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, 1996

                                       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: (617) 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  14,  1997,  OF COMMON  STOCK  HELD BY
NON-AFFILIATES OF THE REGISTRANT:

$56,454,684.00 BASED ON THE LAST REPORTED SALE PRICE ON THE NASDAQ STOCK MARKET.

     Number of shares of common stock outstanding on March 14, 1997: 19,119,235

                       DOCUMENTS INCORPORATED BY REFERENCE

   The  registrant  intends to file a  definitive  Proxy  Statement  pursuant to
Regulation  14A  within  120 days of the end of the  twelve-month  period  ended
December  31,  1996.  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
and  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,  skin
preparations  and digestive and  genito-urinary  system drugs. 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
the  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.
  Statements  in this  Report  on Form  10-K  which  are not  historical  facts,
so-called  "forward  looking  statements,"  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   involve  risks  and
uncertainties,  including  those  detailed  in the  Company's  filings  with the
Securities and Exchange  Commission.  See also "Item 7. Management's  Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors and
Future Trends."

GENERIC DRUG MARKET
Generic  pharmaceutical sales have increased  significantly in recent years, 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 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. The Company believes that these factors,
coupled  with the future  patent  expirations  on widely  prescribed  brand-name
products, will continue to influence the growth in the market for generic drugs.

PRODUCT DEVELOPMENT STRATEGY AND PRODUCTS
The Company's product  development  strategy will continue to emphasize multiple
approaches for developing and marketing new drugs. 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.
Specifically,  the  Company  will seek a balance  between  niche  products  with
limited  competition  and  high-volume   pharmaceutical   products.   Additional
strategies   include  plans  to  introduce  OTC  drugs  once  their   brand-name
equivalents  are converted from  prescription  to OTC status,  to market 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(1) between Copley
and Hoechst Corporation ("HC"), and to develop,  manufacture and market products
for sale outside of the United  States,  expanding the  Company's  business into
markets which are less heavily  penetrated and not as highly  competitive as the
U.S. market.

(1)In connection with HC's acquisition of its majority  interest in the Company,
   the  Company is party to a Product  Agreement  with HC  pursuant to which the
   Company is afforded  the  opportunity  to  distribute  and market the generic
   version of products sold by Hoechst-Roussel  Pharmaceutical Inc. ("HRPI"), an
   indirect  majority  owned  subsidiary  of HC. This Product  Agreement  has an
   initial term of five years,  until  November 11, 1998,  and continues  unless
   terminated by either party giving one year's notice. On January 1, 1996, HRPI
   was merged into HMRI. HMRI has 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   become   available   for  generic
   distribution; some of these contracts currently are being renegotiated. Refer
   to Note J of the Notes to Consolidated Financial Statements.

                                        1
<PAGE>

ANDA-Approved Drugs
The Company's core business will remain the development and marketing of generic
prescription  drugs.  The Company will continue 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 will also
focus on high-volume  pharmaceutical products to respond to customer demand that
suppliers carry a broad array of products.

Prescription to OTC Conversion
The Company  believes  that a substantial  number of drugs will be  reclassified
from  prescription to OTC over the next several years.  The Company believes the
OTC market will expand as consumers  more readily choose  self-treatment  and as
drug companies and healthcare  payors urge the FDA to accelerate the approval of
OTC products.  The Company has experience in this  marketplace,  having marketed
several OTC products,  including  miconazole  nitrate vaginal cream, the generic
equivalent of Ortho McNeil's  Monistat(R)7 and minoxidil topical solution 2% for
men, the off-patent version 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 affords the Company the  opportunity
under  specified  conditions to distribute and market certain HMRI drug products
which  HMRI  desires  to sell  in  generic  form  or  which  become  subject  to
multi-source  competition or which HMRI decides to prelaunch in generic  version
before the relevant patent expires.  The Company markets glyburide,  the generic
version of HMRI's  DiaBeta(R);  HMRI's  micronized  glyburide,  the  therapeutic
equivalent of Pharmacia & Upjohn's Glynase(R) and, in the first quarter of 1996,
commenced marketing  Evalose(R) and Heptalac(R),  the generic versions of HMRI's
Chronulac(R)  and  Cephulac(R).  (Evalose(R)  and Heptalac(R) are purchased from
HMRI but are not covered under the Product Agreement.) Additionally, the Company
expects to market pentoxifylline, the generic version of HMRI's Trental(R), some
time after its patent expiration in 1997.

Non-U.S.  Markets
The Company plans to continue to develop,  manufacture  and market  products for
sale outside of the United States through its  wholly-owned  subsidiary,  Copley
Pharmaceutical  International,   Inc.  The  Company  has  entered  into  certain
collaborative  arrangements in China and certain  republics of the former Soviet
Union.  In  addition,  the  Company  sells  a  limited  number  of its  products
internationally  through  distributors.   Refer  to  Note  J  of  the  Notes  to
Consolidated Financial Statements.

<TABLE>
<CAPTION>
As of March 14, 1997 the Company's products include the following:

------------------------------------------------------------------------------------------------
                                                   Number
                                                   of Dosage
Products                                           Strengths    Brand Name/Company
---------------------------------------------     -----------   --------------------------------
Preparations for Neoplasms, Endocrine System and Metabolic Diseases
-------------------------------------------------------------------
<S>                                                      <C>
  glyburide tablets                                      3      DiaBeta(R)/HMRI
  hydrocortisone enema suspension                        1      Cortenema(R)/Solvay
  micronized glyburide tablets                           2      GluBate(R)/HMRI
                                                                Glynase(R)/Pharmacia & Upjohn

Anti-Infective Agents
---------------------
  amantadine HCl syrup                                   1      Symmetrel(R)/DuPont Merck
  hydroxychloroquine sulfate tablets                     1      Plaquenil(R)/Sanofi-Winthrop
  mebendazole tablets                                    1      Vermox(R)/Janssen Research
  miconazole nitrate vaginal cream                       1      Monistat(R) 7/Ortho McNeil

Central Nervous System and Sense Organ Drugs
--------------------------------------------
  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)/Sandoz
  thiothixene HCl oral solution                          1      Navane(R)/Pfizer
  valproic acid syrup                                    1      Depakene(R)/Abbott
------------------------------------------------------------------------------------------------
</TABLE>

                                        2
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                   Number
                                                   of Dosage
Products                                           Strengths    Brand Name/Company
---------------------------------------------     -----------   -------------------------------------------
<S>                                                      <C>
Respiratory System Drugs
------------------------
  bromatapp extended release ("ER") tablets              1      Dimetapp Extentabs(R)/Whitehall Robins
  clemastine fumarate syrup                              1      Tavist(R)/Sandoz
  doxylamine succinate tablets                           1      Unisom(R)/Pfizer
  R-tannate pediatric suspension                         1      Rynatan(R)/Wallace
  R-tannate tablets                                      1      Rynatan(R)/Wallace

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 Rx tablets                                    1      Natalins(R) Rx/Mead Johnson
  prenatal Z tablets                                     1      Zenate(R)/Solvay
  sodium fluoride drops                                  1      Luride(R)/Colgate

Cardiovascular System Drugs
---------------------------
  captopril tablets                                      4      Capoten(R)/Bristol-Myers Squibb
  diltiazem HCl tablets                                  4      Cardizem(R)/HMRI
  guanabenz acetate tablets                              2      Wytensin(R)/Wyeth-Ayerst
  nadolol tablets                                        3      Corgard(R)/Bristol-Myers Squibb
  procainamide HCl ER tablets                            3      Procan(R)SR/Parke-Davis
  quinidine sulfate ER tablets                           1      Quinidex Extentabs(R)/Robins

Skin Preparations
-----------------
  clindamycin phosphate topical solution                 1      Cleocin-T(R)/Pharmacia & Upjohn
  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
  silver nitrate solution                                1      silver nitrate

Digestive and Genito-Urinary System Drugs
-----------------------------------------
  cholestyramine powder                                  1      Questran(R)/Bristol-Myers Squibb
  Evalose(R)solution                                     1      Chronulac(R)/HMRI
  Heptalac(R)solution                                    1      Cephulac(R)/HMRI

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

Diagnostic Substances
---------------------
  copper sulfate solution                                1      copper sulfate
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                        3
<PAGE>

For the year ended  December 31, 1996,  preparations  for  neoplasms,  endocrine
system and metabolic diseases,  anti-infective agents and central nervous system
and sense  organ  drugs  accounted  for  36.8%,  22.8%  and 10.6% of net  sales,
respectively.   Preparations  for  neoplasms,  endocrine  system  and  metabolic
diseases,  anti-infective  agents and  respiratory  system drugs  accounted  for
47.0%, 15.5% and 10.6% of net sales,  respectively,  for the year ended December
31, 1995.  Preparations for neoplasms,  endocrine system and metabolic diseases,
respiratory  system drugs and vitamins and nutrients  accounted for 44.9%, 15.4%
and 12.2% of net sales, respectively, for the eleven-month period ended December
31, 1994. No other single therapeutic  category accounted for 10% or more of the
Company's net sales during such periods.
   In December 1993, the Company commenced a voluntary recall of certain lots of
its 20 ml vials of albuterol sulfate inhalation solution, 0.5% ("albuterol"). In
January  1994,  the Company  expanded its recall to all lots of this product and
the FDA assigned a Class I  classification  to the recall.  The Company detected
the presence of microbial organisms in tests of certain vials of the product and
it was determined,  in accordance  with FDA policies,  that a product recall was
appropriate.  In  connection  with the  recall,  the  Company has been served in
numerous  lawsuits.  The Company has also received grand jury subpoenas from the
United States Attorney's office in Massachusetts for documents  relating to this
and other  products.  Albuterol  was not  manufactured  by the Company after the
recall, and in the third quarter of 1995 the Company announced that it would not
seek to  manufacture  this product in the future.  This  decision was based on a
number of factors,  including changed market conditions and the availability and
cost of future product liability insurance.
   In September 1994, the Company  initiated a Class II voluntary  recall of its
Brompheril(R)  OTC  extended  release  antihistamine  product  due to a lack  of
assurance  that  the  coating  process  was  conducted  in  accordance  with the
manufacturing  batch  records.  The production and shipment of this product have
been  suspended.  The Company has received  grand jury subpoenas from the United
States   Attorney's   office  in   Massachusetts   for  documents   relating  to
Brompheril(R)  and other products.  The Company  continues to cooperate with the
United States  Attorney's  office and is engaged in ongoing  discussions about a
possible  resolution.  Refer  to  Note  L of  Notes  to  Consolidated  Financial
Statements  for  further  discussion  of the  United  States  Attorney's  office
investigation.

RESEARCH AND DEVELOPMENT
For the years ended December 31, 1996 and 1995, and for the eleven-month  period
ended December 31, 1994, the Company  incurred $13.7 million,  $13.3 million and
$9.1 million of research and development expenditures,  respectively. 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 drug products and  improving  existing  products'  manufacturing
processes.  The  development  of  new  prescription  ANDA  products,   including
formulation,  bioequivalence and stability testing and the FDA approval process,
averages from two 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,  building  modern  manufacturing  plants and
hiring,  employing  and training  technical  and  scientific  staff members have
increased in recent years.

STRATEGIC ALTERNATIVES
On October 31, 1996, the Company  announced  that it had retained  Oppenheimer &
Co. to evaluate  strategic  alternatives  for the  Company,  including  possible
business alliances.

