improvements in manufacturing  processes and inventory management partially
offset by the continued  price erosion on the  Company's  products.  Distributed
product gross profit  decreased to 22.7% of distributed  net sales from 32.5% in
1996 due to the of the  introduction  of the  lower  margin  pentoxifylline  and
renegotiation  of the  distribution  contract.  Refer to Note J of the  Notes to
Consolidated Financial Statements for a further discussion of these agreements.
<TABLE>
<S>                                        <C>            <C>              <C>                     <C>
Operating Expenses
                                           Year ended                      Year ended              Year ended
                                           December 31,                    December 31,            December 31,
(In millions)                              1998           Change           1997                    1996
--------------------------------------------------------------------------------------------------------------
Research and development                   $ 11.0          (5.5)%          $  11.7                 $ 13.7
As a % of manufactured products net sales    14.7%                            16.5%                  17.3%
--------------------------------------------------------------------------------------------------------------
Selling, marketing and distribution        $  4.5          (1.5)%          $   4.6                 $  6.4
As a % of net sales                           3.4%                             3.8%                   5.2%
--------------------------------------------------------------------------------------------------------------
General and administrative                 $  6.1         (14.2)%          $   7.1                 $  9.7
As a % of net sales                           4.6%                             5.9%                   7.9%
--------------------------------------------------------------------------------------------------------------
Recall related and litigation              $  0.8         (79.0)%          $   3.7                 $ 12.3
As a % of net sales                           0.6%                             3.0%                  10.0%
--------------------------------------------------------------------------------------------------------------
Restructuring                              $   --        (100.0)%          $   0.2                 $  3.5
As a % of net sales                                                            0.1%                   2.8%
--------------------------------------------------------------------------------------------------------------
</TABLE>
Research and development  expenses  decreased 5.5% to $11.0 million for the year
ended  December  31, 1998 as  compared  to $11.7  million for the same period in
1997.  Most of this cost  reduction is  attributed  to higher  costs  related to
validation of a new  manufacturing  process during the prior year.  During 1997,
research and  development  costs decreased 14.7% to $11.7 million as compared to
$13.7  million  for the same  period  in 1996.  Most of this cost  reduction  is
attributed to lower product  validation  costs,  primarily a function of process
improvements  in the  manufacture  of validation  batches.  The Company  expects
research and  development  costs to increase in 1999 consistent with its plan to
increase the number of ANDA submissions as compared to 1998.
         Selling,  marketing and  distribution  expenses  decreased 1.5% to $4.5
million for the year ended December 31, 1998 as compared to $4.6 million for the
previous  year.  During 1997,  selling,  marketing,  and  distribution  expenses
decreased  28.1% to $4.6 million  from $6.4  million in the prior year.  Factors
resulting in  this  cost  reduction  are  reduced   promotion  and   advertising
expenditures,  and cost savings related to  restructurings  in December 1996 and
June 1997.
         General and administrative  expenses decreased 14.2% to $6.1 million as
compared to $7.1 million a year earlier, the third consecutive year of decreased
cost.  Significant   among  these  cost  reductions  in  1998  were  savings  in
compensation and benefits and a reduction in the cost of insurance premiums.
         Recall-related and  litigation  expenses for 1998 totaled $0.8 million,
significantly  below expenses of $3.7 million  taken in 1997.  The 1997 expenses
included an adjustment to the 1996 reserve upon the Company's entry of a plea in
the grand  jury  investigation,  and a smaller  adjustment  to the  reserve  for
remaining  outstanding  claims related to the albuterol product liability cases.
Refer to Note K of the Notes to  Consolidated  Financial  Statements for further
discussion of these items.
         In response to increasing  pricing  pressures and eroding margins,  the
Company  restructured  its  operations  in  the  fourth  quarter  of  1996.  The
restructuring included the consolidation of warehouse,  manufacturing and office
sites as well as the write off of  underutilized  and idle  equipment  and, to a
lesser extent, reductions in the labor force. The Company had a second reduction
in labor force during the second quarter of 1997.
                                       11
<PAGE>
<TABLE>
<S>                                        <C>            <C>              <C>
Interest and Other Income (Expense)

                                           Year ended     Year ended       Year ended
                                           December 31,   December 31,     December 31,
(In millions)                              1998           1997             1996
----------------------------------------------------------------------------------------
Interest and other investment income       $  1.8         $  1.4           $  0.7
----------------------------------------------------------------------------------------
Interest expense                             (0.5)          (0.6)            (0.2)
----------------------------------------------------------------------------------------
Other income (expense), net                   0.5           (1.6)            (0.1)
----------------------------------------------------------------------------------------
</TABLE>

Interest and other investment  income increased $0.4 million during 1998 to $1.8
million  as  compared  to 1997  primarily  because  of  increased  average  cash
available to invest.  Interest  expense also decreased in 1998, by $0.1 million.
Much of this decrease  relates to interest from an installment  payment relating
to the grand jury plea agreement.  For 1997,  other income  (expense)  netted an
expense of $1.6  million.  This charge was related  primarily to cost  reduction
initiatives  which include the write-off of assets related to the Company's exit
from a  partnership  in certain  republics  of the former  Soviet  Union and the
discontinuance of the Company's participation in a collaborative research effort
in the  field of  ophthalmology.  Refer to Note K of the  Notes to  Consolidated
Financial Statements.
<TABLE>
Taxes and Net Income (Loss)
<S>                                        <C>            <C>              <C>
                                           Year ended     Year ended       Year ended
                                           December 31,   December 31,     December 31,
(In millions)                              1998           1997             1996
----------------------------------------------------------------------------------------
Income tax expense (benefit)               $  4.6         $  1.1           $  (3.2)
----------------------------------------------------------------------------------------
Effective tax rate                           39.5%          66.5%            (20.3)%
----------------------------------------------------------------------------------------
Net income (loss)                          $  7.1         $  0.6           $ (12.7)
----------------------------------------------------------------------------------------
</TABLE>
The  effective  tax rate was higher in both 1997 and 1996  compared  to 1998 due
primarily to the nondeductible nature of expenses associated with the resolution
of the grand jury investigation  relating to the Company. Refer to Note L of the
Notes to  Consolidated  Financial  Statements  for a further  discussion of this
matter.
         For the year ended December 31, 1998,  the Company  reported net income
of $7.1 million, or $0.37 per share (diluted),  compared to a net income of $0.6
million,  or $0.03 per share (diluted),  for the same period in 1997.  Excluding
recall related and litigation,  restructuring  and other charges related to cost
reduction  initiatives,  1997 net income would have been $4.5 million,  or $0.24
per share.  Excluding  similar  items 1996 would have  resulted in a net loss of
$0.1 million, or $0.01 per share.

Risk Factors and Future Trends
Forward-looking  statements  (statements which are not historical facts) in this
report are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.  Investors are cautioned that all forward-looking
statements,  including statements about product filings and approvals,  industry
trends,  strategic  initiatives,  raw material supply,  the Year 2000 issue, net
sales, price erosion, gross profit, research and development expenses,  selling,
marketing  and  distribution  expenses,  general  and  administrative  expenses,
capital expenditures,  recall-related and litigation expenses, restructuring and
other expenses, and interest expense, involve risks and uncertainties, including
the risks and  uncertainties  detailed  below,  and  actual  results  may differ
significantly from those in any forward-looking statements.
         The Company's  future  results of  operations  depend on its ability to
obtain FDA  approval  of ANDAs for its new  products,  to  procure a  continuous
supply of raw materials, to validate its manufacturing processes used to produce
consistent  test  batches for FDA  approval  and to receive  continued  customer
acceptance of its products.  Raw materials are generally  available from several
sources  although  this may not  always  be the  case.  Since  the ANDA  process
requires  specification  of  raw  material  suppliers,  if  raw  materials  from
specified suppliers become unavailable,  the Company would be required to file a
supplement to its product filing and revalidate the manufacturing  process using
a new  supplier's  materials.  This could cause a delay of several months in the
manufacture  of the drug involved and the consequent  loss of potential  revenue
and  market  share.   Additionally,   there  is  often  a  time  lag,  sometimes
significant,  between the receipt of ANDA  approval and the actual  marketing of
the approved product due to this validation process.
         In recent years,  there has been an  increasing  number of attempts to
use federal  legislation  to extend the patent life of various  drugs beyond the
term permitted under current  statutes.  Although the generic drug industry thus
far has been mostly  successful  in defeating  these  attempts at extending  the
monopoly of brand-name drugs, the Company could be adversely  impacted if future
legislation is enacted which extends the patent exclusivity of a number of drugs
that are expected to come off-patent in the coming years.
                                       12
<PAGE>
         The Company's  future  results of operations  also may be affected by a
variety  of  additional  factors  consistent  with the  nature of its  business,
including, but not limited to, changes in the intensity of competition affecting
the Company's products and customers.  Generic products with limited competition
are generally sold at higher prices, resulting in relatively high gross margins.
As  multi-source  competition  increases,  selling  prices and gross margins can
decline dramatically and impair overall  profitability.  Brand-name  competitors
are bundling the sale of generic and  patented  products as well as  introducing
generic  versions of their own branded  products  prior to the expiration of the
patents for such drugs,  which is  resulting in an  increasing  market share for
these  brand-name  competitors.  Brand-name  pharmaceutical  companies also have
sought to extend patent protection beyond the active  pharmaceutical  ingredient
as well as making  increased  efforts to extend patent  protection by developing
derivative  drugs.  The  Company  also  has  witnessed  a  consolidation  of its
customers,   as  chain  drug  stores  and  wholesalers   merge  or  consolidate.
Additionally,  a  number  of the  Company's  customers  have  instituted  source
programs which limit the number of suppliers of generic pharmaceutical products.
Management expects these trends and the resultant price erosion to continue. The
Company  will need to provide a  continuous  stream of new products and maintain
its strong customer relations to offset these competitive pressures.
         The   Company's   gross  margin   continues  to  be  depressed  by  the
underutilization  of  its  manufacturing  facility.  The  Company,  through  its
restructuring  of operations  begun in the fourth quarter of 1996 and continuing
in 1997,  consolidated  some of its  facilities in an attempt to streamline  its
operations and took additional  steps to reduce its overhead.  It is anticipated
that  the  Company's   gross  margin  will  continue  to  be  depressed  by  the
underutilization  of its manufacturing  facility during 1999 and until such time
as the  volume of  manufactured  products  increases  significantly.  Continuing
compliance with FDA cGMP standards and applicable environmental regulations will
also affect the Company's future results of operations.  Significant investments
which  increase  the  Company's  overhead  need to be made  from time to time to
maintain the required infrastructure to comply with the FDA cGMP standards.
         The albuterol related litigation and various other legal matters remain
unresolved  in part or in whole.  Refer to Note K of the  Notes to  Consolidated
Financial   Statements  for  further   discussion.   Although  the  Company  has
established  reserves  it  believes  appropriate  for these  matters,  the final
outcome may exceed the estimates  used in  establishing  those  reserves and may
have  a  material  adverse  effect  on  the  Company's   consolidated  financial
condition, liquidity and results of operations.

Year 2000 Readiness
The Company has a Year 2000  Compliance  Program,  the  purposes of which are to
identify  important  systems  that are not yet Year 2000 ("Y2K")  compliant;  to
initiate replacement or remedial action to assure that key systems will continue
to  operate  in the Y2K and to test  the  replaced  or  remediated  systems;  to
identify and contact key suppliers,  vendors, customers and business partners to
evaluate their ability to maintain normal  operations in the Y2K; and to develop
appropriate  contingency  plans for dealing with foreseeable Y2K  complications.
The Company  has  appointed a Y2K  Project  Manager who is  responsible  for the
Company's  Y2K  Compliance  Program and who reports  directly to a member of the
Company's executive committee.

Information Technology Systems
The Company's critical internal information technology ("IT") systems consist of
its Prism  manufacturing and JD Edwards  financial  accounting and Harbinger EDI
400 software  packages.  The Company has  contacted the vendors of these systems
and  obtained  written  certification  that these IT systems  are  currently  in
material  Year 2000  compliance.  The  Company  also has  completed a pilot room
testing of these systems. In addition,  the Company is in the process of testing
the Y2K  readiness of its other IT  applications.  The Company, using an outside
consultant, also completed a focused status study on selected aspects of the Y2K
IT compliance testing program.

