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, 1997

                                       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
            CANTON, MASSACHUSETTS                           02021
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)

                         COMMISSION FILE NUMBER: 0-20126

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781)821-6111
        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          COMMON STOCK, $.01 PAR VALUE

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

                              YES     X   NO

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

AGGREGATE  MARKET  VALUE,  AS OF  MARCH  16,  1998,  OF  COMMON  STOCK  HELD  BY
NON-AFFILIATES  OF THE  REGISTRANT:  $54,239,500.00,  BASED ON THE LAST REPORTED
SALE PRICE ON THE NASDAQ NATIONAL MARKET.

   NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON MARCH 16, 1998: 19,153,518

                       DOCUMENTS INCORPORATED BY REFERENCE

THE  REGISTRANT  INTENDS  TO  FILE A  DEFINITIVE  PROXY  STATEMENT  PURSUANT  TO
REGULATION 14A WITHIN 120 DAYS OF THE YEAR ENDED DECEMBER 31, 1997.  PORTIONS OF
SUCH PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART III OF THIS REPORT.

<PAGE>

                                     PART 1

                                ITEM 1: BUSINESS

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

Generic Drug Market
Generic  pharmaceutical sales have increased  significantly 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's publication of a list of therapeutic equivalent drugs,
which provides  physicians and pharmacists  with generic drug  alternatives.  In
addition,  since generic  pharmaceutical  products are typically  sold at prices
significantly  below those of their brand-name  equivalents,  various government
agencies and many  private  managed care or  insurance  programs  encourage  the
prescribing  of generic drugs as a  cost-savings  measure in the purchase of, or
reimbursement for,  prescription drugs. 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  emphasizes 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
seeks 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 a lesser
extent, manufacture and market products for sale outside the United States.

(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"),  a former
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
became  available  for  generic  distribution.  Refer to Note J of the  Notes to
Consolidated Financial Statements.

<PAGE>

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

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

Generic Versions of HMRI Drugs
The  Company's  Product  Agreement  with HC affords the Company the  opportunity
under  specified  conditions to distribute and market certain HMRI drug products
which  HMRI  desires  to sell in  generic  form  which  have  become  subject to
multi-source  competition or which HMRI decides to pre-launch in generic version
before the relevant patent expires.  The Company markets glyburide,  the generic
version  of  HMRI's  DiaBeta(R),   and  micronized  glyburide,  the  therapeutic
equivalent   of  Pharmacia  &  Upjohn's   Glynase(R)   and  HMRI's   GluBate(R).
Additionally,  in July 1997 the Company introduced  pentoxifylline,  the generic
version of HMRI's  Trental(R).  The Company  does not expect to  distribute  and
market any additional new products under the Product Agreement.

Non-U.S.  Markets
The Company  plans to  continue  to  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.  During the second quarter of 1997,  the Company  withdrew from and wrote
off its  investment in a partnership  organized to sell generic drugs in certain
republics of the former Soviet Union but will continue to sell products  through
that  partnership.  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.

As of March 16, 1998 the Company's products include the following:
<TABLE>
<CAPTION>
                                        Number
                                        of Dosage
Products                                Strengths     Brand Name/Company
-------------------------------------------------------------------------------------------------------
<S>                                             <C>   <C>
Preparations for Neoplasms, Endocrine System and Metabolic Diseases
      glyburide tablets                         3     DiaBeta(R)/Hoechst Marion Roussel, Inc.
      hydrocortisone enema suspension           1     Cortenema(R)/Solvay
      micronized glyburide tablets              2     GluBate(R)/Hoechst Marion Roussel, Inc.
                                                      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
     diclofenac sodium delayed-release tablets  3     Voltaren(R)/Ciba-Geigy
     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
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                       Number
                                       of Dosage
Products                               Strengths      Brand Name/Company
------------------------------------------------------------------------------
<S>                                             <C>   <C>
Central Nervous System and Sense Organ Drugs
     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

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
     sodium fluoride drops                      1     Luride(R)/Colgate

Cardiovascular System Drugs
     captopril tablets                          4     Capoten(R)/Bristol-Myers Squibb
     diltiazem HCl tablets                      4     Cardizem(R)/Hoechst Marion Roussel, Inc.
     guanabenz acetate tablets                  2     Wytensin(R)/Wyeth-Ayerst
     nadolol tablets                            3     Corgard(R)/Bristol-Myers Squibb
     pentoxifylline tablets                     1     Trental(R)/Hoechst Marion Roussel, Inc.
     procainamide HCl ER tablets                3     Procan(R)SR/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
     minoxidil topical solution 2% for women    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

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

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

Except for Copley and  Brompheril,  all brand names,  trademarks  or  registered
trademarks appearing in this report are the property of others.