MARKETING AND DISTRIBUTION
The Company markets its products to  approximately  300 customers.  For the year
ended  December  31,  1996,  36% of net sales were to drug  wholesalers,  35% to
retail chains,  19% to multi-source  distributors of the Company's  prescription
drugs,  9% to private  label  store  brand  distributors  of the  Company's  OTC
products and the remaining 1% to government  agencies,  hospitals and HMOs.  The
Company sells its drug products under its own "Copley" label and through private
label arrangements with multi-source  distributors.  For the year ended December
31, 1996,  no single  customer  accounted  for 10% or more 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.

                                        4
<PAGE>

   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.  The Company has completed the update of its material
requirements  planning  ("MRP")  systems which  facilitated the reduction of its
backlog orders and has enhanced its customer service levels.

BACKLOG ORDERS
The net  dollar  amount of  backlog  orders  for the  Company's  products  as of
December 31, 1996 was  approximately  $1.0 million as compared with $5.6 million
as of December 31, 1995.  The Company's  backlog  orders consist of those orders
received  by the  Company  but which the  Company was unable to ship by the date
requested by its  customer.  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 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,  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 dependent  upon  implementation  by the member  countries,  may make it
increasingly  difficult to obtain certain raw materials  prior to the expiration
of the applicable European patents.  The Company's efforts to develop, to obtain
FDA  approval  for,  and to  manufacture  new  products  could be delayed if the
Company were unable to obtain the necessary raw materials from foreign sources.
  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. The
Company attempts to specify two raw material  suppliers in all drug applications
when a second source has been identified.

PERSONNEL
As of  February  28,  1997,  the  Company  had  473  full-time  and 8  part-time
employees.  Of these,  77 were  involved in  research  and  development,  210 in
production,  85 in  quality  affairs,  23 were in  sales  and  marketing,  42 in
administration and 44 in facilities maintenance and engineering.

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  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,  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,  future
developments  in alternative  drug delivery  technologies  or other  therapeutic
techniques may provide therapeutic or cost advantages to competing products.
  Some  brand-name  competitors  try to prevent or discourage the use of generic
equivalents  through  litigation and negative public relations  campaigns.  Some
brand-name  competitors  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 have resulted in a greater
market share for these companies following expiration of the applicable patents.
   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 which 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.

                                        5
<PAGE>

GOVERNMENT REGULATION
All  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,  recordkeeping,  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 New Drug  Applications  ("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 two 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  by the FDA also is
required  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 Hatch-Waxman 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 which 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 nonpatented 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.
  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, and to temporarily  deny approval and
suspend  applications  to market  multi-source  drugs.  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 which 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  reimbursement  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 average net sales price for products  marketed
under ANDAs.  For products  marketed under NDAs,  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 is also  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,  no  assurance  can be given  that  changes to or
compliance with such environmental provisions will not have a material effect on
the Company's earnings, cash requirements or competitive position.

                                       6
<PAGE>

                               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.  See  Note G of the  Notes to  Consolidated  Financial  Statements.  The
Company  owns and  operates a 12,000  square  foot  manufacturing  site in South
Boston.  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.  During the fourth quarter of 1996,  the Company,  as part of its
restructuring  efforts,  consolidated  its leased  warehousing and  distribution
facilities   into  this  newly  leased   warehouse  in  Dedham,   Massachusetts.
Additionally,  the  Company  consolidated  a packaging  site and  administrative
office space from leased facilities to its Canton facility.

During  the  year  ended  December  31,  1996,  the  Company   incurred  capital
expenditures of approximately $12,000 relating to environmental  enhancements to
its waste water treatment equipment.

                            ITEM 3: LEGAL PROCEEDINGS

The information  required under this item is incorporated herein by reference to
the Company's Note L of the Notes to Consolidated Financial Statements contained
in this document on pages 28 - 30.


                                     PART II

                   ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
                                 SECURITYHOLDERS

No matters  were  submitted to a vote of  securityholders  during the last three
months of the Company's year ended December 31, 1996.

                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, 1995
and 1996:

Year Ended December 31, 1995                                High        Low
--------------------------------------------------------------------------------
First Quarter                                              $18.75    $13.00
Second Quarter                                              21.25     14.50
Third Quarter                                               21.25     17.50
Fourth Quarter                                              19.25     13.25

Year Ended December 31, 1996                                 High       Low
--------------------------------------------------------------------------------
First Quarter                                              $20.25    $13.25
Second Quarter                                              18.75     13.25
Third Quarter                                               14.25      9.50
Fourth Quarter                                              15.50      8.75


As of March 14, 1997, there were approximately 275 shareholders of record and at
least 4,300 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  and, as a result,  the
Company has no intention of paying dividends in the foreseeable future.

                                        7
<PAGE>

                         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, 1996 and 1995,  the  eleven-month  period
ended  December 31, 1994,  and the fiscal years ended  January 31, 1994 and 1993
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>
<CAPTION>
                                                                                          Eleven-month
                                                                                          period ended
                                                       Years ended December 31,           December 31,      Years ended January 31,
                                           -----------------------------------------      ------------      -----------------------
(In thousands, except per share data)           1996            1995            1994           1994           1994           1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>            <C>            <C>            <C>
Statement of Operations Data:
Net sales                                  $ 123,461       $ 142,158       $ 120,348(c)   $ 113,973(c)   $  86,268      $  51,981
Gross profit                                  29,430          41,269(b)       52,177         48,318         48,895         32,475
Operating expenses:
  Research and development                    13,682          13,299           9,938          9,057          8,115          8,634
  Selling, general and administrative         19,635(a)       16,324          15,319         14,170         11,454          7,660
  Recall related and litigation               12,343          17,830           4,691          2,766          4,925             --
Income (loss) from operations                (16,230)         (6,184)         22,229         22,325         24,401         16,181
Net income (loss)                            (12,673)(a)      (2,543)(b)      15,109(c)      15,007(c)       6,370(d)      12,334(e)
Fully diluted net income (loss)
  per share                                $   (0.66)(a)   $    (.13)(b)   $     .78(c)   $     .78(c)   $     .34(d)   $     .79(e)
Fully diluted weighted average
  common shares outstanding                   19,081          18,977          19,309         19,273         18,536         16,074
Balance Sheet Data:
Working capital                            $  48,179       $  59,365       $  56,704      $  56,704      $  55,444      $  40,336
Total assets                                 151,727         155,245         152,662        152,662        126,985         85,099
Long-term debt                                 5,100           5,400           5,700          5,700          6,000          6,300
Total shareholders' equity                   100,131         112,524         112,683        112,683         98,588         64,747

<FN>
(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.
(d) Includes  $7.9 million  ($7.3 million after taxes;  $0.40 per share) of litigation settlement expense and $4.9 million ($2.9
    million after taxes; $0.16 per share) of expenses associated with the HC tender offer.
(e) Includes income from settlement of litigation of $3.0 million ($1.8 million after taxes; $0.11 per share).
</FN>
</TABLE>

                                        8
<PAGE>

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

RESULTS OF OPERATIONS
Overview:  The Company  reported a net loss of $12.7  million or $0.66 per share
for the year ended December 31, 1996. Excluding product recall, other litigation
and  restructure  related  items,  the net loss would have been $0.1  million or
$0.01 per share. The Company experienced  substantial increases in sales volumes
of certain  existing  products,  launched seven new products and recognized cost
reductions resulting from improvements in manufacturing  processes and inventory
management  during 1996.  However,  significant  price erosion,  particularly on
glyburide,  the Company's major distributed  product,  continued to offset these
improvements  and resulted in a 13.2%  decrease in net sales over 1995 net sales
and a reduced gross margin of 23.8% of net sales  compared to 29.0% of net sales
a year earlier. Key events during 1996 included:

o   The receipt of FDA  approval for six ANDAs and the  submission  of eight new
    ANDAs, bringing the total awaiting approval to seventeen.
o   The  launching  of seven new  products  during  the  year:  prochlorperazine
    maleate tablets,  cholestyramine  powder,  minoxidil topical solution 2% for
    men, nadolol tablets, captopril tablets, Evalose(R) and Heptalac(R).
o   The reorganization of management to meet the current and future needs of the
    Company.
o   The  completion  of   restructuring   efforts  to   consolidate   warehouse,
    manufacturing  and office  sites as well as to write-off  underutilized  and
    idle equipment.
o   The retention of Oppenheimer & Co., Inc. to evaluate  strategic alternatives
    for the Company, including possible business alliances.

NET SALES

<TABLE>
<CAPTION>
                                                                     (Unaudited)  Eleven-month
                               Year ended             Year ended     Year ended   period ended
                              December 31,           December 31,   December 31,   December 31,
(In millions)                        1996   Change          1995           1994           1994
----------------------------------------------------------------------------------------------
<S>                               <C>          <C>       <C>            <C>            <C>
Manufactured products             $  79.2      3.8%      $  76.3        $  70.2        $  63.9
Distributed products                 44.3    (32.8%)        65.9           50.1           50.1
                                  ------------------------------------------------------------
  Net sales                        $123.5    (13.2%)     $ 142.2        $ 120.3        $ 114.0
</TABLE>

Net sales for 1996 were $123.5 million,  a decrease of 13.2% from 1995 net sales
of $142.2 million.  Increases in volumes of existing  products combined with the
launches of seven new products were  insufficient  to offset  declining  prices,
principally for glyburide,  the Company's major distributed product.  This price
erosion is expected to continue  in 1997 as  competing  products  continue to be
launched by other  manufacturers  and as customers  consolidate  their  supplier
base.
   The Company introduced five new manufactured products and two new distributed
products  for  a  total  of  seven  new  products  during  1996.  The  five  new
manufactured  products were:  prochlorperazine  maleate tablets,  the off-patent
version  of  SmithKline  Beecham's  Compazine(R);   cholestyramine  powder,  the
off-patent  version of Bristol-Myers  Squibb's  Questran(R);  minoxidil  topical
solution 2% for men, the off-patent version of Pharmacia & Upjohn's  Rogaine(R);
nadolol tablets,  the off-patent version of Bristol-Myers  Squibb's  Corgard(R);
and  captopril  tablets,  the  off-patent  version  of  Bristol-Myers   Squibb's
Capoten(R).  The new  distributed  products were  lactulose  solutions, known as
Evalose(R) (laxative) and Heptalac(R) (ammonia  detoxification),  the off-patent
versions of HMRI's Chronulac(R) and Cephulac(R).
   During the year ended  December 31, 1995 the  Company's  net sales  increased
18.2% to $142.2  million  from $120.3  million for the year ended  December  31,
1994. The increase in net sales was the result of new product  introductions and
occurred despite  significant price erosion on the Company's primary distributed
product, glyburide.