Embedded  Systems
The Company is continuing with its assessment of its mission  critical  embedded
systems such as production  equipment,  facility  control  systems,  and quality
control and research and development instrumentation. Specifically, working with
an  outside  consultant,  the  Company  conducted  a pilot  program in which two
products were selected for evaluation of the equipment and  instruments  used in
their processes.  These pilot tests included  inventory  assessment,  compliance
testing and, where indicated,  remediation planning on selected mission critical
embedded systems. This pilot program was completed in the first quarter of 1999.
The Company is  utilizing  the pilot  design  methodology  to  complete  its Y2K
compliance  program on the remainder of the Company's  mission critical embedded
systems.  The Company expects to complete this embedded systems testing phase by
the end of the second  quarter of 1999.  Remediation  steps arising from the Y2K
readiness  testing  program are being  initiated as  appropriate.  The Company's
strategy is to continue to focus on mission critical  systems first.  Beyond the
embedded  system Y2K testing pilot program and the testing program modeled after
these pilots,  the Company has sent Y2K  compliance  inquiries to the vendors of
these embedded systems, is tracking responses to its inquiries and, depending on
vendor response, is securing compliance  information through direct contact with
the manufacturer or through research on the manufacturer's web page. The Company
expects  to  have  completed  its  efforts  to  secure   documented   compliance
information by the conclusion of its testing program on mission critical systems
by the end of the second  quarter of 1999.  After the Company has  completed its
critical embedded systems testing,  it plans to expand its inventory  assessment
and compliance testing to less critical systems.
                                       13
<PAGE>

As a  pharmaceutical  manufacturer,  the Company's  research and development and
manufacturing  operations are subject to government  regulation.  Replacement of
equipment  for  products  subject to FDA approval  and  manufacturing  standards
cannot be accomplished  without filings and review by FDA. While the Company has
made significant  progress in assessment and compliance  testing of its critical
embedded  systems,  the Company  cannot  define the precise  nature or extent of
remediation  required at this time.  The failure of the Company to properly  and
timely identify equipment that will not function properly as a result of the Y2K
Issue  could  result in the  Company's  inability  to repair or  remediate  that
equipment before December 31, 1999. In addition,  equipment  failures due to the
Y2K issue could result not only in significant  replacement costs to the Company
but also in a significant  delay in product shipments while the Company seeks to
validate  replacement  equipment,  which could have a material adverse effect on
the Company.

Third-Party Suppliers, Vendors and Customers
The Company's Y2K Compliance  Program also includes an  investigation of the Y2K
compliance of its major suppliers, vendors, customers and business partners. For
example,  third parties  handle the payroll  function for the Company,  the vast
majority of the  Company's  product  orders are  received  by computer  over the
telecommunications  systems,  and the  Company  also  relies on the  services of
banks, utilities,  and commercial airlines,  among others. The Company continues
to seek and obtain  assurances from key service  providers that there will be no
interruption  of service as a result of Y2K. While the Company has contacted its
supply  chain  business  partners,  not all third- party  suppliers,  vendors or
customers  have  responded.  The Company will continue to make efforts to secure
Y2K  compliance  status from its supply  chain,  and is  addressing  contingency
planning in lieu of third party claimed  compliance.  There can be no assurances
that the contingency plans will adequately prevent a service interruption by one
or more of the Company's  third-party  suppliers from having a material  adverse
effect on the Company.
         The Company  continues to contact its key bulk  chemical and  packaging
suppliers  to  determine  their Y2K  compliance  status.  As with certain of its
equipment, the Company cannot change suppliers of bulk active ingredients unless
the alternative  supplier has been approved through the FDA regulatory  process.
Where  possible,  the Company  tries to qualify  two or more  sources of supply.
However,  certain of the Company's  current and future products will depend on a
sole  source of raw  material  supply.  Should one or more of these sole  source
suppliers  become  unable to deliver  product in a timely  manner due to the Y2K
Issue,  the Company  would need to identify  and qualify a new source of supply.
This process is likely to involve  significant  delays and cost and could have a
material adverse effect on the Company.  In addition,  the Company  continues to
contact significant customers to determine their progress towards Y2K compliance
and to identify  issues,  if any,  which  might  develop  because of  customers'
failure to be prepared for Y2K. In the event issues are identified,  the Company
expects to try to develop procedures to permit the Company to continue to supply
the customer  despite  Y2K.  The Company has been  assured by its key  financial
institutions  that they are  currently Y2K compliant or will be Y2K compliant in
early 1999.

Year 2000 Costs and Expenses
The  Company's  policy  continues  to be to  expense  all costs  related  to Y2K
compliance  unless the useful  life of the  technological  asset is  extended or
increased,  in which case the Company will  capitalize  that cost.  For 1999 the
Company  anticipates  expenses  relating to Y2K to include key personnel  costs,
consultant  engagements,  software and hardware  accommodations,  data entry and
business partner communications.  Based on currently available information,  the
Company believes that these expenses will not exceed $500,000 and will be funded
through  operations.  Until the testing is completed on mission critical systems
in the Company's IT and Embedded Systems operations, the potential costs for any
associated remediation cannot be calculated and is not included in the $500,000.
If unforeseen  compliance  efforts are required or if present compliance efforts
are not completed on time, or if the cost of any required updating, modification
or  replacement  of the  Company's  systems or equipment  exceeds the  Company's
estimates, Y2K could result in material costs and have a material adverse effect
on the Company. For the year ended December 31, 1998 the expenses related to Y2K
were less that $75,000 and consisted mainly of internal payroll costs.
                                       14
<PAGE>
Contingency Plans and Worst Case Scenario
At the present  time,  the  Company  has  formulated  a draft  contingency  plan
addressing system failures in its business processes due to Y2K. The Company has
received written certifications confirming that its critical internal IT systems
are  compliant,  and the Company  and its Y2K IT system  audit  supported  these
findings.  As the  Company  continues  its IT and  Embedded  Systems  compliance
testing  on its  mission  critical  operations,  it is  formulating  appropriate
contingency  planning.  The integrated  draft  contingency  plan encompasses all
functional  areas within the Company,  their  business  processes  and the tasks
associated  with each  process.  It addresses  alternate  strategies  to support
critical   business   functions   to  prevent,   wherever   possible,   business
interruptions.  It is expected that this draft  contingency plan will be revised
as the Company's  testing  program  concludes and  remediation  initiatives  are
completed.  Moreover,  it is  anticipated  that  as the  Company  receives  more
complete compliance information from its major suppliers, vendors, customers and
business  partners,  that additional  efforts  regarding  business  interruption
prevention and contingency  planning can move forward.  The Company expects that
its contingency  plan will be completed by May 31, 1999,  with certain  business
interruption prevention initiatives underway before that date.
         One possible  worst case  scenario for the Company  resulting  from Y2K
would be that one or more of the Company's  sole source bulk chemical  suppliers
would  become  temporarily  unable to deliver raw  materials to the Company as a
result of a system  failure.  If this were to happen,  the Company  would not be
permitted to substitute another manufacturer's raw material for that of its sole
source  supplier.  The  Company  would not be able  immediately  to  continue to
manufacture  product  using that raw material  once its  inventories  of the raw
material were expended.  The Company's  contingency  planning with respect to an
important product might include  pre-qualifying a second source for critical raw
materials  when possible  and/or might  include  building up key sole source raw
material inventories in advance of December 31, 1999.
         Various  statements  in  this  discussion  of Y2K  are  forward-looking
statements  (statements  which are not historical in fact) within the meaning of
the Private  Securities  Litigation Reform Act of 1995. These statements include
statements of the  Company's  expectations,  anticipated  schedules and expected
completion  dates,   estimated  costs  and  statements  regarding  expected  Y2K
compliance.  These forward-looking statements are subject to various risks which
may  materially  affect  the  Company's  efforts to achieve  Y2K  compliance  to
accomplish  its goals and to meet its  expectations  with respect to Y2K issues.
These  risks  include  the  possibility  that  the  Company  will not be able to
complete the plans and modifications that it has identified,  on a timely basis,
if at all, the availability of skilled consultants, the difficulty of evaluating
and  testing  the wide  variety of  information  systems  and  components,  both
hardware  and  software,  that  must  be  evaluated,  the  variety,  number  and
complexity of equipment used in the Company's operations and the large number of
vendors and customers with which the Company interacts. The Company's assessment
of the  effects of Y2K on the  Company  are  based,  in part,  upon  information
received  from third  parties  and the  Company's  reasonable  reliance  on that
information.  Therefore,  the risk that  inaccurate  information  is supplied by
third parties upon which the Company  reasonably  relied must be considered as a
risk factor that might affect the Company's Y2K efforts.  Further,  the delay or
failure  of third  parties to respond to  inquiries  will  hinder the  Company's
ability to evaluate and remediate  the Year 2000 issue.  The Company has not yet
completed  evaluating  certain aspects of Y2K and expects that its assessment of
Y2K will evolve as its Y2K compliance  program  progresses and the evolution and
testing process continues.

Expiration of Governance Agreement
In connection with HC's  acquisition of a majority of the Company's  outstanding
common stock in 1993, the Company and HC entered into a Corporate Governance and
Standstill  Agreement (as amended, the "Governance  Agreement").  The purpose of
the  Governance  Agreement was to provide  limited  protections  to the minority
shareholders  by restricting  certain actions HC would otherwise be legally able
to take as the holder of the  majority  of the  Company's  stock.  On October 8,
1998,  the  Governance  Agreement  expired by its terms,  with the  exception of
certain limited protections that will continue in force as described below.
         Some of the more  significant  protections in the Governance  Agreement
that  expired are: (a) the  requirement  that the Board of Directors  consist of
nine members, three being Company Directors,  three being HC Directors and three
being Independent  Directors  (meaning jointly selected by the Company Directors
and HC  Directors),  and that  committees of the Board of Directors be similarly
constituted;  (b)  the  prohibition  against  HC and  its  affiliates  acquiring
additional   shares  (other  than  as  necessary  to  maintain  its  preexisting
percentage  ownership)  or  otherwise  seeking  to  increase  their  control  of
ownership of the Company without the Company's consent (including the consent of
at least one Company  Director);  (c) the prohibition  against amendments of the
Company's  charter  and  by-laws  without  the  consent of at least one  Company
Director;  (d) the  requirement  that HC vote its shares in accordance  with all
recommendations  of the Board of  Directors  and not vote in  opposition  to any
recommendation  of  the  Board  of  Directors;  (e)  the  requirement  that  all
transactions between the Company, on the one hand, and HC and its affiliates, on
the other hand, and each  transaction in which there is a potential  conflict of
interest  between  the  Company  and  its  shareholders  (other  than HC and its
affiliates) on the one hand, and HC or its affiliates on the other hand, must be
approved by a majority of the  Independent  Directors;  and (f) the  requirement
that HC not sell its shares to any person  whom HC knows would own 5% or more of
the  outstanding  shares unless such person agrees in writing to be bound by the
restrictions  of the Governance  Agreement and to forego certain  benefits under
the Governance Agreement.
                                       15
<PAGE>
         The  restrictions  that continue in effect after October 8, 1998  are:
(a) the prohibition against HC or its affiliates acquiring shares of the Company
without  the  approval  of a majority of the  Independent  Directors,  except in
certain privately negotiated,  unsolicited  transactions which do not reduce the
liquidity of the shares  below the level  expected to be necessary to maintain a
viable market for the shares and liquidity for the Company's  shareholders;  and
(b) the requirement that, so long as the Company is a public company,  the Board
of Directors include at least three Independent  Directors.  For these purposes,
an "Independent Director" is a person who (i) is in fact independent,  (ii) does
not have any  direct  financial  interest  or any  material  indirect  financial
interest in HC or the Company or any of their respective  affiliates,  and (iii)
is not connected with HC or the Company or any of their respective affiliates as
an  officer,  employee,  consultant,  agent  advisor,  representative,  trustee,
partner,  director  (other  than of the  Company) or person  performing  similar
functions.  Other than  these  limited  restrictions  and  subject  only to such
fiduciary  duties as a majority  shareholder  may have to minority  shareholders
under  Delaware  law,  HC,  as a  majority  shareholder,  is  able  to  exercise
substantial  control  of the  Company,  including  the  right to  decide  in its
discretion most matters requiring shareholder approval,  such as the election of
future members of the Board of Directors and approval of any proposed  merger or
acquisition of the Company.