For the year ended  December 31, 1997,  preparations  for  neoplasms,  endocrine
system and metabolic  diseases;  anti-infective  agents;  cardiovascular  system
drugs;  and central  nervous  system and sense organ drugs  accounted for 35.9%,
20.7%, 12.2% and 10.5% of net sales,  respectively.  For the year ended December
31, 1996,  preparations for neoplasms,  endocrine system and metabolic diseases;
anti-infective  agents;  and  central  nervous

<PAGE>

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. No other single  therapeutic  category  accounted for more than 10% of
the Company's net sales during these periods.


Research and Development
For the years ended December 31, 1997, 1996 and 1995, the Company incurred $11.7
million,   $13.7  million  and  $13.3   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 time for new prescription  ANDA products,  including
formulation,  bioequivalence and stability testing and the FDA approval process,
averages from three to five years.  The costs  associated with  establishing and
operating  research and  development  laboratories  for analytic  chemistry  and
formulations,  conducting biostudies, complying with FDA procedures,  completing
scale-up and process  development and hiring,  employing and training  technical
and scientific staff members have increased in recent years.

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.

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

Marketing and Distribution
The Company markets its products to  approximately  250 customers.  For the year
ended December 31, 1997, 42.6% of net sales were to drug  wholesalers,  35.3% to
retail chains, 21.0% to multi-source  distributors of the Company's prescription
drugs  and the  remaining  1.1% to  government  agencies,  hospitals  and  HMOs.
Included in  wholesaler  and  multi-source  distributor  net sales are  indirect
contract  sales  negotiated by the Company with  non-warehousing  retail chains,
retail buying groups,  hospitals,  and managed care entities.  The Company sells
its drug  products  under its own  "Copley"  label  and  through  private  label
arrangements  with  multi-source  distributors.  For the year ended December 31,
1997,  one customer  accounted  for 13.9% of total net sales and no other single
customer  accounted for more than 10% of the  Company's  net sales.  The Company
does not believe that the loss of any one customer would have a material adverse
effect on the Company's business or operations.
      Customer  service  activities  are  an  integral  part  of  the  Company's
marketing  operations.  The Company uses its best  efforts to maintain  adequate
inventories,  make timely  delivery of its  products and provide  technical  and
other service support to its customers.

Backlog Orders
The net  dollar  amount of  backlog  orders  for the  Company's  products  as of
December 31, 1997 was  approximately  $1.8 million as compared with $1.0 million
as of December 31, 1996.  The Company's  backlog  orders consist of those orders
received  by the  Company  but which the Company had not shipped by the later of
two business days following receipt of the order or the customers' requested due
date.  Although  these  orders are  subject  to  cancellation  without  penalty,
management  expects to fill  substantially all of such orders within the current
fiscal year.

Raw Materials
The  active  pharmaceutical  ingredient  (API) 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

<PAGE>

implementation  by the member countries,  may make it increasingly  difficult to
obtain certain raw materials prior to the expiration of the applicable  European
patents.
      Since the FDA's drug  application  process  requires  specification of raw
material  suppliers,  if raw materials from a specified  supplier were to become
unavailable,  the Company  would be required to file a supplement to its product
filing  and  revalidate  the  manufacturing  process  using  the new  supplier's
materials.  This could cause a delay of several months in the manufacture of the
drug involved and the consequent loss of potential revenue and market share. 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,  1998,  the  Company  had  404  full-time  and 5  part-time
employees.  Of these,  182 were  involved  in  production,  67 in  research  and
development,   66  in  quality  affairs,   40  in  facilities   maintenance  and
engineering, 36 in administration and 18 in sales and marketing.