                                        9
<PAGE>

GROSS PROFIT

<TABLE>
<CAPTION>
                                                                             (Unaudited)  Eleven-month
                                        Year ended             Year ended     Year ended   period ended
                                       December 31,           December 31,   December 31,   December 31,
(In millions)                                 1996   Change          1995           1994           1994
----------------------------------------------------------------------------------------------------------
<S>                                          <C>      <C>           <C>            <C>            <C>
Manufactured products                        $15.0    (17.6%)       $18.2          $34.3          $30.4
As a % of manufactured products net sales     18.9%                  23.8%          48.9%          47.6%
                                             -------------------------------------------------------------
Distributed products                         $14.4    (37.7%)       $23.1          $17.9          $17.9
As a % of distributed products net sales      32.5%                  35.0%          35.7%          35.7%
                                             -------------------------------------------------------------
Gross profit                                 $29.4    (28.8%)       $41.3          $52.2          $48.3
As a % of net sales                           23.8%                  29.0%          43.4%          42.4%
                                             -------------------------------------------------------------
</TABLE>

The Company's  gross profit  decreased to $29.4 million,  or 23.8% of net sales,
for the year ended December 31, 1996 as compared to $41.3  million,  or 29.0% of
net sales,  for the same period in 1995.  The decrease was  primarily due to the
continued  price  erosion on the  Company's  products  partially  offset by cost
reductions resulting from improvements in manufacturing  processes and inventory
management.
  Distributed products contributed $14.4 million, or 49%, to the Company's total
gross profit during 1996 versus $23.1 million, or 56%, a year earlier. Glyburide
and micronized  glyburide are marketed by the Company and  manufactured  by HMRI
under  contracts  with  HMRI.  Refer  to  Note J of the  Notes  to  Consolidated
Financial  Statements for further  discussion of this  arrangement.  In order to
assure  continuity  of supply  under a variety of  circumstances  and to provide
other  competitive   benefits,   the  Company  has  agreed  to  renegotiate  the
distribution  contracts  relating to glyburide and  micronized  glyburide;  as a
result,  the profit  contribution  of these products  likely may decrease in the
future.
  During 1995, the Company's gross margin  decreased to 29.0% from 43.4% for the
same  period in 1994 due to  increased  write-offs  of obsolete  inventory,  the
significant  rise in product  liability  insurance  premiums,  the  increase  in
manufacturing  capacity  without a comparable  increase in volume and  narrowing
margins due to price erosion on the Company's products. The inventory write-offs
resulted primarily from normal Company operations and management's  decision not
to reintroduce albuterol sulfate inhalation solution, 0.5%.

OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                                             (Unaudited)  Eleven-month
                                        Year ended             Year ended     Year ended   period ended
                                       December 31,           December 31,   December 31,   December 31,
(In millions)                                 1996   Change          1995           1994           1994
----------------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>          <C>            <C>            <C>
Research and development                     $13.7      3.0%        $13.3          $ 9.9          $ 9.1
As a % of manufactured products net sales     17.3%                  17.4%          14.1%          14.2%
                                             -------------------------------------------------------------
Selling, marketing and distribution          $ 6.4     18.5%        $ 5.4          $ 4.4          $ 4.1
As a % of net sales                            5.2%                   3.8%           3.7%           3.6%
                                             -------------------------------------------------------------
General and administrative                   $ 9.7    (11.0%)       $10.9          $10.9          $10.1
As a % of net sales                            7.9%                   7.7%           9.0%           8.9%
                                             -------------------------------------------------------------
Recall related and litigation                $12.3    (30.9%)       $17.8          $ 4.7          $ 2.8
As a % of net sales                           10.0%                  12.5%           3.9%           2.5%
                                             -------------------------------------------------------------
Restructuring                                $ 3.5        -             -              -              -
As a % of net sales                            2.8%
                                             -------------------------------------------------------------
</TABLE>

Research and development  expenses  increased 3.0% to $13.7 million for the year
ended  December  31, 1996 as  compared  to the same period in 1995.  The Company
filed eight new ANDAs with the FDA during 1996  bringing its total ANDAs on file
with the FDA to  seventeen.  During  1995,  research  and  development  spending
increased  34.3% to $13.3 million when  compared to the year ended  December 31,
1994. This increase resulted from the significant costs

                                       10
<PAGE>

incurred in validating  new products,  and further  investments  in research,
development and product validation made by the Company during 1995.
  Selling,  marketing and distribution  expenses increased 18.5% to $6.4 million
from $5.4 million a year  earlier.  The increase was primarily  attributable  to
higher  advertising  and  promotional  expenses  resulting from the  intensified
competitive  environment.  During  1995,  selling,  marketing  and  distribution
expenses  increased  22.7% from $4.4  million a year  earlier  due to  increased
advertising and promotional expenses.
  General  and  administrative  expenses  decreased  11.0%  to $9.7  million  as
compared to $10.9 million a year earlier. The decrease is primarily attributable
to overall  cost-cutting  measures  partially  offset by charges  recorded  as a
result of a major customer's filing for bankruptcy protection.
   Recall  related and  litigation  expenses for 1996 totaled  $12.3 million and
consisted  principally of an increase in contingency reserves reflecting changes
in  estimates  of the  Company's  exposure  in  its  various  outstanding  legal
proceedings.  Recall  related and  litigation  expenses for 1995  totaled  $17.8
million and included the following:  the Company's required  contribution to the
Albuterol Settlement Trust Fund of $7.35 million;  $2.9 million loss on disposal
of albuterol-related equipment; $2.75 million of costs to settle the shareholder
class action  litigation;  establishment of a $1.1 million reserve for currently
outstanding  albuterol-related  product liability cases outside of the Albuterol
Settlement Trust Fund; and $3.7 million of litigation  expenses  incurred by the
Company for representation in its various legal proceedings.  Refer to Note L of
the Notes to  Consolidated  Financial  Statements  for a further  discussion  of
outstanding  litigation.  Recall related and litigation  expenses for the period
ended  December 31, 1994 were comprised of costs  associated  with the Company's
recall of albuterol and Brompheril(R).
  During the fourth quarter of 1996, the Company recorded a $3.5 million pre-tax
restructuring  charge related to 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.

INTEREST AND OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                                                 (Unaudited)   Eleven-month
                                   Year ended     Year ended     Year ended    period ended
                                  December 31,   December 31,   December 31,    December 31,
(In thousands)                           1996           1995           1994            1994
---------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>             <C>
Interest and other investment income   $  723         $1,089         $1,675          $1,557

Interest expense                       $ (241)        $ (285)        $ (248)         $ (226)

Other income (expense), net            $ (144)        $ (175)        $   87          $  104

</TABLE>

Interest and other investment income decreased  $366,000 during 1996 to $723,000
as  compared  to  $1.1  million  a year  earlier.  The  decrease  was  primarily
attributable  to  decreased  average  cash  available  to invest.  During  1995,
interest  and other  investment  income,  net of  realized  losses of  $383,000,
decreased  approximately $600,000 to $1.1 million as compared to $1.7 million in
1994 due to the  liquidation  of  substantially  all of the Company's  long-term
investment portfolio that resulted in reduced investment earnings. Refer to Note
C of the  Notes  to  Consolidated  Financial  Statements  for  more  information
regarding the transfer of securities.
  Other income  (expense)  of  $(144,000)  for the year ended  December 31, 1996
included an approximate $1.0 million settlement of an insurance claim related to
prior  years'  litigation  offset by expenses  incurred in  connection  with the
evaluation of a possible  business  consolidation  which the Company has decided
not to pursue at this time.

TAXES AND NET INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                 (Unaudited)   Eleven-month
                                   Year ended     Year ended     Year ended    period ended
                                  December 31,   December 31,   December 31,    December 31,
(In thousands)                           1996           1995           1994            1994
---------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>             <C>
Income tax expense (benefit)          $  (3.2)        $ (3.0)        $ 8.6           $ 8.8

Effective tax rate                      (20.3%)        (54.2%)        36.4%           36.8%

Net income (loss)                     $ (12.7)        $ (2.5)        $15.1           $15.0

</TABLE>

The  effective  tax rate for 1996  increased  when compared to the effective tax
rate for the same period in 1995 due primarily to the  non-deductible  nature of
certain recall related and litigation expenses.  The effective tax rate for 1995
decreased due to the decline in profitability.

                                       11
<PAGE>

   For the year ended  December  31,  1996,  the Company  reported a net loss of
$12.7 million,  or $0.66 per share,  compared to 1995's loss of $2.5 million, or
$0.13 per share.  Excluding product recall,  other  litigation,  and restructure
related  items,  the net loss would have been $0.1 million,  or $0.01 per share.
For the year ended  December  31, 1995 the  Company  reported a net loss of $2.5
million  versus net income of $15.1  million  for the same  period in 1994.  Net
income for the year 1995 restated to exclude recall and other litigation related
items  would  have been  $8.2  million  or $0.43  per  share.  The  unusual  and
significant expenses incurred during 1995 relating to the settlement and defense
of various litigations, the Company's increased insurance premiums, the decision
not to  reintroduce  albuterol,  and the  underutilization  of the Company's new
manufacturing facility were the primary causes of the decrease in profitability.

RISK FACTORS AND FUTURE TRENDS
The Company's  future results of operations  depend on its ability to obtain FDA
approval  of ANDAs for its new  products,  its  ability 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;  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  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.  With the
establishment  of a specialized  technical and validation  services group in the
latter part of 1995,  the  Company has  substantially  improved  its  validation
process.
  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.  Multi-source  products  with limited  competition  are
generally sold at higher prices,  resulting in relatively high gross margins. As
competition increases, selling prices and gross margins can decline dramatically
and  impair  overall   profitability.   The  Company  is  witnessing  brand-name
competitors  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.  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  throughout 1997. 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.  During 1996, the Company increased its volume of
manufactured products; however, significant increases are still needed to absorb
the substantial overhead.  The Company,  through its restructuring of operations
undertaken in the fourth quarter of 1996, consolidated some of its facilities in
an  attempt  to  streamline  its  operations  and  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 1997 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  Company has  announced  that it  retained  Oppenheimer  & Co. to evaluate
strategic  alternatives  including possible business  alliances.  Pursuing these
strategic  alternatives could divert management's  attention and could result in
significant costs to the Company.
   The  ongoing  grand jury  investigation,  albuterol  related  litigation  and
various other legal matters remain  unresolved.  Refer to Note L of the Notes to
Consolidated  Financial Statements for further discussion.  Although the Company
has  established  reserves as of December  31, 1996 it believed 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 financial
condition, liquidity and results of operations.

                                       12
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY
                                                      December 31,  December 31,
(In millions)                                                1996          1995
--------------------------------------------------------------------------------
Cash and short-term investments                           $  29.7       $  25.0
Working capital                                              48.2          59.4
Long-term debt                                                5.1           5.4
Shareholders' equity                                        100.1         112.5


WORKING CAPITAL
The Company's combined cash and short-term  investments were $29.7 million as of
December 31, 1996  compared to $25.0  million a year  earlier.  The $4.7 million
increase  primarily  reflects $16.1 million of cash  generated  from  operations
during  1996 offset by $8.4  million of planned  capital  expenditures  and $2.3
million of investments in unconsolidated  affiliates.  The $16.1 million of cash
provided by operating activities primarily resulted from a $6.4 million decrease
in accounts  receivable,  $3.3 million of negotiated insurance  recoveries,  and
$5.1 million of net tax refunds.
  During  1996,  the Company  spent $8.4  million for  machinery  and  equipment
acquisitions and facility enhancements  primarily related to the development and
manufacturing  of new  products.  During the year ended  December 31, 1995,  the
Company spent $21.1  million for capital  expenditures  which  included the $1.9
million buy-out of substantially  all of its leased  manufacturing  and research
and development equipment and the acquisition of parcels of land adjacent to the
Canton,  Massachusetts  manufacturing  facility.  During the eleven-month period
ended  December  31,  1994,  the  Company  spent $4.6  million to  complete  the
expansion of the Canton,  Massachusetts  plant,  in addition to $11.4 million of
machinery and equipment  acquisitions and facility enhancements to the Company's
existing manufacturing locations. Additions in all years were made from the cash
generated from operations without incurring additional  borrowings.  The Company
anticipates  spending  less  than  $5.0  million  for  machinery  and  equipment
acquisitions and facility enhancements during the year ending December 31, 1997.