Capital Resources and Liquidity
                                           December 31,   December 31,
(In millions)                              1998           1997
--------------------------------------------------------------------------------
Cash and short-term investments            $  43.2        $  33.3
Working capital                               71.1           60.1
Long-term debt                                 4.5            4.8
Shareholders' equity                         108.3          100.9
--------------------------------------------------------------------------------

Liquidity
On August 7, 1997,  the  Company  amended  its  working  capital  line of credit
agreement to replace one of its  financial  covenants  related to  profitability
with a working capital covenant  effective June 30, 1997. The Company  currently
has a $30.0 million line of credit. This line of credit is reduced by the amount
of stand-by  letters of credit.  From time to time the Company has been  granted
amendments and waivers to its credit agreements.
         At December 31, 1998 the Company had $11.7 million in stand-by  letters
of credit related to the Albuterol  Settlement Trust Fund outstanding under this
working capital line of credit  agreement.  These standby letters of credit were
obtained by the Company pursuant to the requirements of the Albuterol Settlement
Trust Fund to cover its uninsured obligation.  Recourse to the letters of credit
are  contingent  upon the number of claims filed within  certain  categories and
will not occur  until all  claims  are  processed  and  settlement  amounts  are
recommended by the Special Master.  Refer to Note K of the Notes to Consolidated
Financial Statements for further discussion of the Settlement Agreement.
         The  Company  continues  to make  annual  payments  of  $300,000 on its
outstanding Industrial Development Revenue Bonds the ("Bonds"), which are due in
2014.  These  Bonds  are  secured  by a letter of  credit  agreement.  Effective
December 31, 1996,  the Company  received from its lender  waivers to its credit
agreements  with  respect  to  one  of  its  financial   covenants   related  to
profitability. In the event that the Company is unable to obtain future waivers,
if needed,  the Company's debt would be  reclassified as short-term debt and the
Company could lose its availability to cash under its line of credit.
         Forward-looking  statements (statements which are not historical facts)
in this report are made  pursuant to the safe harbor  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Investors  are  cautioned  that all
forward-looking  statements,  including  statements  about  product  filings and
approvals,  industry trends,  strategic  initiatives,  raw material supply,  net
sales,  the  Year  2000  issue,  price  erosion,  gross  profit,   research  and
development expenses,  selling, marketing and distribution expenses, general and
administrative  expenses,  capital  expenditures,  recall related and litigation
expenses,  restructuring and other expenses, and interest expense, involve risks
and  uncertainties,  including the risks and  uncertainties  detailed below, and
actual  results  may  differ  significantly  from  those in any  forward-looking
statements.

Working Capital
The  Company's  combined  cash and  available-for-sale  investments  were  $43.2
million as of December 31, 1998 compared to $33.3  million a year  earlier.  The
$9.9 million  increase  primarily  reflects $12.6 million of cash generated from
operations  offset by $2.7  million of  capital  expenditures.  Working  capital
increased $11.0 million  primarily from the net income from operations  adjusted
by the net decrease in property, plant and equipment.
         During 1998, the Company spent $2.7 million for machinery and equipment
and facility enhancements as compared to $1.3 million for 1997. The expenditures
primarily related to the development and  manufacturing of new products.  During
the year ended  December  31, 1996,  the Company  spent $8.4 million for capital
expenditures.  Additions  in all years  were made from the cash  generated  from
operations  without  incurring  additional  borrowing.  The Company  anticipates
spending less than $7.5 million for machinery  and  equipment  acquisitions  and
facility enhancements during the year ending December 31, 1999.
                                       16
<PAGE>
         The Company  believes that its current cash  resources,  cash generated
from operations and the amount  available under its amended working capital line
of credit will be  sufficient  to meet its  anticipated  operating  needs for at
least the next twelve months.  However, there can be no assurance that events in
the future will not require the Company to seek additional capital sooner or, if
so  required,  that  such  capital  will be  available  at  terms  favorable  or
acceptable to the Company, if at all.

        ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company  has three  forms of debt which are  subject to interest  rate risk.
They are the industrial  revenue bonds,  the working  capital line of credit and
the  outstanding  letters  of  credit.  The rates on all three  instruments  are
variable and fluctuate with the prime rate of interest charged by the respective
bank.  Carrying value of these instruments which approximates fair value is $4.8
million and principal is payable as follows;  $300,000 for each of the next five
years and $3.3  million  thereafter.  Interest is payable  monthly and  interest
expense  could be  substantially  higher if prime rate was to increase in future
periods. The bank's prime rate was 7.75% at December 31, 1998.
         Forward-looking  statements (statements which are not historical facts)
in this report are made  pursuant to the safe harbor  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Investors  are  cautioned  that all
forward-looking  statements,  including  statements  about  product  filings and
approvals,  industry trends,  strategic  initiatives,  raw material supply,  net
sales,  the  Year  2000  issue,  price  erosion,  gross  profit,   research  and
development expenses,  selling, marketing and distribution expenses, general and
administrative  expenses,  capital  expenditures,  recall related and litigation
expenses,  restructuring and other expenses, and interest expense, involve risks
and  uncertainties,  including the risks and  uncertainties  detailed below, and
actual  results  may  differ  significantly  from  those in any  forward-looking
statements.
                                       17
<PAGE>
           ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
                                      DATA

                           Copley Pharmaceutical, Inc.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                                             <C>              <C>
                                                                                December 31,     December 31,
(In thousands, except share data)                                               1998             1997
-------------------------------------------------------------------------------------------------------------
Assets
Current assets:
     Cash and cash equivalents                                                  $   13,016       $  13,847
     Available-for-sale securities                                                  30,206          19,498
     Accounts receivable, trade, net of allowances for doubtful accounts
        of $500 and $500, respectively                                              33,945          30,170
     Inventories                                                                    22,441          23,286
     Current deferred tax assets                                                     5,528           5,239
     Other current assets                                                            4,742           4,189
                                                                                ----------       ---------
        Total current assets                                                       109,878          96,229
                                                                                ----------       ---------
Property, plant and equipment, net                                                  42,800          46,450
Due from related party                                                               2,107           2,364
Other assets                                                                           580             701
                                                                                ----------       ---------
Total assets                                                                    $  155,365       $ 145,744
                                                                                ----------       ---------
Liabilities and shareholders' equity
Current liabilities:
     Accounts payable, trade                                                    $    3,703       $   2,583
     Accounts payable, related party                                                12,382          13,668
     Current portion of long-term debt                                                 300             300
     Accrued compensation and benefits                                               2,175           1,635
     Accrued rebates                                                                 8,037           9,071
     Accrued income taxes                                                            3,527             374
     Accrued recall related and litigation expenses                                  8,010           8,048
     Accrued expenses                                                                  618             406
                                                                                ----------       ---------
        Total current liabilities                                                   38,752          36,085
                                                                                ----------       ---------
Accrued recall related and litigation expenses                                          --           3,645
Deferred tax liabilities                                                             3,711             269
Accrued compensation and benefits                                                       98              64
Long-term debt                                                                       4,500           4,800
Commitments and contingencies (Note K)
Shareholders' equity:
     Preferred stock, $.01 par value; authorized 3,000,000 shares; none issued          --              --
     Common stock, $.01 par value; authorized 60,000,000 shares;
        issued 25,370,745 shares                                                       254             254
     Additional paid-in capital                                                     78,340          78,063
     Unrealized holding gain(loss) on available-for-sale securities                     35             (16)
     Retained earnings                                                              42,201          35,133
     Treasury stock, at cost, 6,178,168 and 6,235,978 shares,
        respectively                                                               (12,526)        (12,553)
                                                                                ----------       ---------
        Total shareholders' equity                                                 108,304         100,881
                                                                                ----------       ---------
Total liabilities and shareholders' equity                                      $  155,365       $ 145,744
                                                                                ----------       ---------
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       18
<PAGE>
                           Copley Pharmaceutical, Inc.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<S>                                                  <C>               <C>              <C>
                                                     Year ended        Year ended       Year ended
                                                     December 31,      December 31,     December 31,
(In thousands, except per share data)                1998              1997             1996
----------------------------------------------------------------------------------------------------
Net sales:
     Manufactured products                           $ 74,822          $ 70,873        $ 79,201
     Distributed products                              58,675            50,610          44,260
                                                     --------          --------         -------
        Net sales                                     133,497           121,483         123,461
                                                     --------          --------         -------

Cost of goods sold:
     Manufactured products                             54,608            52,725          64,233
     Distributed products                              46,009            39,103          29,798
                                                     --------          --------         -------
        Cost of goods sold                            100,617            91,828          94,031
                                                     --------          --------         -------
           Gross profit                                32,880            29,655          29,430
                                                     --------          --------         -------

Operating expenses:
     Research and development                          11,025            11,672          13,682
     Selling, marketing and distribution                4,520             4,590           6,388
     General and administrative                         6,104             7,110           9,721
     Recall related and litigation                        773             3,687          12,343
     Restructuring                                         --               170           3,526
                                                     --------          --------         -------
        Income (loss) from operations                  10,458             2,426         (16,230)
                                                     --------          --------         -------

Interest and other investment income                    1,749             1,442             723
Interest expense                                         (538)             (580)           (241)
Other income (expense), net                                 5            (1,603)           (144)
                                                     --------          --------         -------
        Income (loss) before income taxes              11,674             1,685         (15,892)
Provision (benefit) for income taxes                    4,606             1,121          (3,219)
                                                     --------          --------         -------
Net income (loss)                                    $  7,068          $    564        $(12,673)
                                                     --------          --------         -------

Other comprehensive income, net of taxes
     Unrealized gains (loss) on securities                 53               (16)            166
     Less: reclassification adjustment for gains
     (losses) included in net income                       (2)               --            (274)
                                                     --------          --------         -------
Comprehensive income (loss)                          $  7,119          $    548        $(12,781)
                                                     --------          --------         -------

Weighted average common shares outstanding:
     Basic                                             19,169            19,127          19,081
     Diluted                                           19,329            19,222          19,081

 Net Income (loss) per share:
     Basic                                           $   0.37          $   0.03         $ (0.66)
     Diluted                                             0.37              0.03          ( 0.66)
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       19
<PAGE>
                           Copley Pharmaceutical, Inc.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


              For the years ended December 31, 1996, 1997 and 1998
<TABLE>
<S>                                 <C>     <C>      <C>         <C>         <C>           <C>        <C>          <C> 
                                                     Additional              Unrealized                            Total
                                    Common Stock     Paid-In     Retained    Holding         Treasury Stock        Shareholders'
(In thousands)                      Shares  Amount   Capital     Earnings    Gain(Loss)    Shares     Amount       Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995          25,371  $254     $77,505     $47,242     $108          6,307      $(12,585)    $112,524

Net income  (loss)                       -     -           -     (12,673)       -              -             -      (12,673)
Acquisition of treasury
   stock by Employee Stock
   Purchase Plan                         -     -         295          -         -            (25)           11          306
Stock option exercises                   -     -          (5)         -         -            (16)            7            2
Tax benefit from stock
   option exercises                      -     -          80          -         -              -             -           80
Change in unrealized
   holding gain (loss) on
   available-for-sale securities         -     -           -          -      (108)             -             -         (108)
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1996          25,371   254      77,875      34,569        -          6,266       (12,567)     100,131

Net income (loss)                        -     -           -         564        -              -             -          564
Acquisition of treasury
    stock by Employee Stock
    Purchase Plan                        -     -         188           -        -            (30)           14          202
Change in unrealized
   holding gain (loss) on
   available-for-sale securities         -     -           -           -      (16)             -             -          (16)
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997          25,371   254      78,063      35,133      (16)         6,236       (12,553)     100,881

Net income (loss)                        -     -           -       7,068        -              -             -        7,068
Acquisition of treasury
   stock by Employee Stock
   Purchase Plan                         -     -         184           -        -            (42)           20          204
Stock option exercises                   -     -          93           -        -            (16)            7          100
Change in unrealized
   holding gain (loss) on
   available-for-sale securities         -     -           -           -       51              -             -           51
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1998          25,371  $254     $78,340     $42,201     $ 35          6,178      $(12,526)    $108,304
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       20
<PAGE>
                           Copley Pharmaceutical, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<S>                                                                                    <C>            <C>              <C>          
                                                                                       Year ended     Year ended       Year ended
                                                                                       December 31,   December 31,     December 31,
(In thousands)                                                                         1998           1997             1996
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
   Net income (loss)                                                                   $ 7,068        $   564          $(12,673)
   Adjustments to reconcile  net income (loss) to net cash provided by operating
     activities:
     Depreciation and amortization                                                       6,569          7,144             7,092
     Realized losses on disposals of assets                                                266          1,349             4,795
     Deferred income taxes                                                               3,153          1,793            (2,379)
     Tax benefit from stock option exercises                                                 -              -                80
     Provision for doubtful accounts                                                         -              -               696
     Proceeds from sale of trading securities                                                -              -               601
     Equity in loss (earnings) of unconsolidated affiliates                                  -             (7)               54
     Changes in operating assets and liabilities:
     Decrease (increase) in accounts receivable                                         (3,775)        (3,146)            5,745
     Decrease (increase) in inventories                                                    845          3,845                95
     Decrease (increase) in other current assets                                          (553)            52               548
     Decrease (increase) in other assets                                                   (19)           121              (951)
     Increase (decrease) in accounts payable                                              (166)        (1,057)           (2,184)
     Increase (decrease) in accrued income taxes                                         3,153           (509)            4,142
     Increase (decrease) in other accrued expenses                                      (3,931)        (5,136)           10,476
                                                                                       -------        -------          --------
   Net cash provided by operating activities                                            12,610          5,013            16,137
                                                                                       -------        -------          --------
Cash flows from investing activities:
   Capital expenditures                                                                 (2,691)        (1,260)           (8,401)
   Investments in unconsolidated affiliates                                                  -           (360)           (2,252)
   Proceeds from sales of property, plant and equipment                                      4            201               113
   Purchases of available-for-sale securities                                          (34,380)       (18,448)          (13,695)
   Proceeds from sales of available-for-sale securities                                  8,104              -               114
   Proceeds from maturities of available-for-sale securities                            15,518         12,825             5,000
                                                                                       -------        -------          --------
   Net cash provided by (used in) investing activities                                 (13,445)        (7,042)          (19,121)
                                                                                       -------        -------          --------
Cash flows from financing activities:
   Payments of long-term debt                                                             (300)          (300)             (300)
   Stock option exercises                                                                  100              -                 2
   Issuance of common stock to Employee Stock Purchase Plan                                204            202               306
                                                                                       -------        -------          --------
Net cash provided by (used in) financing activities                                          4            (98)               8
                                                                                       -------        -------          --------
Net increase (decrease) in cash and cash equivalents                                      (831)        (2,127)          (2,976)
Cash and cash equivalents at beginning of year                                          13,847         15,974           18,950
                                                                                       -------        -------          -------
Cash and cash equivalents at end of year                                               $13,016        $13,847          $15,974
                                                                                       -------        -------          -------
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       21
<PAGE>
                           Copley Pharmaceutical, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Nature of Business