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,  continuity of supply, price, product quality,  breadth
of product line, customer service and reputation.
      A number of the Company's  competitors,  including  generic  divisions and
subsidiaries of large brand-name  pharmaceutical  companies,  have substantially
greater resources to devote to product development,  manufacturing and marketing
than the Company. The industry is characterized by rapid technological  advances
and by the frequent introduction of new products.  The Company's competitors may
develop their products more rapidly or complete the regulatory  approval process
sooner,  and  therefore  market  their  products  earlier.  New drugs and future
developments  in alternative  drug delivery  technologies  or other  therapeutic
techniques may provide therapeutic or cost advantages to competing products.
      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.

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, record keeping, approval,  advertising,  promotion, sale and
distribution  of   pharmaceutical   products.   Noncompliance   with  applicable
requirements  can  result in fines,  recall or  seizure  of  products,  total or
partial suspension of production and/or distribution,  refusal of the government
to enter into supply  contracts or to approve 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 three to five years.
      FDA approval is usually  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 is also required by the
FDA  before a  company  can  market  new  products.  The FDA  conducts  pre- and
post-approval   reviews  and  plant   inspections  to  implement   these  rules.
Supplemental  filings for approval to transfer  products from one  manufacturing
site to another may be under review for a year or more, and certain products may
only be approved for transfer if new  bioequivalency  studies are done.  The FDA
also has increased  the number of regular  inspections  to determine  compliance
with its cGMP standards.
      The  Waxman-Hatch  Act  of  1984  extended  the  established   abbreviated
application procedure for obtaining FDA approval for generic forms of brand-name
drugs  originally  marketed  before 1962 which are  off-patent  or whose

<PAGE>

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 non-patented  drug
products.  Another  provision  may  extend  patents  for  up to  five  years  as
compensation  for reduction of the  effective  life of the patent as a result of
time spent by the FDA reviewing a drug application. Patents may also be extended
pursuant to the terms of the Uruguay Round Agreements Act.
      In the past year there have been an  increasing  number of attempts to use
federal  legislation  to extend the patent life of various drugs beyond the term
permitted  under current  statutes.  Although the generic drug industry thus far
has been mostly successful in defeating these attempts at extending the monopoly
of  brand-name  drugs,  the  Company  could be  adversely  impacted  if  future
legislation is enacted which extends the patent exclusivity of a number of drugs
that are expected to come off patent in the coming years.
      The  Generic  Drug  Enforcement  Act of  1992  establishes  penalties  for
wrongdoing  in  connection  with the  development  or  submission  of an ANDA by
authorizing the FDA to permanently or temporarily debar companies or individuals
from  submitting or assisting in the  submission of an ANDA,  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 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,  including  the  glyburide,
micronized   glyburide   and   pentoxifylline   distributed   by  the   Company,
manufacturers  are  required to rebate the greater of 15.1% of average net sales
price or the difference between average net sales price and the lowest net sales
price during a specified  period.  The Company  believes that the federal and/or
state governments may continue to enact measures in the future aimed at reducing
the cost of drugs to the public.  The Company  cannot predict the nature of such
measures or their impact on the Company's profitability.
      The Company  also is governed by federal,  state and local laws of general
applicability,  such as laws regulating  working  conditions.  In addition,  the
Company is subject, as are manufacturers  generally,  to various federal,  state
and  local  environmental  protection  laws  and  regulations,  including  those
governing the discharge of material into the  environment.  Compliance with such
environmental  provisions  is not  expected  to have a  material  effect  on the
earnings,  cash  requirements  or  competitive  position  of the  Company in the
foreseeable  future.  However,  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.

                               ITEM 2: PROPERTIES

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

<PAGE>

                            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 included
herewith.

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

No matters were  submitted to a vote of security  holders  during the last three
months of the year ended December 31, 1997.


                                     PART II


                ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
                           RELATED SHAREHOLDER MATTERS

The  Company's  common stock is quoted on The NASDAQ  National  Market under the
symbol  "CPLY." The following  table sets forth the range of quarterly  high and
low bid  information  for the common stock for the years ended December 31, 1996
and 1997:

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

YEAR ENDED DECEMBER 31, 1997                             HIGH        LOW
--------------------------------------------------------------------------------
FIRST QUARTER                                          $ 9.63     $ 6.50
SECOND QUARTER                                           8.63       4.63
THIRD QUARTER                                            8.13       5.75
FOURTH QUARTER                                           8.88       5.30

As of March 16, 1998, there were approximately 274 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.  The  Company has no
intention of paying dividends in the foreseeable future.