LIQUIDITY
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.  At December 31, 1996 the Company had $17.1 million in stand-by letters
of credit related to the Albuterol  Settlement Trust Fund outstanding under this
working capital line of credit agreement.  These stand-by 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
is 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 L 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.  Subsequent  to year end,  the Company
received from its lender waivers to its credit agreements with respect to one of
its financial  covenants related to profitability,  effective December 31, 1996.
There can be no assurance that the Company will not require  additional  waivers
in the future or, if  required,  that the lender will grant  them.  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.
   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 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.

RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standard  ("SFAS")  No. 128  "Earnings  per share."  This
statement replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS which excludes dilution.  This statement requires dual
presentation  of  basic  and  diluted  EPS as  well as a  reconciliation  of the
numerator  and  denominator  of the basic EPS  computation  to the numerator and
denominator  of the diluted EPS  computation.  This  statement is effective  for
financial  statements  issued for periods  ending  after  December  15, 1997 and
requires restatement of all prior-period EPS data presented. Earlier application
is not permitted.

                                       13
<PAGE>

                  ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND
                               SUPPLEMENTARY DATA

                           COPLEY PHARMACEUTICAL, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                            December 31, December 31,
(In thousands, except share data)                                                  1996         1995
-------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>
Assets
Current assets:
  Cash and cash equivalents                                                   $  15,974    $  18,950
  Trading securities                                                                 --          950
  Available-for-sale securities                                                  13,757        5,147
  Accounts receivable, trade, net of allowances for doubtful accounts
    of $500 and $500, respectively                                               26,963       32,639
  Accounts receivable, related party                                                 61          826
  Inventories                                                                    27,131       27,226
  Current deferred tax assets                                                     6,548        2,900
  Prepaid income taxes                                                               --        3,259
  Other current assets                                                            4,241        4,789
                                                                              ----------------------
    Total current assets                                                         94,675       96,686
                                                                              ----------------------
Property, plant and equipment, net                                               52,355       55,724
Deferred tax assets                                                                 215        1,484
Other assets                                                                      4,482        1,351
                                                                              ----------------------
Total assets                                                                  $ 151,727    $ 155,245
                                                                              ----------------------
Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable, trade                                                     $   6,360    $   8,301
  Accounts payable, related party                                                10,948       11,191
  Current portion of long-term debt                                                 300          300
  Accrued compensation and benefits                                               1,398        2,003
  Accrued rebates                                                                 6,908        7,980
  Accrued income taxes                                                              883           --
  Accrued recall related and litigation expenses                                 17,839        4,767
  Accrued expenses                                                                1,860        2,779
                                                                              ----------------------
    Total current liabilities                                                    46,496       37,321
                                                                              ----------------------
Long-term debt                                                                    5,100        5,400
Commitments and contingencies (Note L)
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                                                     77,875       77,505
  Unrealized holding gain on available-for-sale securities                           --          108
  Retained earnings                                                              34,569       47,242
  Treasury stock, at cost, 6,266,258 and 6,307,045 shares
    outstanding, respectively                                                   (12,567)     (12,585)
                                                                              ----------------------
    Total shareholders' equity                                                  100,131      112,524
                                                                              ----------------------
Total liabilities and shareholders' equity                                    $ 151,727    $ 155,245
                                                                              ----------------------

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       14
<PAGE>

                           COPLEY PHARMACEUTICAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                               Eleven-month
                                             Year ended        Year ended      period ended
                                            December 31,      December 31,      December 31,
(In thousands, except per share data)              1996              1995              1994
---------------------------------------------------------------------------------------------
<S>                                           <C>               <C>               <C>
Net sales:
  Manufactured products                       $  79,201         $  76,279         $  63,876
  Distributed products                           44,260            65,879            50,097
                                              ---------------------------------------------
    Net sales                                   123,461           142,158           113,973
                                              ---------------------------------------------
Cost of goods sold:
  Manufactured products                          64,233            58,104            33,703
  Distributed products                           29,798            42,785            31,952
                                              ---------------------------------------------
    Cost of goods sold                           94,031           100,889            65,655
                                              ---------------------------------------------
      Gross profit                               29,430            41,269            48,318
                                              ---------------------------------------------
Operating expenses:
  Research and development                       13,682            13,299             9,057
  Selling, marketing and distribution             6,388             5,384             4,093
  General and administrative                      9,721            10,940            10,077
  Recall related and litigation                  12,343            17,830             2,766
  Restructuring                                   3,526                --                --
                                              ---------------------------------------------
    Income (loss) from operations               (16,230)           (6,184)           22,325
                                              ---------------------------------------------

Interest and other investment income                723             1,089             1,557
Interest expense                                   (241)             (285)             (226)
Other income (expense), net                        (144)             (175)              104
                                              ---------------------------------------------
    Income (loss) before income taxes           (15,892)           (5,555)           23,760
Provision (benefit) for income taxes             (3,219)           (3,012)            8,753
                                              ---------------------------------------------
Net income (loss)                             $ (12,673)        $  (2,543)        $  15,007
                                              ---------------------------------------------
Weighted average common shares outstanding:
  Primary                                        19,081            18,977            19,273
  Fully diluted                                  19,081            18,977            19,273

Earnings (loss) per share:
  Primary                                     $   (0.66)        $   (0.13)        $    0.78
  Fully diluted                                   (0.66)            (0.13)             0.78

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       15
<PAGE>

                           COPLEY PHARMACEUTICAL, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

               For the eleven-month period ended December 31, 1994 and for the years ended December 31, 1995 and 1996

                                                        Additional                Unrealized                               Total
                                       Common Stock        Paid-In     Retained      Holding      Treasury Stock    Shareholders'
(In thousands)                      Shares      Amount     Capital     Earnings    Gain(Loss)   Shares       Amount       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>      <C>         <C>          <C>          <C>           <C>      <C>          <C>
Balance, January 31, 1994           25,371   $     254   $  76,281    $  34,778    $      --     6,612    $ (12,725)   $  98,588
Net income  (loss)                      --          --          --       15,007           --        --           --       15,007
Adjustment to beginning
  balance for change in
  accounting principle, net
  of taxes of $425                      --          --          --           --          622        --           --          622
Acquisition of treasury
  stock by Employee Stock
  Purchase Plan                         --          --         308           --           --       (13)           5          313
Stock option exercises                  --          --          29           --           --        (1)           1           30
Tax benefit from stock
  option exercises                      --          --         191           --           --        --           --          191
Change in unrealized
  holding gain (loss) on
  available-for-sale securities         --          --          --           --       (2,068)       --           --       (2,068)
                                    ------------------------------------------------------------------------------------------------

Balance, December 31, 1994          25,371         254      76,809       49,785       (1,446)    6,598      (12,719)     112,683
Net income (loss)                       --          --          --       (2,543)          --        --           --       (2,543)
Acquisition of treasury
  stock by Employee Stock
  Purchase Plan                         --          --         290           --           --       (23)          11          301
Stock option exercises                  --          --         221           --           --      (268)         123          344
Tax benefit from stock
  option exercises                      --          --         185           --           --        --           --          185
Change in unrealized
  holding gain (loss) on
  available-for-sale securities         --          --          --          --         1,554        --           --        1,554
                                    ------------------------------------------------------------------------------------------------

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

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       16
<PAGE>

                           COPLEY PHARMACEUTICAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 Eleven-month
                                                               Year ended        Year ended      period ended
                                                              December 31,      December 31,      December 31,
(In thousands)                                                       1996              1995              1994
---------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>               <C>
Cash flows from operating activities:
  Net income (loss)                                              $(12,673)         $ (2,543)         $ 15,007
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Depreciation and amortization                                   7,092             5,775             3,404
    Realized losses on disposals of assets                          4,795             3,025                 7
    Deferred income taxes                                          (2,379)           (1,398)            3,203
    Tax benefit from stock option exercises                            80               185               191
    Provision for doubtful accounts                                   696                --               250
    Proceeds from sales of trading securities                         601                --                --
    Equity in loss (earnings) of unconsolidated affiliates             54                --                --
  Changes in operating assets and liabilities:
    Decrease (increase) in accounts receivable                      5,745            (6,680)           (7,602)
    Decrease (increase) in inventories                                 95            11,236           (14,110)
    Decrease (increase) in other current assets                       548            (1,885)            2,125
    Decrease (increase) in other assets                              (951)            1,598              (222)
    Increase (decrease) in accounts payable                        (2,184)            3,536            10,632
    Increase (decrease) in accrued income taxes                     4,142               (59)            1,411
    Increase (decrease) in accrued expenses                        10,476              (494)            1,250
                                                                 --------------------------------------------
  Net cash provided by operating activities                        16,137            12,296            15,546
                                                                 --------------------------------------------
Cash flows from investing activities:
  Capital expenditures                                             (8,401)          (21,123)          (16,050)
  Investments in unconsolidated affiliates                         (2,252)             (753)               --
  Proceeds from sales of property, plant and equipment                113               500                24
  Purchases of available-for-sale securities                      (13,695)          (24,172)          (12,556)
  Proceeds from sales of available-for-sale securities                114            42,416            14,411
  Proceeds from maturities of available-for-sale securities         5,000             3,224             3,005
                                                                 --------------------------------------------
  Net cash provided by (used in) investing activities             (19,121)               92           (11,166)
                                                                 --------------------------------------------
Cash flows from financing activities:
  Proceeds from short-term borrowings                                  --             4,542               284
  Payments of short-term borrowings                                    --            (4,542)             (284)
  Payments of long-term debt                                         (300)             (300)             (300)
  Stock option exercises                                                2               344                30
  Issuance of common stock to Employee Stock Purchase Plan            306               301               313
  Draws from restricted cash, net                                      --                --                14
                                                                 --------------------------------------------
  Net cash provided by financing activities                             8               345                57
                                                                 --------------------------------------------
Net increase (decrease) in cash and cash equivalents               (2,976)           12,733             4,437
Cash and cash equivalents at beginning of period                   18,950             6,217             1,780
                                                                 --------------------------------------------
Cash and cash equivalents at end of period                       $ 15,974          $ 18,950          $  6,217
                                                                 --------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       17
<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  years  1996  and 1995 and for the
eleven-month  period ended December 31, 1994, no single  customer  accounted for
10% or more of total net sales.
  The Company not only distributes  multi-source  products that it manufactures,
it  also,  as  part  of a  distribution  arrangement,  markets  and  distributes
multi-source  versions  of certain  drugs now  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 27% and 41% of the Company's  1996 and 1995 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 and the  renegotiation  of the  distribution  contracts
relating to glyburide and micronized,  management  expects  continued decline in
this  product's net sales and related gross profit in 1997.  Refer to Note J for
further discussion of the distribution arrangement.
  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.  Due to 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.
  The raw materials  essential to the Company's business are purchased primarily
from U.S.  distributors of bulk pharmaceutical  chemicals  manufactured  abroad.
Such 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 two to five years.

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.
  In 1994,  the Company had changed to a calendar  year  reporting  basis from a
fiscal year ending  January 31 reporting  basis.  This change in fiscal year end
reporting  resulted  in a  transition  period of eleven  months  which  began on
February 1, 1994 and ended December 31, 1994.  Presented below is financial data
for the years ended December 31, 1996, 1995 and 1994.