Copley Pharmaceutical,  Inc. (the "Company") develops, manufactures, markets and
distributes  a  broad  range  of  multi-source  pharmaceutical  products.  These
products  include  prescription  and  over-the-counter  ("OTC")  drugs  and  are
available in a variety of dosage forms. The Company's  customers  include retail
chains, wholesalers,  distributors,  hospitals, health maintenance organizations
("HMOs"),  other managed care  entities and  government  agencies.  For the year
1998, one customer that purchased both  manufactured  and  distributed  products
accounted  for 10.8% of total net sales and no other single  customer  accounted
for more  than 10% of total  net  sales.  For the year  1997 one  customer  that
purchased both  manufactured  and  distributed  products  accounted for 13.9% of
total net  sales and no other  single  customer  accounted  for more than 10% of
total net sales.  For 1996,  no single  customer  accounted for more than 10% of
total net sales.
         The  Company  not  only  distributes   multi-source  products  that  it
manufactures,  but also,  as part of a  distribution  arrangement,  markets  and
distributes  multi-source  versions  of certain  drugs  manufactured  by Hoechst
Marion  Roussel,  Inc.  ("HMRI"),  a  subsidiary  of Hoechst  Aktiengesellschaft
("Hoechst  AG"), the Company's  indirect 51% fully diluted  shareholder.  One of
these drugs,  glyburide,  accounted for 23.4%,  25.2% and 27.1% of the Company's
1998,  1997  and  1996  net  sales,  respectively.   This  product  had  limited
competition  until  late in 1995,  when  competing  products  became  available,
resulting in  significant  erosion of this  product's  selling price and related
gross profit. Given this intensified competitive environment, management expects
continued  decline in this product's net sales and related gross profit in 1999.
Refer to Note J for further discussion of the distribution arrangements.
         Historically, the Company's sales have been predominantly in the United
States.  During 1995, the Company  formed a wholly-owned  subsidiary to focus on
foreign expansion  opportunities.  Refer to Note J for further discussion of the
Company's  foreign  investments.  Because  of the  length  of time it  takes  to
establish,  register and receive approvals to manufacture or distribute products
in a foreign  country,  it may be an extended  period of time before the Company
generates material international revenue, if at all.
         The raw  materials  essential to the  Company's  business are purchased
primarily from U.S. distributors of bulk pharmaceutical  chemicals  manufactured
abroad.  These raw  materials  are  generally  available  from several  sources;
however,  this may not always be the case.  Since the federal  drug  application
process requires specification of raw material suppliers,  if raw materials from
specified suppliers became unavailable,  the Company would be required to file a
supplement to its product filing and revalidate the manufacturing  process using
a new  supplier's  materials.  This could cause a delay of several months in the
manufacture  of the drug involved and the consequent  loss of potential  revenue
and market share.
         As  a  multi-source  drug  manufacturer,  the  Company  is  subject  to
extensive regulation by the Food and Drug Administration ("FDA").  Noncompliance
with applicable requirements can result in fines, recall or seizure of products,
total or partial  suspension of production and/or  distribution,  refusal of the
government  to enter into supply  contracts or to approve New Drug  Applications
("NDA") or Abbreviated New Drug Applications  ("ANDA") and criminal prosecution.
The FDA also has the  authority to revoke  previously  granted  drug  approvals.
Changes in FDA  procedures  have  increased  the time and  expense  involved  in
obtaining   ANDA  approvals  and  in  complying  with  the  FDA's  current  Good
Manufacturing  Practice  ("cGMP")  standards.  The  ANDA  drug  development  and
approval process currently averages approximately three to five years.
     Being  a  generic   pharmaceutical   company   lends   itself  to   certain
inherent  business  risks.  These risks  include rapid  technological  advances,
frequent introduction of new products, aggressive competition from other generic
drug  manufactures  and generic  divisions and  subsidiaries of large brand-name
pharmaceutical  companies  and the  potential  for customer  consolidations  and
future legislation regarding product patent protection.

B. Summary of Significant Accounting Policies

Basis of Presentation
The   consolidated   financial   statements   include  the  accounts  of  Copley
Pharmaceutical, Inc. and its wholly-owned subsidiaries. Significant intercompany
transactions  have been eliminated.  The preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting  periods.  Actual results could differ from those estimates.

Cash  Equivalents
The Company  considers all highly liquid  investments with an original  purchase
maturity  of three  months  or less to be cash  equivalents.
                                       22
<PAGE>
Available-for-Sale   Securities
Available-for-sale  securities  include the Company's  investments in equity and
debt  securities  for which the  Company  does not have the  positive  intent or
ability to hold to maturity. Available-for-sale securities are carried at market
value,  with  unrealized  gains and losses,  net of tax,  reported as a separate
component of shareholders'  equity. Gross realized gains and losses on the sales
of available-for-sale  securities are determined on the specific  identification
method and are included in interest and other investment income.

Trading Securities
Trading securities include the Company's  investment in debt securities held for
sale in the near term.  Trading  securities  are  recorded at market  value with
unrealized  and  realized  gains  and  losses  recorded  in  interest  and other
investment  income.  Gross  realized  gains and  losses on the sales of  trading
securities are determined on the specific identification method.

Accounts Receivable and Revenue Recognition
Revenue is recognized upon product shipment. Provisions for rebates, returns and
other  adjustments  are provided for in the same period as the related sales are
recorded. The Company's accounts receivable balance reflects the amount due from
its customers  based on actual  outstanding  invoices less  estimates of credits
that may be issued against these invoiced amounts including, but not limited to,
price adjustments and returned goods. The Company estimates credits to be issued
for price adjustments and returned goods incurred but not currently  identified.
At December 31, 1998 and 1997 the credit  allowances  were $5.2 million and $3.7
million,  respectively.  Additionally, the Company provides for an allowance for
uncollectible  accounts.  The  Company  believes  that these  estimates  made by
management,  based on past  experience and current trends,  are sufficient,  but
actual results may differ from these estimates.

Inventories
The Company values its inventories at the lower of cost or market on a first-in,
first-out basis.  Management estimates market based on various assumptions about
the future demand for the Company's  products,  remaining products' shelf lives,
and the future selling price and pricing  environment  for the products.  Actual
results may differ from these estimates.

Property, Plant and Equipment
Property,  plant and equipment are stated at historical  cost.  Maintenance  and
repairs  which  neither  materially  add  to  the  value  of  the  property  nor
appreciably  prolong its life are charged to expense as incurred.  Tooling costs
are also expensed as incurred.  Upon retirement or other  disposition,  the cost
and related  accumulated  depreciation  are eliminated from the accounts and the
resulting gain or loss is included in income from  operations.  Depreciation  of
property,  plant and equipment is computed using the  straight-line  method over
the following estimated useful lives:

                                                        Estimated Useful Life
--------------------------------------------------------------------------------
Building and improvements                                            25 years
Machinery and equipment                                            5-10 years
Motor vehicles                                                      3-5 years
Furniture and fixtures                                                5 years

Leasehold  improvements are amortized over the shorter of their estimated useful
lives or the term of the lease.  Interest  is  capitalized  in  connection  with
construction of major facilities.  The capitalized  interest is recorded as part
of the asset to which it relates and is  amortized  over the  asset's  estimated
useful life.  There was no interest capitalized during the years ending December
31, 1998, 1997 or 1996.

Research and Development
Research and development costs are expensed as incurred.

Advertising and Promotion
All costs associated with advertising and promoting products are expensed in the
year incurred.
                                       23
<PAGE>
Income Taxes
Deferred  tax assets and  liabilities  have been  established  for the  expected
future tax  consequences  of events that have been  recognized  in the Company's
consolidated financial statements and tax returns. These deferred tax assets and
liabilities  are  determined  based  on the  difference  between  the  financial
statement  carrying  amounts  and tax  basis of  assets  and  liabilities  using
currently  enacted tax rates that are expected to be in effect  during the years
in which the  differences  are  anticipated  to reverse.  Deferred tax provision
(benefit)  represents the change in the deferred tax asset balance.  Tax credits
are  treated  as  reductions  of income  taxes in the year in which the  credits
become available for income tax purposes.

Net Income (Loss) Per Share
The Company applies Statement of Financial  Accounting  Standards No. 128 ("SFAS
128"), Earnings Per Share to compute net income per share. Under SFAS 128, basic
EPS is calculated by dividing net income (loss) by the  weighted-average  common
shares  outstanding  during the  period.  Diluted  EPS  reflects  the  potential
dilution to basic EPS that could occur upon exercise of options to common shares
using the treasury  stock method based upon the  weighted-average  fair value of
the Company's  common  shares  during the period.  Diluted net income (loss) per
share is computed by dividing net income (loss) by the weighted  average  number
of common shares and common share equivalents,  if dilutive,  outstanding during
the period. For 1998 and 1997, 377,569 and 550,920, respectively, of outstanding
options  were not used to  calculate  diluted  net income per share  because the
exercise  price exceeded the  weighted-average  fair value during the period and
their inclusion would be antidilutive.  For 1996,  736,734  outstanding  options
were not used to  calculate  diluted  net  income  (loss)  per  share due to the
Company  being  in  a  net  loss   position,   therefore  the  effect  would  be
antidilutive.

Concentration of Credit Risk
Financial  instruments that potentially  subject the Company to concentration of
credit risk  consist  principally  of  available-for-sale  securities  and trade
account receivables.  It is the Company's policy to invest excess cash primarily
in investment-grade  marketable  securities.  Concentrations of credit risk with
respect to trade  account  receivables  are limited  due to the large  number of
customers  comprising the Company's  customer base and their  dispersion  across
different geographies.

Segment Information
The Company applies Statement of Financial  Accounting Standards No. 131, ("SFAS
131") Disclosures about Segments of an Enterprise and Related Information.  SFAS
131  supersedes  SFAS No. 14 ,  Financial  Reporting  for Segments of a Business
Enterprise,  replacing the  "industry  segment"  approach with the  "management"
approach.  The management approach designates the internal  organization that is
used by management for making operating  decisions and assessing  performance as
the source of the  Company's  reportable  segments.  Currently the Company's two
segments are categorized as manufactured products and distributed products.
            The  Company's  management  recognizes  the  fact  that  distributed
products  have  relatively  no impact on  absorption  of overhead  or  operating
expense of the  Company as  compared  to  manufactured  products.  Consequently,
management focus on evaluating the Company's segments is based on an analysis of
net  sales  and  gross  profit  as  reflected  in  the  Company's  statements of
operations.  There  are no  inter-segment  revenues.  Assets,  all of which  are
located in the United States are not allocated to specific business segments.

Reclassifications
Certain  reclassifications have been made to prior period consolidated financial
statements to conform to the current presentation.

C. Securities

Available-for-Sale Securities
<TABLE>
<S>                                      <C>        <C>          <C>         <C>           <C>        <C>        <C>         <C>
                                                             1998                                            1997
                                                    Gross        Gross                                Gross      Gross
                                         Amortized  Unrealized   Unrealized  Market        Amortized  Unrealized Unrealized  Market
(In thousands)                           Cost       Gain         Loss        Value         Cost       Gain       Loss        Value
------------------------------------------------------------------------------------------------------------------------------------
In Current Assets:
Debt securities:
     State and municipal
      securities                         $ 8,827    $ 40         $  -        $ 8,867       $ 1,0000   $ -        $  -        $ 1,000
      U.S. Treasury and
      government agencies                 19,625      19          (19)        19,625         17,814     5         (18)        17,801
Other securities:
     Bank certificates of deposit          1,719       -           (5)         1,714            700     -          (3)           697
------------------------------------------------------------------------------------------------------------------------------------

Total current available-
     for-sale securities                 $30,171    $ 59         $(24)       $30,206       $ 19,514   $ 5        $(21)       $19,498
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       24
<PAGE>
Gross  gains of $3,000  and gross  losses of $5,000  were  realized  on sales of
available-for-sale securities in 1998, no gains or losses were realized on sales
of  available-for-sale  securities  in 1997.  Gross  gains of $75,000  and gross
losses of $0 were  realized  on sales of  available-for-sale  securities  during
1996. Gross losses of $349,000 were realized on trading  securities in 1996. The
Company no longer holds trading securities.