                         ITEM 6: SELECTED FINANCIAL DATA

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

<PAGE>

<TABLE>
<CAPTION>
                                                                                                     Eleven-month
                                                                                                     period ended      Year ended
                                                           Years ended December 31,                   December 31,     January 31,
(In thousands, except per share data)           1997        1996            1995            1994           1994           1994
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>             <C>             <C>            <C>            <C>
Statement of Operations Data:
Net sales                                  $ 121,483   $ 123,461       $ 142,158       $ 120,348(c)   $ 113,973(c)   $  86,268
Gross profit                                  29,655      29,430          41,269(b)       52,177         48,318         48,895
Operating expenses:
     Research and development                 11,672      13,682          13,299           9,938          9,057          8,115
     Selling, general and administrative      11,870      19,635(a)       16,324          15,319         14,170         11,454
     Recall related and litigation             3,687      12,343          17,830           4,691          2,766          4,925
Income (loss) from operations                  2,426     (16,230)         (6,184)         22,229         22,325         24,401
Net income (loss)                                564     (12,673)(a)      (2,543)(b)      15,109(c)      15,007(c)       6,370(d)
Diluted earnings (loss)
     per share                             $    0.03   $    (.66)(a)   $    (.13)(b)   $     .78(c)   $     .78(c)   $     .34(d)
Diluted weighted average
     common shares outstanding                19,222      19,081          18,977          19,309         19,273         18,536
Balance Sheet Data:
Working capital                            $  60,080   $  48,179       $  59,365       $  56,704      $  56,704      $  55,444
Total assets                                 145,744     151,727         155,245         152,662        152,662        126,985
Long-term debt                                 4,800       5,100           5,400           5,700          5,700          6,000
Total shareholders' equity                   100,881     100,131         112,524         112,683        112,683         98,588
<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.
</FN>
</TABLE>

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

Results of Operations

Overview
The Company  reported net income of $0.6 million or $0.03 per share for the year
ended December 31, 1997.  Excluding  product recall,  other  litigation and cost
reduction  initiatives related items, net income would have been $4.5 million or
$0.24 per share.  Net sales of $121.5  million  were 1.6%  lower than 1996.  New
product launches, primarily the distributed product pentoxifylline,  contributed
$9.0 million to total  revenues.  Price erosion slowed in 1997, but prices still
fell by 9.9% or $12.2 million. Gross margin improved in 1997 to 24.4% from 23.8%
in 1996.  Manufacturing  process and inventory  control  improvements  more than
offset  the  combined  adverse  effects of price  erosion  and the impact of the
renegotiated  distribution agreements with HMRI. Refer to Note J of the Notes to
Consolidated  Financial Statements for a further discussion of these agreements.
Operating  expenses of $23.4  million,  excluding  restructuring  and litigation
related items, were 21.5% below 1996 levels. Key events during 1997 included:

o The conclusion of the grand jury investigation of the Company.
o Three product launches, including pentoxifylline.
o The receipt of FDA approval for two products,  and the submission of one
  new ANDA, bringing the total  awaiting approval to fifteen.
o Cost reduction  initiatives  including a company wide reduction in force and
  the exit from two collaborative ventures, one domestic and one international.

     Forward-looking  statements  (statements which are not historical facts) in
this  report are made  pursuant  to the safe  harbor  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Investors  are  cautioned  that all
forward-looking  statements,  including  statements  about  product  filings and
approvals, raw material supply, net sales, price erosion, gross profit, research
and development expenses,  selling, marketing and distribution expenses, general
and   administrative   expenses,   recall  related  and   litigation   expenses,
restructuring and other expenses, and

<PAGE>

interest  expense,  involve  risks and  uncertainties,  including  the risks and
uncertainties  detailed below, and actual results may differ  significantly from
those in any forward looking statements.