                                       18
<PAGE>

               Comparative Consolidated Statements of Operations

                                                 Years ended December 31,
                                            ---------------------------------
                                                                   (Unaudited)
(In thousands, except per share data)            1996        1995        1994
--------------------------------------------------------------------------------
Net sales                                   $ 123,461   $ 142,158   $ 120,348
Cost of goods sold                             94,031     100,889      68,171
                                            ---------------------------------
Gross profit                                   29,430      41,269      52,177
                                            ---------------------------------
Operating expenses:
  Research and development                     13,682      13,299       9,938
  Selling, marketing and distribution           6,388       5,384       4,386
  General and administrative                    9,721      10,940      10,933
  Recall related and litigation                12,343      17,830       4,691
  Restructuring                                 3,526          --          --
                                            ---------------------------------
Income (loss) from operations                 (16,230)     (6,184)     22,229
                                            ---------------------------------
Interest and other investment income              723       1,089       1,675
Interest expense                                 (241)       (285)       (248)
Other income (expense), net                      (144)       (175)         87
                                            ---------------------------------
Income (loss) before income taxes             (15,892)     (5,555)     23,743
Provision (benefit) for income taxes           (3,219)     (3,012)      8,634
                                            ---------------------------------
Net income (loss)                           $ (12,673)  $  (2,543)  $  15,109
                                            ---------------------------------
Weighted average common shares outstanding:
  Primary                                      19,081      18,977      19,309
  Fully diluted                                19,081      18,977      19,309
Earnings (loss) per share:
  Primary                                   $   (0.66)  $   (0.13)  $    0.78
  Fully diluted                                 (0.66)      (0.13)       0.78

Cash  Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

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, 1996 and 1995 the estimated incurred costs were $2.4 million and
$1.6 million, respectively.  Additionally, the Company provides for an allowance
for uncollectible  accounts.  The Company has experienced  insignificant account
write-offs  in the  past;  however,  during  1996,  one of the  Company's  major
customers  filed  for  bankruptcy  protection.   These  estimates  are  made  by
management  based on past  experience  and current  trends.  Actual  results may
differ from these estimates.

                                       19
<PAGE>

Inventories
The Company values its inventories at the lower of cost or market on a first-in,
first-out  basis.  Management  estimates  the lower of cost or  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 or, if the estimated
cash flows from the asset  exceed the  carrying  value,  the asset's fair value.
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.

Research and Development
Company sponsored research and development costs are expensed as incurred. Costs
related to contracted  research and development are included in other assets and
charged to research and development upon recognition of related revenue.

Advertising and Promotion
All costs associated with advertising and promoting products are expensed in the
year incurred.

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  bases 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.

Earnings  (Loss) Per Share
Earnings  (loss)  per  share is  computed  by  dividing  earnings  (loss) by the
weighted  average  number of common  shares and  common  share  equivalents,  if
dilutive, outstanding during the period. Common share equivalents are calculated
under the  treasury  stock  method and  consist of  unexercised  employee  stock
options.
   In February 1997, the Financial  Accounting  Standards Board issued Statement
of Financial  Accounting  Standard  ("SFAS") No. 128  "Earnings per share." This
statement replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS which excludes dilution.  This statement requires dual
presentation  of  basic  and  diluted  EPS as  well as a  reconciliation  of the
numerator  and  denominator  of the basic EPS  computation  to the numerator and
denominator  of the diluted EPS  computation.  This  statement is effective  for
financial  statements  issued for periods  ending  after  December  15, 1997 and
requires restatement of all prior-period EPS data presented. Earlier application
is not permitted.

                                       20
<PAGE>

Concentration of Credit Risk
Financial  instruments that potentially  subject the Company to concentration of
credit risk consist principally of trading and 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.

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>
<CAPTION>
                                                        1996                                         1995
                                   -------------------------------------------  -----------------------------------------------
                                                  Gross      Gross                             Gross      Gross
                                   Amortized Unrealized Unrealized      Market  Amortized Unrealized Unrealized     Market
(In thousands)                          Cost       Gain       Loss       Value       Cost       Gain       Loss      Value
-------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>         <C>        <C>        <C>            <C>    <C>
In Current Assets:
Debt securities:
  State and municipal
    securities                       $ 8,136    $     7    $    --     $ 8,143    $    --    $    --        $--    $    --
  U.S. Treasury and
    government agencies                4,871          1         (5)      4,867         --         --         --         --
                                     -------------------------------------------------------------------------------------------
Other securities:
  Marketable equity
    securities                            --         --         --          --         39         88         --        127
  Bank certificates of deposit           750         --         (3)        747         --         --         --         --
  Other securities                        --         --         --          --      5,000         20         --      5,020
                                     -------------------------------------------------------------------------------------------
Total current available-
  for-sale securities                $13,757    $     8    $    (8)    $13,757    $ 5,039    $   108        $--    $ 5,147
                                     -------------------------------------------------------------------------------------------
</TABLE>

Gross  gains  of  $75,000  and  gross  losses  of $0 were  realized  on sales of
available-for-sale  securities in 1996, gross gains of $275,000 and gross losses
of $409,000 were realized on sales of available-for-sale  securities in 1995 and
gross gains of $55,000  and gross  losses of $47,000  were  realized on sales of
available-for-sale  securities during the eleven-month period ended December 31,
1994.

Trading  Securities
At December 31, 1995, the Company transferred  government agency securities with
a  market  value of  $950,000  from  available-for-sale  securities  to  trading
securities  as the  Company was holding  these  securities  for sale in the near
term.  In  1995,  a loss of  $248,000  was  recognized  upon  transfer  of these
securities and was included in interest and other  investment  income.  In 1996,
these securities were sold and an additional loss of $349,000 was realized.

                                       21
<PAGE>

D. INVENTORIES

                                                     December 31,  December 31,
(In thousands)                                              1996          1995
--------------------------------------------------------------------------------
Raw materials                                            $12,580       $13,634
Work in process                                            4,390         4,913
Finished goods                                            10,161         8,679
                                                         -----------------------
  Total inventories                                      $27,131       $27,226
                                                         -----------------------

During  the  third  quarter  of 1995,  the  Company  wrote off $2.5  million  of
albuterol-related  materials inventory after the decision was made by management
not to reintroduce  albuterol.  This write-off was included in the cost of goods
sold for manufactured products.

E. PROPERTY, PLANT AND EQUIPMENT

                                                     December 31,  December 31,
(In thousands)                                              1996          1995
--------------------------------------------------------------------------------
Land                                                      $ 3,335      $ 3,232
Building and improvements                                  31,700       28,454
Machinery and equipment                                    31,020       28,479
Motor vehicles                                                 58           53
Furniture and fixtures                                      4,940        4,815
Leasehold improvements                                        100          986
                                                         -----------------------
                                                           71,153       66,019
Less: accumulated depreciation and amortization           (19,109)     (16,063)
                                                         -----------------------
                                                           52,044       49,956
Construction in process                                       311        5,768
                                                         -----------------------
  Total property, plant and equipment                     $52,355      $55,724
                                                         -----------------------

At December 31, 1995 the Company had  $140,000 of deposits  related to committed
construction projects of $433,000.
  During  1995,  the Company  realized a loss of $2.9 million on the disposal of
equipment  related  specifically  to the  manufacture  of  albuterol  after  the
decision was made by management not to reintroduce this recalled  product.  This
loss was included in recall related and litigation expenses.
   Depreciation expense was $7,135,000,  $5,745,000 and $3,271,000 for the years
ended  1996  and 1995 and the  eleven-month  period  ended  December  31,  1994,
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, 1996 and
1995 are as follows:

<TABLE>
<CAPTION>
                                                                         December 31,  December 31,
(In thousands)                                                                  1996          1995
--------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>
Deferred tax assets:
  Acquired joint product development rights                                  $   973       $ 1,026
  Tender offer costs                                                           1,972         1,966
  Recall and litigation accrual                                                3,257           905
  Operating loss and tax credit carryforwards                                  1,235           824
  Charitable contribution carryforwards                                          620           551
  Difference in accounting for inventory and accounts receivable                 871           259
  Difference in cost recognition basis, accrual for books and cash for tax       565           360
                                                                             ---------------------
    Total deferred tax assets                                                  9,493         5,891
Deferred tax liabilities:
  Depreciation                                                                (2,730)       (1,507)
                                                                             ---------------------
Total net deferred tax assets                                                $ 6,763       $ 4,384
                                                                             ---------------------
</TABLE>

                                       22
<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,  however,  could be reduced in the near term if  estimates of future
taxable income are reduced.

Provision for (benefit of) income taxes consist of the following:

                                                                   Eleven-month
                                       Year ended     Year ended   period ended
                                      December 31,   December 31,   December 31,
(In thousands)                               1996           1995           1994
--------------------------------------------------------------------------------
Current income taxes (benefit):
  Federal                                $(1,033)        $(1,701)       $ 4,999
  State                                      193              87            551
                                         ---------------------------------------
                                            (840)         (1,614)         5,550
                                         ---------------------------------------
Deferred income tax expense (benefit):
  Federal                                 (1,272)            (26)         2,550
  State                                   (1,107)         (1,372)           653
                                         ---------------------------------------
                                          (2,379)         (1,398)         3,203
                                         ---------------------------------------
Total:
  Federal                                 (2,305)         (1,727)         7,549
  State                                     (914)         (1,285)         1,204
                                         ---------------------------------------
                                         $(3,219)        $(3,012)       $ 8,753
                                         ---------------------------------------

The  income  tax  expense  (benefit)  for the years  ended 1996 and 1995 and the
eleven-month  period ended December 31, 1994, 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>
<CAPTION>
                                                                                                      Eleven-month
                                                                                                      period ended
                                                Year ended December 31,  Year ended December 31,       December 31,
(In thousands)                                             1996                   1995                   1994
---------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>     <C>             <C>     <C>              <C>
Statutory rate                                   $(5,562)        (35%)   $(1,944)        (35%)   $ 8,316          35%
Increases (decreases) in taxes resulting from:
  State income taxes, net of
    federal tax benefit                             (594)         (4%)      (835)        (15%)       783           3%
  Research tax credits                              (200)         (1%)      (163)         (3%)      (222)         (1%)
  Tax-exempt interest and dividends                 (136)         (1%)      (102)         (2%)      (316)         (1%)
  Nondeductible portion of recall related
    and litigation expenses                        3,127          20%         --          --          --          --
  Other, net                                         146           1%         32           1%        192           1%
                                                 --------------------------------------------------------------------
                                                 $(3,219)        (20%)   $(3,012)        (54%)   $ 8,753          37%
                                                 --------------------------------------------------------------------
</TABLE>

At December  31,  1996,  the Company had net  operating  loss  carryforwards  of
approximately  $7,954,000  which are  available to offset  future state  taxable
income  through the year ended  December 31, 2001. In addition,  at December 31,
1996,  the  Company  had  approximately  $1,536,000,  $386,000  and  $859,000 of
charitable  contribution  carryforwards,   research  credits  carryforwards  and
investment  credits  carryforwards,  respectively,  that are available to offset
future state taxable income through the years 2001, 2011 and 1999, respectively.

                                       23
<PAGE>

G. DEBT

                                                      December 31,  December 31,
(In thousands)                                               1996          1995
--------------------------------------------------------------------------------
Industrial Development Revenue Bonds (a)                   $5,400        $5,700
Less: current portion                                        (300)         (300)
                                                           ---------------------
                                                           $5,100        $5,400
                                                           ---------------------

(a) Interest is payable  monthly at a floating rate based on the prime rate. The
    effective  interest rate for the Bonds  approximated 4.3%, 4.7% and 3.9% for
    the years ended 1996 and 1995 and the eleven-month period ended December 31,
    1994, respectively.