D. Inventories

                                                   December 31,     December 31,
(In thousands)                                     1998             1997
--------------------------------------------------------------------------------
Raw materials                                      $10,771          $ 6,596
Work in process                                      3,207            5,282
Finished goods                                       8,463           11,408
                                                   -------          -------
     Total inventories                             $22,441          $23,286
--------------------------------------------------------------------------------


E. Property, Plant and Equipment

                                                   December 31,     December 31,
(In thousands)                                     1998             1997
--------------------------------------------------------------------------------
Land                                               $ 3,335          $ 3,335
Building and improvements                           32,320           31,882
Machinery and equipment                             32,103           31,393
Motor vehicles                                          44               44
Furniture and fixtures                               5,727            5,144
Leasehold improvements                                  30                -
                                                   --------         --------
                                                    73,559           71,798
Less: accumulated depreciation and amortization    (32,439)         (26,154)
                                                   --------         --------
                                                    41,120           45,644
Construction in process                              1,680              806
                                                   --------         --------
     Total property, plant and equipment           $42,800          $46,450
--------------------------------------------------------------------------------

Depreciation and amortization of fixed assets was $6.3 million, $7.1 million and
$7.1 million for 1998, 1997 and 1996, respectively.

F. Income Taxes

The effects of temporary  differences that give rise to significant  portions of
the deferred tax assets and  deferred tax  liabilities  at December 31, 1998 and
1997 are as follows:
<TABLE>
<S>                                                                             <C>              <C>
                                                                                December 31,     December 31,
(In thousands)                                                                  1998             1997
-------------------------------------------------------------------------------------------------------------
Deferred tax assets:
     Acquired joint product development rights                                  $     -          $   914
     Tender offer costs                                                           2,002            1,974
     Recall and litigation accrual                                                1,639            1,615
     Operating loss and tax credit carryforwards                                  1,481            1,796
     Charitable contribution carryforwards                                          273              741
     Difference in accounting for inventory and accounts receivable               1,623              596
     Difference in cost recognition basis, accrual for books and cash for tax       512              490
                                                                                -------          -------
        Total deferred tax assets                                                 7,530            8,126
Deferred tax liabilities:
     Depreciation                                                                (3,364)          (3,156)
     Accounts receivable mark-to-market                                          (2,349)               -
        Total deferred tax liabilities                                          -------          -------
                                                                                 (5,713)          (3,156)
                                                                                -------          -------
Total net deferred tax assets                                                   $ 1,817          $ 4,970
-------------------------------------------------------------------------------------------------------------
</TABLE>
                                       25
<PAGE>
Deferred tax assets are expected to be realized through the reversal of existing
deferred tax  liabilities  and from the  recognition of future  taxable  income.
Realization  of the deferred tax assets is  dependent on  generating  sufficient
future  taxable income or the  availability  of carryback  provisions.  Although
realization is not assured,  management believes that it is more likely than not
that all of the deferred tax assets will be realized and,  accordingly,  has not
provided a valuation  allowance.  The amount of deferred  tax assets  considered
realizable  could be reduced  in the near term if  estimates  of future  taxable
income are reduced.

Provision for (benefit of) income taxes consists of the following:
<TABLE>
<S>                                                           <C>               <C>              <C>
                                                              Year ended        Year ended       Year ended
                                                              December 31,      December 31,     December 31,
(In thousands)                                                1998              1997             1996
-------------------------------------------------------------------------------------------------------------
Current income tax expense (benefit):
     Federal                                                  $ 1,429           $(1,149)         $(1,033)
     State                                                         24               477              193
                                                              -------           -------          -------
                                                                1,453              (672)            (840)
                                                              -------           -------          -------
Deferred income tax expense (benefit):
     Federal                                                    2,341             2,102           (1,272)
     State                                                        812              (309)          (1,107)
                                                              -------           -------          -------
                                                                3,153             1,793           (2,379)
                                                              -------           -------          -------
Total:
     Federal                                                    3,770               953           (2,305)
     State                                                        836               168             (914)
                                                              -------           -------          -------
                                                              $ 4,606           $ 1,121          $(3,219)
-------------------------------------------------------------------------------------------------------------
</TABLE>
The income tax expense  (benefit) for the years 1998,  1997 and 1996 varied from
the amount  computed by applying the statutory  income tax rate to income (loss)
before taxes. The reasons for the differences are as follows:
<TABLE>
<S>                                                           <C>        <C>    <C>        <C>   <C>       <C>
                                                              Year ended        Year ended       Year ended
                                                              December 31,      December 31,     December 31,
(In thousands)                                                1998              1997             1996
----------------------------------------------------------------------------------------------------------------
Statutory rate                                                $4,086     35%    $    590   35%   $(5,562)  (35)%
Increases (decreases) in taxes resulting from:
     State income taxes, net of
        federal tax benefit                                      543      5%         109    6%      (594)   (4)%
     Research tax credits                                          -      -            -    -       (200)   (1)%
     Tax-exempt interest and dividends                           (50)     -         (263) (16)%     (136)   (1)%
     Nondeductible portion of recall-related
        and litigation expenses                                    -      -          650   39%     3,127    20%
     Other, net                                                   27      -           35    2%       146     1%
----------------------------------------------------------------------------------------------------------------
                                                              $4,606     40%    $  1,121   66%   $(3,219)  (20)%
----------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company had state net operating loss  carryforwards of
approximately  $4,598,000  which are  available to offset  future state  taxable
income  through the year ended  December 31, 2001. In addition,  at December 31,
1998,  the  Company  had  approximately  $666,000,  $1,091,000  and  $750,000 of
charitable contribution  carryforwards,  state research credit carryforwards and
state  investment  credit  carryforwards,  respectively,  that are  available to
offset  future  taxable   income   through  the  years  2002,   2012  and  2000,
respectively.

G. Debt
Repayment schedule of Industrial Revenue Bonds is as follows:

(In thousands)
--------------------------------------------------------------------------------
1999                                                          $  300
2000                                                             300
2001                                                             300
2002                                                             300
2003                                                             300
Thereafter                                                     3,300
                                                              ------
                                                              $4,800 
                                                              ------
                                       26
<PAGE>
The  Industrial  Development  Revenue  Bonds (the  "Bonds")  were issued for the
initial acquisition and construction of the Company's headquarters and principal
manufacturing site at 25 John Road, Canton, Massachusetts.  The Bonds would have
originally  matured on August 1,  2004;  however,  in July 1990,  the Bonds were
amended  to extend the  maturity  date to August 1,  2014.  Interest  is payable
monthly at a floating rate based on the prime rate. The effective  interest rate
for the Bonds  approximated  4.5%,  4.5% and 4.3% for the years  1998,  1997 and
1996, respectively.
         In order to secure the timely  payment of principal and interest on the
Bonds,  the  Company  has  entered  into a letter of credit  agreement  with its
primary  financial  institution.  The letter of credit agreement imposes minimum
requirements on the maintenance of working capital and certain  financial ratios
and  includes  restrictions  on cash  dividends,  repurchases  of the  Company's
capital stock, certain  investments,  advances,  guarantees and borrowings.  The
Letter of Credit and the Bonds are  collateralized by the Company's  property at
25 John Road,  Canton,  Massachusetts,  including land,  buildings and equipment
thereon and are further  collateralized  by an assignment of leases and rents on
the Company's South Boston property.
         Costs of $704,000  associated  with the issuance of the Bonds are being
amortized  to  interest  expense  over  the life  of  the  Bonds.  The
unamortized  balance of $283,000  and $301,000 at December 31, 1998 and December
31, 1997, respectively, is included in other assets.
         On August 7, 1997,  the Company  amended its  working  capital  line of
credit  agreement  to  replace  one  of  its  financial   covenants  related  to
profitability  with a working capital covenant  effective June 30, 1997. On July
31, 1996 the Company  amended its working  capital  line of credit  agreement to
increase its maximum  borrowing  capacity from $20.0  million to $30.0  million.
This amendment also provided for the issuance of stand-by  letters of credit and
includes related  provisions for payment of letter of credit fees equal to 1% of
the face amount of outstanding  stand-by letters of credit. The stand-by letters
of credit reduce the funds available from the working capital line of credit. No
other  amounts have been drawn  against the working  capital line of credit.  At
December  31,  1998  and  1997,  the  Company  had  $11.7  and  $14.85  million,
respectively,  in outstanding standby letters of credit related to the Albuterol
Settlement Trust Fund. In February 1998 the Company's stand-by letters of credit
were  reduced by $3.15  million to reflect its  additional  cash  deposits  made
pursuant to the August 1997 court order. Refer to Note K for more information on
the Albuterol Settlement Trust Fund.
         Borrowings  under the working capital line of credit  agreement are due
on demand and bear  interest,  payable  monthly,  at the bank's prime rate.  The
prime rate was 7.75% at December 31, 1998.  Borrowings are collateralized by the
Company's  properties  located  in  Canton  and  South  Boston,   Massachusetts,
including land and buildings and equipment  thereon.  The line of credit imposes
restrictive  covenants  regarding  the sale or  encumbrance  of the land and the
building as well as minimum  requirements  on the maintenance of working capital
and certain financial ratios and includes restrictions on cash dividends.
         The fair  value of the  Company's  long-term  debt  which  approximates
carrying value is estimated by discounting  cash flows based on similar  current
rates offered to the Company for debt of the same remaining maturities.

H. Common and Preferred Stock

At December 31, 1998 the Company had 1,907,077  shares of common stock  reserved
for future  issuance in connection  with the Company's  stock option plans.  The
Board of Directors  has not assigned  any terms to the  authorized  but unissued
3,000,000 shares of preferred stock.

I. Employee Benefits

Stock Option Plans
Under the Amended and Restated 1992 Stock Plan ("1992 Plan"),  the  Compensation
Committee of the Board of Directors may recommend that any employee,  consultant
or officer be granted  incentive stock options or nonqualified  stock options to
purchase the Company's common stock. The Board of Directors has the authority to
select optionees and determine the terms of the options granted.  Under the 1992
Stock Plan, the options generally become exercisable cumulatively,  beginning on
the date of grant,  in equal  annual  installments  of 25%, and expire ten years
from the date of  grant.  The  shareholders  approved  1,523,750  shares  as the
maximum  number of shares  available  to be  granted  under  the 1992  Plan.  At
December 31, 1998 the Company had 338,917  shares  available to grant under this
plan.
         In May 1995, the  shareholders  voted to replace the 1992  Non-Employee
Director Stock Option Plan with the 1995 Non-Employee Director Stock Option Plan
(the  "Director  Plan").  Under the  Director  Plan,  upon  initial  election or
appointment to the Board, the Company  automatically  grants to its non-employee
directors,  excluding  directors of  affiliated  companies,  nonqualified  stock
options to purchase  15,000 shares of the Company's  common stock.  This initial
grant vests in equal  annual  installments  of 33 1/3%  beginning on the date of
grant.   After  this  initial  two-year  vesting  period,   on  each  subsequent
anniversary date, non-employee directors receive fully vested nonqualified stock
options to  purchase  3,333  shares of the  Company's  common  stock.  The stock
options are granted at an exercise  price equal to the fair market  value of the
Company's  common  stock on the date of grant and expire ten years from the date
of grant.  The Director Plan authorized the issuance of 250,000 shares of common
stock.  At December 31, 1998 the Company had 196,669  shares  available to grant
under this plan.
                                       27
<PAGE>
         The Company has an Employee  Stock  Purchase Plan that  authorizes  the
issuance of a maximum of 450,000 shares of common stock pursuant to the exercise
of nontransferable  options granted to participating  employees. At December 31,
1998 the Company had 308,087 shares available to grant under this plan.
 Stock option activity during 1996, 1997 and 1998 was as follows:

--------------------------------------------------------------------------------
                                                                Weighted Average
                                          Shares                Exercise Price
--------------------------------------------------------------------------------
Outstanding at December 31, 1995          1,040,645             $13.98
Options granted                              16,666              15.20
Options exercised                           (15,908)              0.16
Options forfeited                          (304,669)             17.18
                                          ---------             ------
Outstanding at December 31, 1996            736,734              12.98
                                          ---------             ------
Options granted                              64,999               6.53
Options forfeited                          (108,536)             16.21
                                          ---------             ------
Outstanding at December 31, 1997            693,197              11.86
                                          ---------             ------
Options granted                             580,366               7.26
Options exercised                           (15,717)              6.36
Options forfeited                          (194,442)             14.41
                                          ---------             ------
Outstanding at December 31, 1998          1,063,404             $ 8.97
--------------------------------------------------------------------------------