Net Sales
                          YEAR ENDED                Year ended     Year ended
                          DECEMBER 31,              December 31,   December 31,
(In millions)                1997        Change       1996            1995
--------------------------------------------------------------------------------
Manufactured products      $ 70.9        (10.5)%    $ 79.2          $ 76.3
Distributed products         50.6         14.3%       44.3            65.9
--------------------------------------------------------------------------------
      Net sales            $121.5         (1.6)%    $123.5          $142.2
--------------------------------------------------------------------------------

Net sales for 1997 were $121.5  million,  a decrease of 1.6% from 1996 net sales
of $123.5 million.  Sales volumes of existing  products were  essentially  flat,
with price erosion of existing  products slightly greater than revenue increases
from new  products.  The Company  expects  price erosion to be less in 1998 than
1997.
      In 1997 the Company introduced two new manufactured products: procainamide
HCl ER 1000 mg. tablets,  the off-patent  version of Parke-Davis's  Procan(R)
SR; and diclofenac sodium  delayed-release  tablets,  the off-patent  version of
Ciba-Geigy's Voltaren(R). The Company also launched one new distributed product,
pentoxifylline, the generic version of HMRI's Trental(R).
      Net sales for 1996 were $123.5 million,  a decrease of 13.2% from the 1995
net sales of $142.2 million.  Increases in volumes of existing products combined
with the  launches  of seven new  products in 1996 were  insufficient  to offset
declining  prices,  principally for glyburide,  the Company's major  distributed
product.

Gross Profit
                          YEAR ENDED                Year ended     Year ended
                          DECEMBER 31,              December 31,   December 31,
(In millions)                1997        Change       1996            1995
--------------------------------------------------------------------------------
Manufactured products       $18.2         21.2%      $15.0           $18.2
As a % of manufactured
   products net sales        25.6%                    18.9%           23.8%
--------------------------------------------------------------------------------
Distributed products        $11.5        (20.4)%     $14.4           $23.1
As a % of distributed
   products net sales        22.7%                    32.5%           35.0%
--------------------------------------------------------------------------------
Gross profit                $29.7          0.8%      $29.4           $41.3
As a % of net sales          24.4%                    23.8%           29.0%
--------------------------------------------------------------------------------

The Company's  gross profit  increased to $29.7 million,  or 24.4% of net sales,
for the year ended December 31, 1997 as compared to $29.4  million,  or 23.8% of
net  sales,  for the same  period  in 1996  even  though  net  sales  decreased.
Manufactured  product gross profit for the year ended December 31, 1997 at $18.2
million  increased by 21.2% compared to the same period in 1996.  Falling prices
were more than offset by the combined  improvements in  manufacturing  processes
and inventory management. Distributed product gross profits of $11.5 million for
the year  decreased  20.4% as  compared  to 1996.  The  introduction  of the new
distributed  product,  pentoxifylline,  did not contribute  sufficient profit to
offset the impacts of falling prices and the renegotiated distribution contracts
on existing distributed  products.  Refer to Note J of the Notes to Consolidated
Financial Statements.
      For the year ended December 31, 1996, the Company's gross profit decreased
to $29.4 million or 23.8% of net sales,  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.

Operating Expenses
                          YEAR ENDED                Year ended     Year ended
                          DECEMBER 31,              December 31,   December 31,
(In millions)                1997        Change       1996            1995
--------------------------------------------------------------------------------
Research and development   $11.7       (14.7)%      $13.7          $13.3
As a % of manufactured
   products net sales       16.5%                    17.3%          17.4%
--------------------------------------------------------------------------------
Selling, marketing and
   distribution            $ 4.6       (28.1)%      $ 6.4          $ 5.4
As a % of net sales          3.8%                     5.2%           3.8%
--------------------------------------------------------------------------------
General and administrative $ 7.1       (26.9)%      $ 9.7          $10.9
As a % of net sales          5.9%                     7.9%           7.7%
--------------------------------------------------------------------------------
Recall related and
   litigation              $ 3.7       (70.1)%      $12.3          $17.8
As a % of net sales          3.0%                    10.0%          12.5%
--------------------------------------------------------------------------------
Restructuring              $ 0.2       (95.2)%      $ 3.5             --
As a % of net sales          0.1%                     2.8%
--------------------------------------------------------------------------------