The  Industrial  Development  Revenue  Bonds (the  "Bonds")  were issued for the
initial acquisition and construction of the Company's  headquarters building 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.  Scheduled
repayments of the debt are: 1997,  $300,000;  1998,  $300,000;  1999,  $300,000;
2000, $300,000; 2001, $300,000; 2002 and thereafter, $3,900,000.
  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  25-year  life  of  the  Bonds.  The
unamortized  balance of $319,000  and  $337,000  at December  31, 1996 and 1995,
respectively, is included in other assets.
  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.  On August 30, 1995, the Company had amended this working  capital line
of credit agreement to increase its maximum borrowing capacity from $7.5 million
to $20.0  million.  This  amendment  also  provided  for the issuance of standby
letters of credit  and  includes  related  provisions  for  payment of letter of
credit fees equal to 1% of the face  amount of  outstanding  standby  letters of
credit.  At  December  31,  1996 and 1995,  the  Company  had $17.1  million  in
outstanding standby letters of credit related to the Albuterol  Settlement Trust
Fund.  Refer to Note L 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  8.25%,   8.5%  and  8.5%  at  December  31,  1996,  1995   and  1994,
respectively. Borrowings are collateralized by the Company's property at 25 John
Road, Canton,  Massachusetts,  including land,  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.  Subsequent to year end, the Company  received
from its  lender  waivers to its credit  agreements  with  respect to one of its
financial covenants related to profitability, effective December 31, 1996. There
can be no assurance that the Company will not require  additional waivers in the
future or, if required,  that the lender will grant them.  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.

H. COMMON AND PREFERRED STOCK

At  December  31,  1996 the Company had  1,995,204  shares  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 1992 Stock Plan ("1992 Plan"), the Compensation Committee of the Board
of Directors may grant to any employee,  consultant or officer,  incentive stock
options or nonqualified stock options to

                                       24
<PAGE>

purchase the  Company's  common  stock.  The  Compensation  Committee 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.  In 1995,  the  shareholders
approved an amendment to increase the maximum  number of shares  available to be
granted under the 1992 Plan from 1,023,750 to 1,523,750  shares. At December 31,
1996 the Company had 644,675 shares available to grant under this plan.
  On May 24, 1995, the Board of Directors voted to allow all  nonofficer  option
holders under the 1992 Plan to elect to exchange their existing  options with an
exercise  price in excess of $16.50 per share for options with an exercise price
of $16.50 per share,  the closing  price on May 23, 1995,  provided they forfeit
25% of the shares covered by the options  elected to be repriced.  Total options
elected to be repriced were 212,875, approximately 75% of the eligible shares.
  In May 1995, the shareholders voted to replace the 1992 Non-Employee Directors
Stock Option Plan with the 1995  Non-Employee  Directors 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 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, 1996
the Company had 233,335 shares available to grant under this plan.
  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, 1996
the Company had 380,460 shares available to grant under this plan.

Stock option  activity during the  eleven-month  period ended December 31, 1994,
and the years ended 1995 and 1996 was as follows:

                                                                Option Price
                                                   Shares         Per Share
--------------------------------------------------------------------------------
Outstanding at January 31, 1994                   721,626    $ 0.16  -   $42.75
                                               ---------------------------------
Options granted                                   400,000     14.75  -    23.50
Options exercised                                  (1,248)                23.50
Options forfeited                                (113,500)    23.50  -    42.75
                                               ---------------------------------
Outstanding at December 31, 1994                1,006,878      0.16  -    36.50
                                               ---------------------------------
Options granted                                   554,656     14.00  -    21.00
Options exercised                                (267,514)     0.16  -    16.50
Options forfeited                                (253,375)    10.00  -    36.50
                                               ---------------------------------
Outstanding at December 31, 1995                1,040,645      0.16  -    23.50
                                               ---------------------------------
Options granted                                    16,666     14.00  -    17.75
Options exercised                                 (15,908)     0.16
Options forfeited                                (304,669)    10.00  -    23.50
                                               ---------------------------------
Outstanding at December 31, 1996                  736,734    $ 0.93  -   $23.50
                                               ---------------------------------

The following  table  summarizes  information  about the Company's stock options
outstanding at December 31, 1996:

Year of expiration         Shares                     Option Price per share
--------------------------------------------------------------------------------
       1999                35,888                            $ 0.93
       2000                69,757                              0.93
       2002               216,819                             10.00
       2004               225,938                             16.50 - 23.50
       2005               171,666                             14.00 - 17.75
       2006                16,666                             14.00 - 17.75
                         ---------
                          736,734
                         ---------

                                       25
<PAGE>

At December  31,  1996,  1995 and 1994,  exercisable  options  totaled  608,453,
625,301 and  704,253,  respectively.  Treasury  shares of common stock have been
used upon  exercise of stock  options.  The  difference  between the cost of the
treasury  stock used and the total  option price of shares  exercised  have been
reflected in additional paid-in capital.
   During 1996, the Company adopted the  disclosure-only  provisions of SFAS No.
123 "Accounting for Stock-Based  Compensation," but, as permitted,  continues to
apply Accounting Principles Board Opinion No. 25 and related  interpretations in
accounting  for its stock option plans.  If the Company had elected to recognize
compensation  expense for the stock  option plans based on the fair value at the
grant dates for awards under those plans  consistent with the method  prescribed
by  SFAS  No.  123,  the  Company's  results  would  have  reflected  additional
compensation  expense of  approximately  $1,106,000  and $1,618,000 for 1996 and
1995,  respectively.  Net  income(loss) and earnings (loss) per share would have
been changed to the pro forma amounts indicated below.
                                                     Year ended      Year ended
                                                    December 31,    December 31,
(In thousands, except per share data)                      1996            1995
--------------------------------------------------------------------------------
Net income (loss):
  As reported                                          $(12,673)        $(2,543)
  Pro forma                                             (13,333)         (3,508)
--------------------------------------------------------------------------------
Earnings (loss) per share:
  As reported                                          $  (0.66)        $ (0.13)
  Pro forma                                               (0.70)          (0.18)

As the provisions of SFAS No. 123 have not been applied to options granted prior
to January 1, 1995,  the  resulting  pro forma compensation  expense  may not be
representative of that to be expected in future years.
   The fair value of the  Company's  stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant  date  using  the  Black-Scholes  option-pricing  model  with the
following weighted average  assumptions for 1996 and 1995: dividend yield of 0%;
expected  volatility  of 60%; a risk free interest rate of 6.3% and the expected
holding period of 5 years.

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 amend the plan to
assure a minimum Company contribution of 2% of qualified  compensation up to the
limits allowed by the Internal Revenue Service.  The Company expensed  $123,000,
$500,000 and $600,000 for contributions under this plan for the years ended 1996
and 1995 and for the eleven-month period ended December 31, 1994,  respectively.
Effective January 1, 1994, the Company's  Employee Stock Ownership Plan ("ESOP")
was merged into the savings plan.

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  maintains a bonus plan which provides cash awards to employees,  at
the  discretion  of the Board of  Directors,  based upon  operating  results and
employee performance.  Net bonus expense was $315,000, $181,000 and $464,000 for
the years ended 1996 and 1995 and for the eleven-month period ended December 31,
1994, respectively.

J. RELATED PARTY TRANSACTIONS

In  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 is now a  subsidiary  of HMRI.  Net sales to
Rugby were  approximately $1.0 million and $4.1 million for the years ended 1996
and 1995,  respectively.  Total  amounts due from Rugby at December 31, 1996 and
1995 were approximately $61,000 and $826,000, respectively.

                                       26
<PAGE>

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  has an initial  term of five years,  until  November  11,  1998,  and
continues unless terminated by either party giving one year's notice. On January
1, 1996,  HRPI was merged into HMRI.  HMRI has 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 become available for generic  distribution.
In order to assure  continuity of supply under a variety of circumstances and to
provide other  competitive  benefits,  the Company has agreed to renegotiate the
distribution  contracts  relating to glyburide and  micronized  glyburide;  as a
result,  the profit  contribution  of these products  likely may decrease in the
future.  For the years  ended 1996 and 1995 and the  eleven-month  period  ended
December 31,  1994,  approximately  $30,814,000,  $42,470,000  and  $33,131,000,
respectively, of generic versions of products were purchased from HMRI.
  Under the Product  Agreement the Company also is afforded the  opportunity  to
purchase bulk  pharmaceutical  ingredients under certain  circumstances.  During
1996 and  1995,  the  Company  purchased  approximately  $230,000  and  $37,000,
respectively, of bulk products under these agreements.
  In  connection  with HC's acquisition  of MMD, on December 5, 1995 the Federal
Trade  Commission  issued its Decision and Order  ("Order")  which,  among other
things,  requires  either HC or MMD to divest its assets  relating to  research,
development,  manufacture and sale of the compounds mesalamine and rifampin. For
purposes of the Order,  Copley is  considered  part of HC.  Copley has agreed to
divest its assets  relating to  mesalamine  and  rifampin  and has entered  into
agreements  for the  sale of these  assets  which  are  awaiting  Federal  Trade
Commission approval.  Both these products are in the developmental stage and the
Company has not submitted an ANDA for either  product.  The Company expects that
it will be  compensated  by its  majority  owner if it is not  able to  obtain a
satisfactory price for these assets.
   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  to
approximately  $5,140,000  and  $3,210,000  for the years  ended  1996 and 1995,
respectively,  compared to approximately  $193,000 for the  eleven-month  period
ended December 31, 1994.
  For the  years  ended  1996 and  1995,  the  Company  purchased  approximately
$265,000  and  $808,000,  respectively,  of bulk raw  chemicals  from a chemical
company whose president is a member of the Company's Board of Directors.
  For the years ended 1996 and 1995 and the  eleven-month  period ended December
31, 1994, the Company invested $59,000, $485,000 and $25,000, respectively, in a
multi-source  pharmaceutical  company,  MIR  Pharmaceutical,  whose  senior vice
president  is a member of the  Company's  Board of  Directors.  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 is
accounted for under the cost method.
  At  December  31,  1996,  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.  The  Company's
investment  in CTCP  totaled  $2.4 million and $218,000 at December 31, 1996 and
1995, respectively.
  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 if this  transaction is completed,
the  Company  will  receive  the  return of  approximately  $2.1  million of its
investment  in  CTCP  and  will  experience  a  corresponding  reduction  in its
ownership  interest in CTCP.  This  investment is accounted for under the equity
method.

K. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments:

Cash and Cash Equivalents
The carrying  amount  approximates  fair value because of the short  maturity of
these instruments.

                                       27
<PAGE>

Securities
The fair values of those instruments are estimated based on quoted market prices
for these or similar investments.

Long-term  Debt
The fair value of the Company's  long-term debt is estimated by discounting cash
flows based on similar current rates offered to the Company for debt of the same
remaining maturities.