The following  table  summarizes  information  about the Company's stock options
at December 31, 1998.
<TABLE>
<S>                   <C>            <C>                     <C>                               <C>           <C>
                             Options Outstanding                                                 Options Exercisable

Range of              Number         Weighted Average        Weighted Average                  Number        Weighted Average
Exercise              Outstanding    Remaining               Exercise                          Exercisable   Exercise
Prices                At 12/31/98    Contractual Life        Price                             At 12/31/98   Price 
---------             -----------    ----------------        ----------------                  -----------   ----------------
$0.93                   105,608      1.2                     $0.93                             105,608       $ 0.93
 6.13-10.00             759,442      8.0                      7.86                             353,832         8.65
 14.00-17.25            155,354      6.0                     15.85                             155,354        15.85
 23.50                   43,000      5.3                     23.50                              43,000        23.50
-----------------------------------------------------------------------------------------------------------------------------
$0.93-23.50           1,063,404      6.9                     $8.97                             657,794       $10.08
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1998, 1997 and 1996,  exercisable  options and weighted  average
exercise  prices were  657,794  and  $10.08,  634,447 and $12.09 and 608,453 and
$12.05,  respectively.  Treasury  shares of common  stock have been  issued upon
exercise of stock options. The difference between the cost of the treasury stock
used and the  total  option  price of shares  exercised  has been  reflected  in
additional paid-in capital.
     The Company applies the disclosure-only  provisions of SFAS No. 123. If the
Company had elected to recognize  compensation costs in accordance with SFAS No.
123 the  reported  net income  (loss)  would have been  reduced to the pro forma
amounts for the years ended December 31, 1998, 1997 and 1996 as indicated below:
<TABLE>
<S>                                                          <C>            <C>            <C>
                                                             Year ended     Year ende      Year Ended
                                                             December 31,   December 31,   December 31,
(In thousands, except per share data)                        1998           1997           1996
-------------------------------------------------------------------------------------------------------
Net income (loss):
     As reported                                             $ 7,068        $   564        $(12,673)
     Pro forma                                                 6,244           (241)        (13,333)

Diluted earnings (loss) per share:
     As reported                                             $  0.37        $  0.03        $  (0.66)
     Pro forma                                                  0.32          (0.01)          (0.70)
-------------------------------------------------------------------------------------------------------
</TABLE>
                                       28
<PAGE>
The  Company  estimates  the fair  value,  as of the date of grant,  of  options
outstanding  in the plan using the  Black-Scholes  option pricing model with the
following assumptions:
<TABLE>
<S>                                                          <C>            <C>            <C>
                                                             1998           1997           1996
-----------------------------------------------------------------------------------------------
Expected Holding Period                                      5              5              5
Expected future dividend yield                               0%             0%             0%
Expected volatility                                          55%            55%            60%
Risk free interest rate                                      5.4%           6.4%           6.3%
-----------------------------------------------------------------------------------------------
</TABLE>
The risk-free interest rates were based upon U.S. Treasury instrument rates with
maturity  equal to expected  term.  The  weighted  average fair value of options
granted  during the years ended  December 31, 1998,  1997 and 1996 with exercise
price  equal to fair  market  value on the date of grant were  $3.86,  $3.55 and
$8.71,  respectively.  During  1998,  1997 or 1996 no options  were granted with
exercise  price in excess of or below  fair  market  value at the date of grant.

Savings Plan
The Company has a defined  contribution plan that qualifies under Section 401(k)
of the Internal  Revenue Code for the benefit of  substantially  all  full-time,
eligible employees.  Employees may contribute between 1% and 15% of their salary
up to the  dollar  maximum  allowed by the  Internal  Revenue  Service.  Company
contributions  were  voluntary  and  made  at the  discretion  of the  Board  of
Directors.  In January  1996,  the Board of Directors  voted to assure a minimum
Company  contribution of at least 2% of qualified  compensation up to the limits
allowed by the Internal Revenue Service. The Company expensed $575,000, $290,000
and $123,000 for  contributions  under this plan for the years ended 1998,  1997
and 1996, respectively.

Deferred Compensation Plan
The Company established an unfunded deferred compensation plan in August 1995 to
allow for certain of its management or highly compensated employees to defer the
receipt of specified compensation under Sections 201(2), 301(a)(3) and 401(a)(1)
of the Employee Retirement Income Security Act of 1974.

Employee Bonus Plan
The Company makes cash bonus awards to employees, at the discretion of the Board
of Directors,  based upon operating results and employee performance.  Net bonus
expense was  $1,000,000,  $0 and  $315,000  for the years  1998,  1997 and 1996,
respectively.

J. Related Party Transactions

In November 1993, Hoechst Corporation ("HC"),  through an indirect  wholly-owned
subsidiary,  completed  a tender  offer and  acquired  51% of the fully  diluted
shares of the Company.
         On July 18, 1995, HC completed its purchase of Marion  Merrell Dow Inc.
("MMD") and changed MMD's name to Hoechst Marion  Roussel,  Inc.  ("HMRI").  The
acquisition  of MMD and  the  formation  of HMRI  resulted  in a  related  party
relationship between the Company and its customer, Rugby Laboratories ("Rugby"),
which was a subsidiary of MMD and  subsequently  a subsidiary of HMRI. Net sales
to Rugby were approximately $7,000, $17,000 and $1.0 million for the years 1998,
1997 and 1996, respectively. Effective February 27, 1998, Rugby was sold by HMRI
to an unrelated third party.
         In connection  with HC's  acquisition  of its majority  interest in the
Company, the Company is a party to a Product Agreement with HC pursuant to which
the Company is afforded the opportunity under specified conditions to distribute
and  market  the   generic   version  of   products   sold  by   Hoechst-Roussel
Pharmaceuticals Inc. ("HRPI"),  which was an indirect majority-owned  subsidiary
of HC. This Product Agreement will expire June 1, 1999. On January 1, 1996, HRPI
was merged into HMRI.  HMRI agreed to be bound by the Product  Agreement  to the
extent that HRPI was bound;  that is, the Product  Agreement  continues to be in
effect  for  products  manufactured  by the  former  HRPI  but not for  products
manufactured by HMRI prior to the merger with HRPI nor for products developed by
HMRI after January 1, 1996. In furtherance of the Product Agreement, the Company
and HMRI entered into separate  contracts relating to specific products as these
products became available for generic  distribution and these separate contracts
now continue in effect beyond the expiration of the Product Agreement.  In order
to assure  continuity of supply and to provide other competitive  benefits,  the
Company, in 1997,  renegotiated the distribution contracts relating to glyburide
and micronized glyburide; as a result, the profit contribution of these products
decreased in 1997.  In 1997 the Company  entered into an agreement to distribute
HMRI's pentoxifylline product. For the years 1998, 1997 and 1996,  approximately
$45,163,000,  $39,555,000 and $30,814,000,  respectively, of generic versions of
products were  purchased from HMRI. The Company does not expect to distribute or
market any additional products under the Product Agreement.
                                       29
<PAGE>
         As part of the  relationship  with HC, the Company also is afforded the
opportunity to purchase  generic bulk  pharmaceutical  ingredients from entities
related  to HC under  certain  circumstances.  During  1998,1997  and 1996,  the
Company  purchased  approximately  $0, $151,000 and $230,000,  respectively,  of
generic bulk products under these  agreements.  The Company is aware that HC has
announced  its  intention  to  deemphasize   the  generic  bulk   pharmaceutical
manufacturing business and the Company is pursuing alternative sources.
         The  Company  obtains  its  comprehensive  general  liability,  product
liability,  umbrella liability and all risks property insurance coverage through
an insurance and risk-sharing  arrangement  with HC and its parent,  Hoechst AG,
and its various subsidiaries.  Insurance coverage is provided by HC, through its
wholly-owned  insurance  subsidiary,  as  well  as by  external  parties.  Total
premiums  paid  by  the  Company  for  these   insurance   policies   aggregated
approximately $4,563,000, $4,763,000 and $5,140,000 for the years 1998, 1997 and
1996, respectively.
         For the  years  ended  1998,  1997  and  1996,  the  Company  purchased
approximately $0, $26,000 and $265,000, respectively, of bulk raw chemicals from
a  chemical  company  whose  president  was a member of the  Company's  Board of
Directors until July 1998.
         In 1997, the Company increased its investment by approximately $360,000
in a multi-source pharmaceutical company, MIR Pharmaceutical,  whose senior vice
president was a member of the Company's Board of Directors until July 1998. This
company was founded in 1993 to market  multi-source  drugs,  including  products
manufactured  by the Company,  in certain  republics of the former Soviet Union.
This  investment  was  written  off in June 1997 in the amount of  approximately
$955,000. The write-off was included in other income (expense).
         At December  31,  1998,  the Company was a 49% owner of Chia Tai Copley
Pharmaceutical ("CTCP") which, in turn, was an 85% owner of Wuxi Chia Tai Copley
Pharmaceutical  ("WCTCP").  CTCP and WCTCP were formed to manufacture and market
multi-source drug products in the People's Republic of China.
         During 1995,  the  Company's  Board of Directors  voted to decrease the
Company's financial commitment to and deemphasize the Company's role in CTCP and
WCTCP.  Subsequently a subsidiary of Hoechst AG indicated its desire to purchase
an interest in WCTCP and it is  anticipated  that upon  transfer of its indirect
ownership in WCTCP the Company will  recover  approximately  $2.1 million of its
investment  in CTCP.  In 1998,  the Company  wrote down its  investment  of $2.4
million  to $2.1  million  and  reclassified  it to a  long-term  related  party
receivable.

K. Commitments and Contingencies

Leases
During 1996, the Company restructured its operations by consolidating warehouse,
manufacturing  and office  sites.  The Company  consolidated  its  warehouse and
distribution  operations into one location under a noncancelable operating lease
with a  third-party  lessor.  This 1996 lease is for five years with a five-year
renewal  option and  requires  the payment of  insurance,  real estate taxes and
other operating expenses.  The Company also leases vehicles and office equipment
under one- to five-year operating leases.
         Net rental expense was $652,000, $797,000 and $1,053,000 for 1998, 1997
and 1996, respectively. The amount expensed in 1996 included $180,000 of related
party expense  incurred under an operating  lease with a related party which was
subsequently terminated that same year.

Future  minimum  lease  payments  under  noncancelable  operating  leases are as
follows:

(In thousands)
--------------------------------------------------------------------------------
1999                                                          $  651
2000                                                             535
2001                                                             484
2002                                                               1
2003                                                               -
Thereafter                                                         -
--------------------------------------------------------------------------------
         Total minimum lease payments                         $1,671
--------------------------------------------------------------------------------