<PAGE>

Research and development  expenses decreased 14.7% to $11.7 million for the year
ended  December  31, 1997 as  compared  to $13.7  million for the same period in
1996.  Most of this cost  reduction is attributed  to lower  product  validation
costs,  primarily  a function  of process  improvements  in the  manufacture  of
validation  batches.  During 1996, research and development costs increased 2.9%
to $13.7 million as compared to $13.3  million for the same period in 1995.  The
Company expects  research and  development  costs to increase in 1998 consistent
with its plan to increase the number of ANDA submissions as compared to 1997.
      Selling,  marketing  and  distribution  expenses  decreased  28.1% to $4.6
million for the year ended December 31, 1997 as compared to $6.4 million for the
previous year. Factors included in this cost reduction are reduced promotion and
advertising expenditures, and cost savings related to restructurings in December
1996 and June 1997. During 1996, selling,  marketing,  and distribution expenses
increased 18.6% to $6.4 million from $5.4 million in the prior year. Much of the
1996 increase was attributable to higher advertising and promotional expenses.
      General and  administrative  expenses  decreased  26.9% to $7.1 million as
compared  to  $9.7  million  a year  earlier,  the  second  consecutive  year of
decreased cost. Significant among these costs reductions in 1997 were savings in
compensation and benefits and a reduction in the cost of insurance premiums.
      Recall  related and  litigation  expenses for 1997  totaled $3.7  million,
significantly  below charges of $12.3  million  taken in 1996.  The 1997 charges
included an adjustment to the 1996 reserve upon the Company's entry of a plea in
the grand  jury  investigation,  and a  smaller  adjustment  to the  outstanding
reserve  for  remaining  outstanding  claims  related to the  albuterol  product
liability  cases.  Refer  to  Note  L of the  Notes  to  Consolidated  Financial
Statements for further discussion of these items.
      In response to the increasing  pricing pressures and eroding margins,  the
Company  restructured  its  operations  in  the  fourth  quarter  of  1996.  The
restructuring included the consolidation of warehouse,  manufacturing and office
sites as well as the write off of  underutilized  and idle  equipment  and, to a
lesser extent, reductions in the labor force. The Company had a second reduction
in labor force during the second quarter of 1997.

Interest and Other Income (Expense)

                                     YEAR ENDED     Year ended     Year ended
                                     DECEMBER 31,   December 31,   December 31,
(In millions)                          1997           1996           1995
--------------------------------------------------------------------------------
Interest and other investment income  $ 1.4          $ 0.7          $ 1.1
--------------------------------------------------------------------------------
Interest expense                       (0.6)          (0.2)          (0.3)
--------------------------------------------------------------------------------
Other income (expense), net            (1.6)          (0.1)          (0.2)
--------------------------------------------------------------------------------

Interest and other investment  income increased $0.7 million during 1997 to $1.4
million as compared to 1996 and is primarily  attributable to increased  average
cash  available  to invest.  Interest  expense also  increased in 1997,  by $0.4
million.  Much of this increase relates to interest from a partial resolution of
an  ongoing  investigation  by  the  Internal  Revenue  Service.   Other  income
(expense),  net in 1997 is a charge of $1.6  million.  This charge is  primarily
related to cost  reduction  initiatives  which  include the  write-off of assets
related to the  Company's  exit from a partnership  in certain  republics of the
former Soviet Union and the  discontinuance of the Company's  participation in a
collaborative research effort in the field of ophthalmology.  Refer to Note J of
the Notes to Consolidated Financial Statements.

Taxes and Net Income (Loss)
                                     YEAR ENDED     Year ended     Year ended
                                     DECEMBER 31,   December 31,   December 31,
(In millions)                          1997           1996           1995
--------------------------------------------------------------------------------
Income tax expense (benefit)          $ 1.1         $ (3.2)        $ (3.0)
--------------------------------------------------------------------------------
Effective tax rate                     66.5%         (20.3)%        (54.2)%
Net income (loss)                     $ 0.6         $(12.7)        $ (2.5)
--------------------------------------------------------------------------------

The  effective  tax rates  increased in both 1997 and 1996  compared to 1995 due
primarily to the nondeductible nature of expenses associated with the resolution
of the grand jury investigation  relating to the Company. Refer to Note L of the
Notes to  Consolidated  Financial  Statements  for a further  discussion of this
matter.
      For the year ended December 31, 1997, the Company reported a net income of
$0.6 million,  or $0.03 per share,  compared to a net loss of $12.7 million,  or
$0.66 per share,  for the same  period in 1996.  Excluding  recall  related  and
litigation,   restructuring   and  other  charges   related  to  cost  reduction
initiatives,  1997  earnings  would have been a net profit of $4.5  million,  or
$0.24 per share.  If 1996 had been restated to exclude  similar items,  it would
have resulted in a net loss of $0.1 million, or $0.01 per share.