                                 December 31, 1996            December 31, 1995
                                 -----------------------------------------------
                                 Carrying     Fair            Carrying     Fair
(In thousands)                      Value    Value               Value    Value
--------------------------------------------------------------------------------
Cash and cash equivalents         $15,974  $15,974             $18,950  $18,950
Available-for-sale securities      13,757   13,757               5,147    5,147
Trading securities                     --       --                 950      950
Long-term debt                      5,400    5,400               5,700    5,700

L. 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 lease is for five years with a
five-year  renewal  option and requires  the payment of  insurance,  real estate
taxes  and other  operating  expenses.  Additionally,  during  1996 the  Company
leased,  on a monthly  basis,  a warehouse and packaging site from a real estate
trust that is 50% owned by a member of the Company's Board of Directors; by year
end the Company  consolidated these operations into the existing  facilities and
terminated  this lease.  The Company also leases  vehicles and office  equipment
under one-to five-year operating leases.
   Net rental  expense was  $1,053,000,  $1,720,000 and $1,519,000 for the years
ended 1996 and 1995,  and the  eleven-month  period  ended  December  31,  1994,
respectively,  which included related party rental expense of $180,000, $171,000
and $145,000,  respectively.  Additionally,  the Company expensed  $236,000 as a
restructuring charge in 1996 for future lease commitments on locations that were
vacated in the consolidation effort.

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

(In thousands)
--------------------------------------------------------------------------------
1997                                                                     $  562
1998                                                                        541
1999                                                                        532
2000                                                                        527
2001                                                                        476
Thereafter                                                                   --
                                                                         -------
  Total minimum lease payments                                           $2,638
                                                                         -------

Albuterol Class Action Lawsuits
In connection with the Company's product recall of albuterol sulfate  inhalation
solution,  0.5%  ("albuterol"),  the Company has been served with  complaints in
numerous  lawsuits  in federal and state  court,  some of which are on behalf of
numerous  claimants.  The plaintiffs  principally seek compensatory and punitive
damages  and allege  that  injuries  and deaths  were  caused by  inhalation  of
allegedly contaminated product manufactured and distributed by the Company.
  The federal court  lawsuits were  consolidated  in the United States  District
Court for the District of Wyoming as a  multi-district  litigation for pre-trial
purposes  under the  caption  In Re:  Copley  Pharmaceutical,  Inc.  "Albuterol"
Products  Liability  Litigation.  The District  Court  certified a partial class
action for  determination  of liability  only and commenced a jury trial in June
1995. 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 non-binding negotiation and arbitration.  Within
the Company's  minimum and maximum  contributions,  the amount to be paid by the
Company is  subject  to  revision  based

                                       28
<PAGE>

upon the number and  seriousness  of  individual  claims  eventually  filed.  On
November 15, 1995, the District Court entered its Order giving final approval of
the settlement and that Order has become final and nonappealable.
  The settlement  agreement requires that the $150 million maximum  contribution
to be funded by an initial $50 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.  During the third  quarter of
1995, the Company paid $5.1 million to the Albuterol  Settlement  Trust Fund and
obtained  approximately $17.1 million in irrevocable  stand-by letters of credit
to  cover  its  uninsured  obligation  to fund  the  settlement  agreement.  The
settlement agreement required an additional $15.0 million cash deposit after the
order approving the settlement became final and nonappealable, which occurred in
late  December   1996. In January   1997,  the Company made an additional  $2.25
million  cash  deposit and its  stand-by  letters of credit will be reduced by a
like  amount.  The balance of the additional $15.0 million cash deposit is to be
funded  by a draw  upon a letter of  credit  previously  provided  by one of the
Company's  insurers.  The $7.35  million cash  contributions  by the Company are
nonrefundable pursuant to the terms of the settlement agreements.
  Approximately  5,530  proofs of claim have been filed with the Special  Master
appointed  by the Court to oversee  the  Albuterol  Settlement  Trust  Fund.  In
addition,  approximately 860 clients of Jacoby & Meyers, representing nearly all
of that firm's  clients who are not alleging a death caused by  albuterol,  have
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.
Proofs of claim  also have been  filed on  behalf of  approximately  485  people
alleging wrongful death.
  Recourse to the  remaining  letters of credit in the class  action  settlement
will not occur  until all  claims  are  processed  and  settlement  amounts  are
recommended  by the Special  Master,  and is  contingent on the number of claims
filed  within  certain  categories.  Although  the total  number of claims filed
against the  Albuterol  Settlement  Trust Fund is less than the number of claims
for which the  settling  parties  anticipated  would be necessary to require the
maximum funding of the Albuterol Settlement Trust Fund, at this time the Company
is unable to determine  how many of these claims will be awarded  damages by the
Special  Master  and,  if  awarded  damages,  how much will be given to  various
claimants.  In addition,  administrative fees and class action attorney fees and
expenses will be paid out of the Albuterol  Settlement Trust Fund.  Accordingly,
the  Company  cannot  predict the total  amount to be paid out of the  Albuterol
Settlement Trust Fund.
  The  settlement  also is subject to certain other  contingencies  and does not
cover certain  individuals  who  previously  opted out of the class action.  The
Company  continues  to be a  defendant  in lawsuits  that were  brought by or on
behalf of  approximately 65 people who properly opted out of the class action; a
tentative  settlement was reached in two lawsuits involving  approximately 45 of
these persons in the first quarter of 1997.

Grand Jury Investigation
The Company has received grand jury subpoenas from the United States  Attorney's
Office in  Massachusetts  for documents  related to albuterol and  Brompheril(R)
products,  which were  recalled by the Company in  December  1993 and  September
1994,  respectively,  and  extending  beyond  these  products.  The  Company  is
complying with the subpoenas and has cooperated with federal  authorities.  This
investigation  continues and the Company is engaged in ongoing discussions about
a possible  resolution  with federal  authorities.  At this time  management  is
unable to determine the ultimate impact on the Company's financial condition. An
adverse outcome of these  proceedings could result in material  sanctions and/or
fines.

Shareholders'  Lawsuit
In April 1993, three former  shareholders of the Company filed a lawsuit against
the Company and  certain of its  officers  and  directors  in the United  States
District Court for the Southern District of New York. Ladenburg, Thalmann & Co.,
Inc.,  a  former  financial  advisor  to the  plaintiffs,  was  also  named as a
defendant in the complaint.  The complaint  alleges that the Company and certain
of its officers and  directors  committed  fraud and  breached  their  fiduciary
duties  to the  plaintiffs  in  connection  with  the  Company's  November  1991
repurchase of shares then  representing the equivalent of 168,750 current shares
of common stock from the  plaintiffs by making false and  misleading  statements
and failing to disclose material facts regarding the Company and its prospects.
  The complaint seeks monetary  damages in excess of $10 million,  rescission of
the November  1991 share  repurchase,  unspecified  punitive  damages and costs,
disbursements  and  attorney's  fees.  The  Company  filed a motion for  summary
judgment  in August  1994  which was  granted  in part and  denied in part in an
opinion  dated  October  11,  1995.  The case is  awaiting  trial  which  now is
scheduled to begin in late April 1997.
  The Company and its officers and directors  believe that they have meritorious
defenses to any claims by the former  shareholders  based on the  November  1991
repurchase, that any such claims are without merit, and that the Company and its
officers and directors should prevail in any such lawsuits.  However,  there can
be no assurance  that the Company and its officers and directors will prevail in
this lawsuit or that an adverse outcome would not result in significant monetary
damages or have a material adverse effect on the Company's  financial  condition
or results of operations.

                                       29
<PAGE>

Marion Merrell Dow, Inc. Bulk Diltiazem Lawsuit
In November of 1992,  a lawsuit was filed  against the Company by MMD and Tanabe
Seiyaku  Co.,  Ltd.  ("Tanabe")  in the  United  States  District  Court for the
District of Massachusetts  captioned Marion Merrell Dow, Inc. and Tanabe Seiyaku
Co., Ltd. v. Copley Pharmaceutical,  Inc. and Orion Corporation Fermion. MMD and
Tanabe  allege that the Company and Orion  Corporation  Fermion  ("Orion"),  the
manufacturer  of the Company's bulk  diltiazem,  are infringing a process patent
for one method of manufacturing bulk diltiazem. MMD and Tanabe have alleged that
they are the  exclusive  licensee and  patentee,  respectively,  of such process
patent.  The  complaint  seeks a permanent  injunction  and trebled  unspecified
monetary  damages.  The  Company has denied all  liability  in its answer to the
complaint. On May 10, 1993, the Court ordered the case administratively  closed,
staying the case until further  notice.  On June 27, 1995,  the parties  jointly
moved the Court for an Order  further  staying  the  action  until 30 days after
completion of the related  International Trade Commission  proceeding  discussed
below.

International  Trade  Commission  Complaint
On February 25, 1993, the Company,  together with a number of other multi-source
pharmaceutical manufacturers and certain chemical manufacturers,  was named as a
respondent  in a  complaint  filed by MMD and Tanabe  before  the United  States
International Trade Commission ("the ITC") captioned Complaint of Marion Merrell
Dow, Inc. and Tanabe Seiyaku Co., Ltd. Pursuant to Section 337 of the Tariff Act
of 1930. The complaint  seeks an order (i) prohibiting the importation of, among
other things,  the bulk diltiazem  purchased by the Company from Orion, and (ii)
requiring the Company to immediately stop selling its current diltiazem product,
which  incorporates  bulk  diltiazem  supplied  by Orion,  based on the  alleged
infringement by Orion of a process patent for one method of  manufacturing  bulk
diltiazem.
  On  June  1,  1995,  the ITC  issued  its  Final  Determination  ordering  the
investigation  terminated with the finding of no violation of Section 337, of no
patent  infringement  and taking no position on the issue of patent validity and
enforceability. On July 20, 1995, MMD and Tanabe filed an appeal with the United
States  Court of Appeals for the  Federal  Circuit  seeking  review of the ITC's
Final  Determination.  On March 7, 1997,  the United States Court of Appeals for
the Federal Circuit  affirmed the ITC's decision  finding no  infringement.  The
time for further appeal has not expired.
  Orion has agreed at its  expense to defend the  Company in this action and the
MMD Bulk Diltiazem Lawsuit discussed previously and to indemnify the Company for
any  damages  that  might be  assessed  as a  result  of the  Company's  sale of
diltiazem  obtained  from  Orion.  Although  the  Company  believes  that  these
complaints  are  without  merit,  that the  Company  and Orion have  meritorious
defenses  to these  actions,  and  that  the  Company  should  prevail  in these
lawsuits,  there can be no  assurance  that the Company  will prevail or that an
adverse  outcome  would not have a  material  adverse  effect  on the  Company's
financial condition or results of operations.

Subsequent  Event
On January 29,  1997,  the  Company  was served  with a  complaint  in an action
pending  in  the  New  Jersey   Superior   Court,   Morris   County,   captioned
Warner-Lambert  Company v. Copley  Pharmaceutical,  Inc. and Shubha Chungi.  The
plaintiff  alleges that the Company obtained access to the plaintiff's  formula,
process and sustained  release  technology  for a procainamide  product  through
improper  means.  The Company has been  marketing  its product  since 1985.  The
individual named as a defendant is a former employee of the plaintiff who joined
the Company in 1984.  The Company  believes it has  meritorious  defenses to the
claims asserted by plaintiff and will vigorously defend the case. However, there
can be no  assurance  that the  Company  will  prevail in the lawsuit or that an
adverse  outcome  would not  result in  significant  monetary  damages or have a
material  adverse  effect on the  Company's  financial  condition  or results of
operations.