Albuterol Class Action Lawsuits
In connection  with the Company's  December 1993 and January 1994 product recall
of albuterol sulfate inhalation  solution,  0.5% ("albuterol"),  the Company was
served with complaints in numerous  lawsuits in federal and state court, some of
which were on behalf of numerous  claimants.  The federal  court  lawsuits  were
consolidated as a multi-district litigation. A class action was certified by the
United  States  District  Court for the District of Wyoming under the caption In
Re: Copley  Pharmaceutical,  Inc. "Albuterol" Products Liability Litigation.  In
August 1995, prior to the conclusion of the jury trial, the Company entered into
a settlement  agreement with the  representative  plaintiffs in the class action
lawsuit.  The settlement  calls for the Company to receive a general  release of
all non-death claims in return for contributions by the Company and its insurers
of a  minimum  of $65  million  and a maximum  of $130  million  to  settle  all
non-death  claims  relating  to the  Company's  manufacture,  sale and recall of
albuterol.  An  additional  $20  million  is  allocated  under  the terms of the
settlement  as an estimate of the cost of  settling  claims by persons  alleging
wrongful  death,  which  claims are limited by the  settlement  to  compensatory
damages only and are subject to nonbinding  negotiation and arbitration.  Within
the Company's  minimum and maximum  contributions,  the amount to be paid by the
Company is subject to the number and seriousness of individual claims eventually
filed.
                                       30
<PAGE>
         The settlement agreement requires the $150 million maximum contribution
to be funded by a  non-refundable  $65  million  cash  deposit  and  issuance of
letters  of  credit  for the  remaining  balance,  to be  held by the  Albuterol
Settlement  Trust Fund as security for potential  future  payments.  The Company
negotiated  agreements  with its insurers  pursuant to which the Company and its
insurers have agreed to pay defined  percentages of required settlement payments
and  related  expenses.  The  minimum  contribution  of $65 million to the class
action settlement has been funded by cash  contributions from the Company ($7.35
million) and its insurers ($57.65 million). Most of the remaining balance of the
$150 million maximum  contribution has been secured either by a $21 million cash
deposit made pursuant to court order by the Company  ($3.15  million) and one of
its insurers  ($17.85 million) in a separate account (which also is available to
pay other  litigation  expenses,  judgments  and  settlements)  or by letters of
credit or other security  totaling $64 million,  $11.7 million of which has been
posted by the  Company  and $52.3  million  of which  has been  provided  by the
Company's insurers.
         Approximately  6,650  proofs of claim have been filed with the  Special
Master  appointed by the Court to oversee the Albuterol  Settlement  Trust Fund.
The Special Master has approved approximately 5,240 class action claims totaling
approximately  $75  million.  No awards  have been made to  approximately  1,000
rejected  class  action  claims.  Appeals  from some of these  decisions  of the
Special  Master are being  taken to the  Court.  The Court has  ordered  that no
further  claims may be  submitted.  (These  figures  include  approximately  850
clients of Jacoby & Meyers,  representing  nearly all of that firm's clients who
are not  alleging a death  caused by  albuterol,  who agreed to be treated as if
they were class members and class counsel have agreed that these  claimants will
be paid out of the Albuterol  Settlement  Trust Fund.) In addition,  the Company
has reached settlement  agreements with approximately 135 class members alleging
wrongful  death;  approximately  100 claims of class members  alleging  wrongful
death remain unresolved.
         The settlement also is subject to certain other  contingencies and does
not cover  certain  individuals  who  previously  opted out of the class action,
including  40 people who opted out and never  filed  suit,  some of whom now are
barred from bringing suit by the statute of limitations.  The Company  continues
to be a defendant in lawsuits that were brought by or on behalf of approximately
three  people who  properly  opted out of the class action while the Company has
settled with 81 litigants who had opted out. These  settlements were paid out of
the funds described  above.  There also are two active lawsuits brought by class
members alleging  wrongful death who are pursuing  litigation under the terms of
the class action settlement agreement.
         Including the amounts paid to the class action  settlement or deposited
in the separate  account  described  above or paid for other  albuterol  related
settlements  or  expenses,  the Company has paid $10.5  million and its insurers
have paid approximately $95 million,  some of which already has been distributed
and the  remainder of which is available to pay class action  claims,  claims of
parties  who opted  out of the class  action,  attorneys'  fees,  administrative
costs,  and expenses in the connection with the pre-trial,  trial,  settlements,
and ongoing events. At this time, the Company cannot predict the total amount to
be paid out in connection with claims arising from the albuterol recall.

Grand Jury Investigation
On May 28, 1997, the Company announced that it had entered into a plea agreement
pursuant to which it agreed to waive  indictment and plead guilty to a one count
Information charging a violation of Title 18, United States Code, Section 371, a
conspiracy to defraud the United  States and one of its  agencies,  the Food and
Drug Administration ("FDA"). The Information alleged that Copley made changes in
the  manufacturing  processes  for four drugs (only two of which  currently  are
being  manufactured by the Company)  without proper  notification to the FDA and
signed false batch  records  with respect to two of these drugs.  As part of the
plea  agreement,  the Company agreed to pay a fine of $10.65  million,  of which
$3.55 million plus interest remains to be paid in June 1999.
         The plea agreement followed a nearly three-year investigation and grand
jury  subpoenas  for  documents  from the  United  States  Attorney's  Office in
Massachusetts.  The Company  complied  with the subpoenas  and  cooperated  with
federal authorities  throughout the investigation.  The investigation  continues
with respect to  individuals,  some of whom are  indemnified  by the Company for
legal fees and related expenses.
         Also on May 28, 1997 the Company  announced that it had entered into an
agreement  with the FDA  providing  for an  independent  audit of 20 of Copley's
ANDAs. The Company is cooperating  fully with the FDA, and the independent audit
has been substantially  completed.  The FDA has agreed that during this audit it
will continue to review the Company's  pending ANDAs,  accept new ANDAs from the
Company and, where appropriate, approve Copley's ANDAs.
                                       31
<PAGE>
SmithKline Beecham Lawsuit
In August 1997,  the Company filed an ANDA for nabumetone  which  certified that
SmithKline  Beecham  Corporation's  ("SB")  patent  relating to  nabumetone  was
invalid and  unenforceable  and that the Company was entitled to manufacture and
sell  nabumetone  prior to the December 13, 2002  expiration of SB's  nabumetone
patent.  As a result,  on October 31, 1997 the Company was served with a summons
and  complaint  in a patent  infringement  action  entitled  SmithKline  Beecham
Corporation  and Beecham  Group  p.l.c.  v. Copley  Pharmaceutical,  Inc. in the
United States District Court for the District of Massachusetts. In their action,
plaintiffs  allege that because the Company seeks approval of its ANDA to engage
in the  commercial  manufacture,  use and sale of nabumetone as claimed in their
patent  before  the  patent's  expiration,   the  Company  has  infringed  their
nabumetone patent. Plaintiffs seek damages and an injunction against approval of
the Company's  nabumetone ANDA and its sale of nabumetone  prior to December 13,
2002.  A trial  tentatively  has been  scheduled to begin in October  1999.  The
manufacturer  and supplier of the nabumetone that the Company has designated for
use in its ANDA has agreed to defend the Company in this action and to indemnify
the Company for any damages that might be assessed as a result of the  Company's
sale of nabumetone obtained from the manufacturer. Although the Company believes
that this complaint is without merit and the Company has meritorious defenses to
this  action,  there  can be no  assurance  that the  Company  will  prevail.  A
substantial  damages award in this suit could have a material  adverse effect on
the Company.

Shareholder Derivative Action
On  September  2,  1998,  the  Company  was served as a nominal  defendant  in a
shareholder  derivative  action against six of its nine current  Directors.  The
lawsuit,  which  was  brought  by Great  Neck  Capital  Appreciation  Investment
Partnership,  the alleged owner of an unspecified  number of Company shares,  is
pending in Norfolk  County,  Massachusetts  Superior  Court. On October 2, 1998,
plaintiff filed a First Amended Shareholder Derivative Complaint that named HCCP
Acquisition Corporation,  Hoechst Corporation and Hoechst  Aktiengesellschaft as
additional  defendants.  The amended  complaint's  allegations include claims of
alleged breach of fiduciary duty and alleged waste of corporate assets and seeks
unspecified  money  damages  and  injunctive  relief.  According  to the amended
complaint,  "Copley  is named  as a  defendant  herein  solely  in a  derivative
capacity.  This  action is brought  on its  behalf,  and no claims are  asserted
against  it." The Company is  obligated  to defend and  indemnify  the  Director
defendants and has put its directors and officers insurance carrier on notice of
this claim.  The  Company  has been  served with  motions to dismiss the amended
complaint filed by the other defendants;  these motions remain pending as of the
date of this report.

Other Legal Proceedings
The Company has $8.0 million of estimated  recall-related and legal  contingency
reserves  accrued at December 31, 1998.  These  reserves  reflect the  Company's
estimates of its exposure at December 31, 1998 in its various legal  proceedings
described above.  Actual settlements  amounts may differ from amounts estimated.
In addition,  the Company is from time to time subject to claims  arising in the
ordinary course of business. While the outcome of the claims cannot be predicted
with  certainty,  management  does not expect  these  matters to have a material
adverse  effect on the results of  operations  and  financial  condition  of the
Company.
L. Supplemental Cash Flow Information

The following provides additional information concerning disclosure of cash flow
activities:
<TABLE>
<S>                                                          <C>            <C>            <C>
                                                             Year ended     Year ended     Year ended
                                                             December 31,   December 31,   December 31,
(In thousands)                                               1998           1997           1996
-------------------------------------------------------------------------------------------------------
Cash paid (received) during the period for:
     Interest                                                $  599         $ 374          $   241
     Income taxes                                            (1,700)         (163)          (5,062)
-------------------------------------------------------------------------------------------------------
</TABLE>

M. Restructuring

In response to increasing  pricing  pressures and eroding  margins,  the Company
restructured  its operations in the fourth  quarter of 1996.  The  restructuring
included the consolidation of warehouse,  manufacturing and office sites as well
as the write-off of  underutilized  and idle  equipment and, to a lesser extent,
reductions in the labor force. The Company had a second reduction in labor force
during the second quarter of 1997.
                                       32
<PAGE>
N. Quarterly Financial Data (Unaudited)
<TABLE>
<S>                                              <C>           <C>            <C>            <C>          <C>
                                                     Three-month periods ended                            Total
                                                 March 31,     June 30,       September 30,  December 31, December 31,
(In thousands, except per share data)            1998          1998           1998           1998         1998
----------------------------------------------------------------------------------------------------------------------
Net sales                                        $28,208       $34,727        $35,340        $ 35,222     $133,497
Gross profit                                       5,742         8,685          7,527          10,927       32,880
Recall related and litigation expenses               180            15            183             395          773
Net income (loss)                                    403         2,756          1,097           2,812        7,068
Net income (loss) per share                      $  0.02       $  0.14        $  0.06        $   0.15     $   0.37

                                                     Three-month periods ended                            Total
                                                 March 31,     June 30,       September 30,  December 31, December 31,
(In thousands, except per share data)            1997          1997           1997           1997         1997
----------------------------------------------------------------------------------------------------------------------
Net sales                                        $25,816       $25,500        $36,475        $ 33,692     $121,483
Gross profit                                       4,829         6,848         10,341           7,637       29,655
Recall related and litigation expenses               200         2,167            227           1,093        3,687
Net income (loss)                                   (363)       (1,514)         1,754             687          564
Net income (loss) per share                      $ (0.02)      $ (0.08)       $  0.09        $   0.04     $   0.03

</TABLE>
Quarterly results are not an indication of future results.

O. Subsequent Events
In December 1998, the Company filed an ANDA for loratadine syrup which certified
that two of Schering  Corporation's  patents  relating to loratadine  syrup were
invalid, unenforceable and/or not infringed and that the Company was entitled to
manufacture and sell loratadine  syrup in 2002,  following the expiration of one
patent  but  prior  to the  expiration  of two  other of  Schering's  loratadine
patents.  As a result, on March 19, 1999,  Schering filed a patent  infringement
action  entitled  Schering  Corporation  v. Copley  Pharmaceutical,  Inc. in the
United  States  District  Court for the  District  of  Delaware.  In its action,
Schering  alleges that because the Company seeks  approval of its ANDA to engage
in the  commercial  manufacture,  use and sale of loratadine  syrup prior to the
expiration of two patents  allegedly  relating to loratadine  syrup, the Company
has  infringed  at least  one of these  patents.  Schering  seeks an  injunction
against  approval  of the  Company's  loratadine  syrup  ANDA  and  its  sale of
loratadine syrup prior to at least April 21, 2004. Although the Company believes
that this complaint is without merit and the Company has meritorious defenses to
this  action,  there  can be no  assurance  that the  Company  will  prevail.  A
substantial  damages award in this suit could have a material  adverse effect on
the Company.
         In  January  1999 the  Company  learned  that it had  been  named as a
defendant in a lawsuit  entitled K-V  Pharmaceutical  Company v. Johnson H. Lim,
Hoechst Corporation,  and Copley Pharmaceutical,  Inc. pending in the St. Louis,
Missouri  Circuit  Court.  Plaintiff  alleges that the Company  hired one of its
former employees in contravention of an employment  agreement  between plaintiff
and the  individual  and seeks actual damages in excess of $1 million as well as
punitive  damages and fees and  expenses  based on a variety of legal  theories.
Although the Company  believes  that this suit is without  merit and the Company
has  meritorious  defenses to this action,  there can be no  assurance  that the
Company will  prevail.  A  substantial  damages  award in this suit could have a
material  adverse  effect on the Company.

                           Copley Pharmaceutical, Inc.
                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
Copley Pharmaceutical, Inc.:

In our opinion,  the accompanying  consolidated balance sheet as of December 31,
1998 and the related consolidated statements of operations, shareholders' equity
and cash flows present fairly, in all material respects, the financial condition
of Copley Pharmaceutical,  Inc. and its subsidiaries the ("Company") at December
31, 1998 and the results of their  operations  and their cash flows for the year
then ended, in conformity with generally accepted accounting  principles.  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  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free from material misstatement.  An audit includes examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.  The financial  statements of the Company as of December 31, 1997 and for
each of the two years in the period then ended were audited by other independent
accountants whose report dated January 29, 1998 expressed an unqualified opinion
on those statements.

                                                    PricewaterhouseCoopers LLP
Boston, Massachusetts
January 27, 1999, except as
to the information presented
in Note O for which the date
is March 29, 1999
                                       33
<PAGE>
The Board of Directors and Shareholders
Copley Pharmaceutical, Inc.:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Copley
Pharmaceutical,  Inc. and  subsidiaries  (the "Company") as of December 31, 1997
and the related consolidated statements of operations,  shareholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibilty  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.  These 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 the 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  Copley
Pharmaceutical, Inc. and subsidiaries as of December 31, 1997 and the results of
their  operations and their cash flows for each of the years in the the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

KPMG LLP
Providence, Rhode Island
January 29, 1998


               MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The consolidated  financial statements and other financial information contained
in this annual  report on Form 10-K were  prepared by  management  in conformity
with generally accepted accounting  principles.  In preparing these consolidated
financial  statements,  reasonable  estimates and judgments  have been made when
necessary.
         Management is responsible for  establishing and maintaining a system of
internal control,  designed to provide reasonable  assurance as to the integrity
and reliability of the financial  records.  The concept of reasonable  assurance
recognizes  that there are inherent  limitations  in any control system and that
the cost of maintaining a control system should not exceed the expected benefits
to be derived  therefrom.  Management  believes  its system of internal  control
effectively meets its objective of reliable financial reporting.
         The  Audit  Committee  of the  Board of  Directors  is  comprised  of a
majority of non-employee  directors and meets  periodically  with management and
the  independent  accountants  to review and discuss  audit  findings  and other
financial and accounting matters.  The independent  accountants have free access
to the Audit  Committee,  with and without  management  present,  to discuss the
results of their audit work.
         The  Company's  independent   accountants  are  engaged  to  audit  the
Company's  consolidated  financial  statements,  in  accordance  with  generally
accepted  auditing  standards,  for the purpose of  expressing an opinion on the
consolidated financial statements.




Daniel M.P. Caron
Vice President, Chief Financial Officer and Treasurer
                                       34
<PAGE>
            ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURES

KPMG LLP were previously the principal  accountants for the Company. On November
19, 1998,  that firm's  appointment as principal  accountants was terminated and
PricewaterhouseCoopers   LLP  were  engaged  as  principal  accountants  by  the
Company's Board of Directors.
         In connection with the audits for the years ended December 31, 1997 and
1996, and during the interim period from December 31, 1997, the date of the last
audited  consolidated  financial  statements,  to November 19, 1998, the date of
dismissal, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make  reference in  connection  with their opinion to the subject
matter of disagreement.
     The  audit  reports  of KPMG  LLP on the  financial  statements  of  Copley
Pharmaceutical,  Inc. as of and for the years ended  December  31, 1997 and 1996
did not contain any adverse opinion or disclaimer of opinion.

                                    PART III

                ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE
                                   REGISTRANT

The  information  concerning  directors  and  executive  officers of the Company
required  under this Item is  incorporated  herein by reference to the Company's
definitive  proxy  statement  pursuant to  Regulation  14A, to be filed with the
Commission  not later than 120 days after the close of the Company's  year ended
December 31, 1998,  under the headings  "Occupations  of Directors and Executive
Officers" and "Management and Principal Shareholders."

                         ITEM 11: EXECUTIVE COMPENSATION

The information  required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the  Commission  not later than 120 days  after the close of the  Company's
year  ended  December  31,  1998,  under  the  heading  "Compensation  and Other
Information Concerning Directors and Executive Officers."

                ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                              OWNERS AND MANAGEMENT

The information  required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the  Commission  not later than 120 days  after the close of the  Company's
year ended  December  31,  1998,  under the heading  "Management  and  Principal
Shareholders."

             ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  required under this Item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the  Commission  not later than 120 days  after the close of the  Company's
year ended  December  31, 1998,  under the heading  "Certain  Relationships  and
Related Transactions."
                                       35
<PAGE>
                                     PART IV

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

(a)1. Consolidated Financial Statements
For      the following financial information included herein see Part II. Item 8
         Consolidated Balance Sheets as of December 31, 1998 and 1997
         Consolidated Statements of Operations and Comprehensive  Income for the
                years ended December 31, 1998, 1997 and 1996
         Consolidated  Statements  of  Shareholders'  Equity for the years ended
         December 31, 1998, 1997 and 1996 Consolidated  Statements of Cash Flows
         for the  years  ended  December  31,  1998,  1997  and  1996  Notes  to
         Consolidated Financial Statements Report of Independent Accountants

2. Financial Statement Schedules
Financial statement schedules are not submitted because they are not applicable,
not  required  or  because  the  information  is  included  in the  Consolidated
Financial Statements or Notes to the Consolidated Financial Statements.

3. List of Exhibits
Exhibit No.       Description
--------------------------------------------------------------------------------
3.1      Amended and Restated  Certificate  of  Incorporation  of the Company,
         as amended.
3.2      Amended and Restated By-Laws of the Company.
10.3     Industrial Revenue Bond Agreements executed by the Company dated July
         15, 1989.
10.4     1986 Incentive Stock Option Plan.
10.5     1990 Stock Plan.
10.6     Amended and Restated 1992 Stock Plan.
10.7     1992 Non-Employee Director Stock Plan.
l0.8     1992 Employee Stock Purchase Plan.
10.9     Employee Stock Ownership Plan.
10.10    Profit Sharing and 401(k) Savings Plan, as amended.
10.12    Form of Indemnity Agreement with Directors and Certain Officers.
10.13(b) Employment Agreement, dated as of October 8, 1993, between the Company
         and Jane C.I. Hirsh.
10.14(b) Form of Employment Agreement between the Company and certain employees.
10.16    Corporate Governance and Standstill  Agreement,  dated as of October 8,
         1993,  by  and  among  the  Company,   Hoechst  Celanese  and  HCCP
         Acquisition Corporation,  as amended.
10.18(b) Product Agreement, dated as of October 8, 1993, between Hoechst
         Celanese Corporation and the Company.
10.20(c) Amended and Restated Loan Agreement dated August 17, 1993 between
         Copley Pharmaceutical, Inc. and The First National Bank of Boston.
10.22(f) 1995 Non-Employee Director Stock Option Plan.
10.23(f) First Amendment to Amended and Restated Loan Agreement dated as of June
         29, 1995 by and between the Company and the First National Bank of
         Boston ("Bank of Boston").
10.24(f) First Amendment to Amended and Restated Promissory Note dated as of
         June 29, 1995 by and between the Company and Bank of Boston.
10.25(f) First Amendment to Reimbursement Agreement dated as of June 29, 1995 by
         and between the Company and Bank of Boston.
10.26(g) Agreement of Compromise and Settlement dated August 22, 1995.
10.27(g) Supplement to August 22, 1995 Agreement of Compromise and  Settlement.
10.28(g) Escrow and Trust Agreement dated August 28, 1995.
10.29(g) Second Amendment to Amended and Restated Loan Agreement dated as of
         August 30, 1995 by and  between  the  Company  and Bank of Boston.
10.30(h) Stipulation of Compromise and Settlement dated November 17, 1995.
10.31(h) Third Amendment to Amended and Restated Loan Agreement dated as of 
         March 25, 1996 by and between the Company and Bank of Boston.
10.32(i) Fourth Amendment to Amended and Restated Loan Agreement dated as of 
         July 31, 1996 by and between the Company and Bank of Boston.
                                       36
<PAGE>
--------------------------------------------------------------------------------
Exhibit No.       Description
--------------------------------------------------------------------------------

10.33(i) Third Amendment to Amended and Restated Promissory Note dated as of
         July 31, 1996 by and between the Company and Bank of Boston.
10.34(j) Letter agreement between the Company and Hoechst Marion Roussel, Inc.
         relating to the employment for Ken E.Starkweather.
10.35(j) Fifth Amendment to Amended and Restated Promissory Note dated as of
         August 7, 1997 by and between the Company and Bank of Boston.
10.36(k)*Amended and Restated Glyburide Agreement effective January 1, 1997
         by and between Hoechst Marion Roussel, Inc. and Copley Pharmaceutical,
         Inc.
10.37(k)*Amended and Restated Micronized Glyburide Agreement effective January
         1, 1997 by and between Hoechst Marion Roussel,Inc. and Copley
         Pharmaceutical, Inc.
10.38(k)*Pentoxifylline Agreement effective January 1, 1997 by and between
         Hoechst Marion Roussel, Inc. and Copley Pharmaceutical, Inc.
10.39(l) Plea Agreement dated May 27, 1997.
10.40(l) Criminal information
10.41(l) Agreement between the Company and the Food and Drug Administration.
10.41(*) Nabumetone Agreement
21       Subsidiaries of the Company
23.1     Consent of PricewaterhouseCoopers LLP
23.2     Consent of KPMG LLP

(b)      Previously  filed as exhibits to the Company's  
         Solicitation/Recommendation Statement on Schedule 14D-9 dated October
         14, 1993 and incorporated herein by reference.
(c)      Previously filed as an exhibit to the Company's Quarterly Report on
         Form 10-Q for the quarterly period ended October 31, 1993 and 
         incorporated herein by reference.
(d)      Previously filed as exhibits to the Company's Annual Report on Form
         10-K for the fiscal year ended January 31, 1994 and incorporated herein
         by reference.
(e)      Previously filed as an exhibit to the Company's Annual Report on Form
         10-K for the  eleven-month  period ended  December 31, 1994 and 
         incorporated herein by reference.
(f)      Previously  filed as exhibits to the Company's  Quarterly Report on 
         Form 10-Q for the  quarterly  period  ended June 30, 1995 and
         incorporated herein by reference.
(g)      Previously  filed as exhibits to the Company's  Quarterly Report on 
         Form 10-Q of the  quarterly  period ended  September 30, 1995 and 
         incorporated herein by reference.
(h)      Previously filed as exhibits to the Company's Annual Report on Form
         10-K for the fiscal year ended December 31, 1995 and incorporated
         herein by reference.
(i)      Previously  filed as exhibits to the Company's  Quarterly Report on 
         Form 10-Q for the  quarterly  period  ended June 30, 1996 and 
         incorporated herein by reference.
(j)      Previously  filed as exhibits to the Company's  Quarterly Report on 
         Form 10-Q for the  quarterly  period ended March 31, 1997 and
         incorporated herein by reference.
(k)      Previously  filed as exhibits to the Company's  Quarterly Report on
         Form 10-Q for the quarterly period ended June 30, 1997.
 *       Confidential treatment as to certain portions has been requested
         pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of
         1934, as amended.
(l)      Previously  filed as exhibits to the Company's  Current  Report on Form
         8-K dated May 28, 1997.

(b)Reports on Form 8-K
Form 8-K dated  November  19, 1998 - Item 4: Change in  Registrant's  Certifying
Accountant.  The Company  announced that it had terminated its relationship with
KPMG LLP(KPMG) and has retained PricewatehouseCoopers LLP as its new independent
accountants.

Form 8-KA dated  November 19, 1998 - Item 4: Change in  Registrant's  Certifying
Accountant.  The Company  announced that it had terminated its relationship with
KPMG LLP(KPMG) and has retained PricewatehouseCoopers LLP as its new independent
accountants.

No other reports on Form 8-K were filed during the last three months of the year
ended December 31, 1998.

(c)Exhibits
The Company  hereby files as exhibits to this Report on Form 10-K those exhibits
listed in Item 14(a)(3), above.

(d)Financial Statement Schedules
The Company hereby files as financial statement schedules to this Report on Form
10-K those  financial  statement  schedules,  if any,  listed in Item  14(a)(2),
above.
                                       37
<PAGE>
                                   Signatures

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

                                    Copley Pharmaceutical, Inc.

                                    By: /s/ Daniel L. Korpolinski
                                    Daniel L. Korpolinski
                                    President, CEO
                                    (principal executive officer)


                                    By: /s/ Daniel M. P. Caron 
                                    Vice President, Chief Financial Officer and
                                    Treasurer



Date: March  30, 1999


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<S>                                 <S>                                         <C>
Signature                                            Title(s)                         Date
------------------------------------------------------------------------------------------------------------------------------------
/s/Daniel L. Korpolinski            President, CEO and Director                 March 30, 1999
------------------------            (principal executive officer)
Daniel L. Korpolinski               

/s/Daniel M.P. Caron                Vice President, Chief Financial Officer     March 30, 1999
--------------------                and Treasurer (principal accounting officer)
Daniel M.P. Caron          

/s/David A. Jenkins                 Chairman of the Board of Directors          March 30, 1999
-------------------
David A. Jenkins

/s/ Robert P. Cook                  Director                                    March 30, 1999
-------------------
Robert P. Cook

/s/ Jane C.I. Hirsh                 President of Copley Pharmaceutical          March 30, 1999
-------------------
Jane C.I. Hirsh                     International, Inc. and Director

/s/William K. Hoskins               Director                                    March 30, 1999
---------------------
William K. Hoskins

/s/ Kenneth N. Larsen               Director                                    March 30, 1999
---------------------
Kenneth N. Larsen

/s/ Charles T. Lay                  Director                                    March 30, 1999
------------------
Charles T Lay

/s/ Jess G. Thoene                  Director                                    March 30, 1999
------------------
Jess G. Thoene

/s/ Martin Zeiger                   Director                                    March 30, 1999
-----------------
Martin Zeiger
                                       38
</TABLE>