Other Legal  Proceedings
The Company is subject to other legal  proceedings and claims which arise in the
ordinary course of business.  In the opinion of management,  the results of such
proceedings will not have a material  adverse effect on the Company's  financial
condition or results of operations.
   The Company has $17.8 million of estimated legal contingency reserves accrued
at December 31, 1996.  These  reserves  reflect the  Company's  estimates of its
exposure at  December  31, 1996 in its  various  outstanding  legal  proceedings
described above. Actual settlement amounts may differ from amounts estimated.

M. SUPPLEMENTAL CASH FLOW INFORMATION

The following provides additional information concerning disclosure of cash flow
activities:

                                       30
<PAGE>

                                                                  Eleven-month
                                     Year ended     Year ended    period ended
                                    December 31,   December 31,    December 31,
(In thousands)                             1996           1995            1994
--------------------------------------------------------------------------------
Cash paid (refunded) during the period for:
  Interest                             $    241        $   280         $   225
  Income taxes                           (5,062)        (1,741)          3,948

N. 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.

O. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         Three-month Periods Ended
                                                        ---------------------------------------------------------             Total
                                                         March 31,        June 30,   September 30,   December 31,       December 31,
(In thousands, except per share data)                        1996            1996            1996           1996               1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>            <C>                <C>
Net sales                                               $  24,347       $  35,311       $  32,589      $  31,214          $ 123,461
Gross profit                                                4,648          10,002           7,920          6,860             29,430
Recall related and litigation expenses                        191            (255)            175         12,232 (a)         12,343
Net income (loss)                                          (3,029)          1,702             614        (11,960)(b)        (12,673)
Net income (loss) per share                             $   (0.16)      $    0.09       $    0.03      $   (0.63)         $   (0.66)
</TABLE>

<TABLE>
<CAPTION>
                                                                         Three-month Periods Ended
                                                        ---------------------------------------------------------             Total
                                                         March 31,        June 30,   September 30,   December 31,       December 31,
(In thousands, except per share data)                        1995            1995            1995           1995               1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>            <C>                <C>
Net sales                                               $  30,893       $  35,148       $  39,232      $  36,885          $ 142,158
Gross profit                                               11,570          12,658          10,807          6,234(c)          41,269
Recall related and litigation expenses                      1,500           2,011          12,827          1,492             17,830
Net income (loss)                                           2,915           1,505          (5,246)        (1,717)            (2,543)
Net income (loss) per share                             $    0.15       $    0.08       $   (0.28)     $   (0.09)         $   (0.13)
</TABLE>


(a) Includes an increase in contingency reserves reflecting changes in estimates
    of the Company's exposure in its various outstanding legal proceedings.
(b) Includes $3.5 million ($2.1 million after taxes) of restructuring expenses.
(c) Includes increased  inventory  write-offs and increased accounts  receivable
    allowances. The inventory write-offs resulted primarily  from normal Company
    operations and management's decision to discontinue  certain of its products
    during the fourth quarter. The accounts receivable allowances resulted
    primarily from pricing adjustments related to competitive pressures and from
    increased government rebates and returns recognized during the fourth
    quarter.

                                       31
<PAGE>

                           COPLEY PHARMACEUTICAL, INC.
                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Copley
Pharmaceutical,  Inc. and  subsidiaries  ("the Company") as of December 31, 1996
and 1995 and the related  consolidated  statements of operations,  shareholders'
equity and cash flows for the years then  ended.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.
  We  conducted  our  audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
  In our  opinion,  the  consolidated  financial  statements  referred  to above
present  fairly,  in all  material  respects, the  financial  position of Copley
Pharmaceutical,  Inc. and  subsidiaries as of December 31, 1996 and 1995 and the
results of their  operations  and their cash flows for the years then ended,  in
conformity with generally accepted accounting principles.




/S/KPMG Peat Marwick LLP
   Boston, Massachusetts
   January 29, 1997




               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 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  solely  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.




/S/Ken E. Starkweather
   Vice President-Finance and Treasurer

                                       32
<PAGE>

                           COPLEY PHARMACEUTICAL, INC.
                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the consolidated  statement of operations,  shareholders' equity
and cash flows of Copley Pharmaceutical,  Inc. for the eleven-month period ended
December 31, 1994.  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  in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
  In our opinion,  the financial statements referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Copley  Pharmaceutical, Inc. for the eleven-month period ended December 31, 1994
in conformity with generally accepted accounting principles.


/S/Coopers & Lybrand L.L.P
   Boston, Massachusetts
   January 25, 1995

                                       33
<PAGE>

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

Coopers & Lybrand  L.L.P.  were  previously  the principal  accountants  for the
Company. On September 6, 1995, that firm's appointment as principal  accountants
was terminated  and KPMG Peat Marwick LLP were engaged as principal  accountants
by the Company's Board of Directors.
  In connection  with the audit of the  eleven-month  period ended  December 31,
1994 and during the interim  period from December 31, 1994, the date of the last
audited financial statements, to September 6, 1995, the date of dismissal, there
were no disagreements  with Coopers & Lybrand L.L.P. 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 report of Coopers & Lybrand  L.L.P.  on the financial  statements of
Copley  Pharmaceutical,  Inc.  for  the  eleven-month  transition  period  ended
December 31, 1994 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, 1996,  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,  1996,  under  the  heading  "Compensation  and Other
Information Concerning Directors and 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,  1996,  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, 1996,  under the heading  "Certain  Relationships  and
Related Transactions."

                                     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, 1996 and December 31, 1995

    Consolidated Statements of Operations for the years ended December 31, 1996
    and 1995 and the eleven-month period ended December 31, 1994

    Consolidated  Statements of Shareholders' Equity for the eleven-month period
    ended December 31, 1994 and the years ended December 31, 1995 and 1996

    Consolidated  Statements of Cash Flows for the years ended December 31, 1996
    and 1995 and the eleven-month period ended December 31, 1994

    Notes to Consolidated Financial Statements

    Reports 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.
   4****          Description  of Capital Stock  contained in the Company's
                  Amended and Restated Certificate of Incorporation, as amended,
                  filed as Exhibit 3.1.
   10.1*          Subordinated Convertible Debenture Purchase Agreement between
                  the Company and certain investors dated November 15, 1991.
   10.2*          Registration Rights Agreement between the Company and certain
                  investors dated November 22, 1991.
   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.
   10.11*         Research & Development Cross License and Option to Purchase
                  with Copley R&D Limited Partnership II.
   10.12*         Form of Indemnity Agreement with Directors and Certain
                  Officers.
   10.13**        Employment Agreement, dated as of October 8, 1993, between the
                  Company and Jane C.I. Hirsh.
   10.14**        Form of Employment Agreement between the Company and certain
                  employees.

                                       34
<PAGE>

   Exhibit No.    Description
   -----------------------------------------------------------------------------
   10.15**        Acquisition Agreement, dated as of October 8, 1993, by and
                  among the Company, Hoechst Celanese and HCCP Acquisition
                  Corporation.
   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.
   10.17**        Stock Purchase Agreement, dated as of October 8, 1993, by and
                  among Hoechst Celanese Corporation, HCCP Acquisition
                  Corporation, Jane C.I. Hirsh, Mark Hirsh, and Advent VI L.P.,
                  Advent Atlantic and Pacific Limited Partnership, Advent
                  Atlantic and Pacific II Limited Partnership, Advent New York
                  L.P., Advent Industrial II, L.P., TA Venture Investors Limited
                  Partnership, Chestnut III Limited Partnership and Chestnut
                  Capital  International  Partnership.
   10.18**        Product Agreement, dated as of October 8, 1993, between
                  Hoechst  Celanese  Corporation  and the  Company.
   10.19**        Confidentiality Agreement, dated as of September 10, 1993,
                  between the Company and Hoechst Celanese  Corporation.
   10.20***       Amended and Restated Loan Agreement dated August 17, 1993
                  between Copley Pharmaceutical, Inc. and The First National
                  Bank of Boston.
   10.21*****     Resignation Agreement dated December 22, 1994 between Anthony
                  A. Bonelli and Copley Pharmaceutical,  Inc.
   10.22+         1995 Non-Employee Director Stock Option Plan.
   10.23+         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+         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+         First Amendment to Reimbursement Agreement dated as of June
                  29, 1995 by and between the Company and Bank of Boston.
   10.26++        Agreement of Compromise and Settlement dated August 22, 1995.
   10.27++        Supplement to August 22, 1995 Agreement of Compromise and
                  Settlement.
   10.28++        Escrow and Trust Agreement dated August 28, 1995.
   10.29++        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+++       Stipulation of Compromise and Settlement dated November 17,
                  1995.
   10.31+++       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++++      Fourth Amendment to Amended and Restated Loan Agreement dated
                  as of July 31, 1996 by and between the Company and Bank of
                  Boston.
   10.33++++      Third Amendment to Amended and Restated Promissory Note dated
                  as of July 31, 1996 by and between the Company and Bank of
                  Boston.
   21             Subsidiaries of the Company.
   23.1           Consent of KPMG Peat Marwick LLP.
   23.2           Consent of Coopers & Lybrand L.L.P.
   27             Financial Data Schedule.

   *              Previously filed as exhibits to the Company's Registration
                  Statement on Form S-1 (File No. 33-60324) filed on March 31,
                  1993 and incorporated herein by reference.
   **             Previously filed as exhibits to the Company's Solicitation/
                  Recommendation Statement on Schedule 14D-9 dated October 14,
                  1993 and incorporated herein by reference.
   ***            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.
   ****           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.
   *****          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.
   +              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.
   ++             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.
   +++            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.
   ++++           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.

(b)REPORTS ON FORM 8-K
   Form 8-K dated July 9, 1996- Item 5: Other Events. The Company announced that
   Kenneth N. Larsen will assume the office of the President on an interim basis
   in place of Dr.  Gabriel R. Cipau,  who has  resigned  all  positions  in the
   Company.

   Form 8-K dated September 6, 1996- Item 5: Other Events. The Company announced
   that Ken E. Starkweather has accepted the position of Vice President-Finance,
   succeeding  Barbara Sherrill,  who has resigned all positions in the Company.

   No other  reports on Form 8-K were filed  during the year ended  December 31,
   1996.

(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.

                                       35
<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/ KENNETH N. LARSEN
                                -------------------------
                                Kenneth N. Larsen
                                Chairman of the Board
                                (principal executive officer)


                                By: /S/ KEN E. STARKWEATHER
                                ---------------------------
                                Vice President-Finance and Treasurer
                                (principal financial and accounting officer)



Date: March  28, 1997


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.

Signature               Title(s)                                Date
--------------------------------------------------------------------------------
/S/KENNETH N. LARSEN
--------------------
Kenneth N. Larsen       Chairman of the Board and Director       March 28, 1997
                        (principal executive officer)

/S/KEN E. STARKWEATHER
----------------------
Ken E. Starkweather     Vice President-Finance and Treasurer     March 28, 1997
                        (principal financial and accounting officer)

/S/ JUDITH FENSTERER
--------------------
Judith Fensterer        Director                                 March 28, 1997

/S/ JANE C.I. HIRSH
-------------------
Jane C.I. Hirsh         President of Copley Pharmaceutical       March 28, 1997
                        International, Inc. and Director

/S/ PETER W. LADELL
-------------------
Peter W. Ladell         Director                                 March 28, 1997

/S/JAMES P. MITCHUM
-------------------
James P. Mitchum        Director                                 March 28, 1997

/S/ AGNES VARIS
---------------
Agnes Varis             Director                                 March 28, 1997

/S/ MARTIN ZEIGER
-----------------
Martin Zeiger           Director                                 March 28, 1997

                                       36