<PAGE>

Risk Factors and Future Trends
Forward-looking  statements  (statements which are not historical facts) in this
report are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.  Investors are cautioned that all forward-looking
statements,  including  statements  about  product  filings and  approvals,  raw
material  supply,  net  sales,  price  erosion,   gross  profit,   research  and
development expenses,  selling, marketing and distribution expenses, general and
administrative expenses,  recall-related and litigation expenses,  restructuring
and other  expenses,  and interest  expense,  involve  risks and  uncertainties,
including the risks and  uncertainties  detailed  below,  and actual results may
differ significantly from those in any forward looking statements.
      The Company's future results of operations depend on its ability to obtain
FDA approval of ANDAs for its new  products,  to procure a continuous  supply of
raw  materials,   to  validate  its  manufacturing  processes  used  to  produce
consistent  test  batches for FDA  approval  and to receive  continued  customer
acceptance of its products.  Raw materials are generally  available from several
sources  although  this may not  always  be the  case.  Since  the ANDA  process
requires  specification  of  raw  material  suppliers,  if  raw  materials  from
specified suppliers become unavailable,  the Company would be required to file a
supplement to its product filing and revalidate the manufacturing  process using
a new  supplier's  materials.  This could cause a delay of several months in the
manufacture  of the drug involved and the consequent  loss of potential  revenue
and  market  share.   Additionally,   there  is  often  a  time  lag,  sometimes
significant,  between the receipt of ANDA  approval and the actual  marketing of
the approved product due to this validation process.
      In the past year, there have been an increasing  number of attempts to use
federal  legislation  to extend the patent life of various drugs beyond the term
permitted  under current  statutes.  Although the generic drug industry thus far
has been mostly successful in defeating these attempts at extending the monopoly
of  brand-name  drugs,  the  Company  could be  adversely  impacted  if  future
legislation is enacted which extends the patent exclusivity of a number of drugs
that are expected to come off patent in the coming years.
      The  Company's  future  results of  operations  also may be  affected by a
variety  of  additional  factors  consistent  with the  nature of its  business,
including, but not limited to, changes in the intensity of competition affecting
the Company's products and customers.  Generic products with limited competition
are generally sold at higher prices, resulting in relatively high gross margins.
As  multi-source  competition  increases,  selling  prices and gross margins can
decline dramatically and impair overall  profitability.  Brand-name  competitors
are bundling the sale of generic and  patented  products as well as  introducing
generic  versions of their own branded  products  prior to the expiration of the
patents for such drugs,  which is  resulting in an  increasing  market share for
these brand-name competitors.  The Company also has witnessed a consolidation of
its  customers,  as chain drug  stores  and  wholesalers  merge or  consolidate.
Additionally,  a  number  of the  Company's  customers  have  instituted  source
programs which limit the number of suppliers of generic pharmaceutical products.
Management expects these trends and the resultant price erosion to continue. The
Company  will need to provide a  continuous  stream of new products and maintain
its strong customer relations to offset these competitive pressures.
      The   Company's   gross   margin   continues   to  be   depressed  by  the
underutilization  of  its  manufacturing  facility.  The  Company,  through  its
restructuring  of operations  begun in the fourth quarter of 1996 and continuing
in 1997,  consolidated  some of its  facilities in an attempt to streamline  its
operations and took additional  steps to reduce its overhead.  It is anticipated
that  the  Company's   gross  margin  will  continue  to  be  depressed  by  the
underutilization  of its manufacturing  facility during 1998 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   Governance   Agreement   will  expire  on  October  8,  1998.  See
"Expiration of the Governance Agreement" below.
      Kenneth N. Larsen  resigned as President  of the Company in January  1997.
Since that time,  the Board of Directors has evaluated  candidates for President
of the Company.
      The albuterol  related  litigation  and various other legal matters remain
unresolved  in part or in whole.  Refer to Note L of the  Notes to  Consolidated
Financial   Statements  for  further   discussion.   Although  the  Company  has
established  reserves  it  believes  appropriate  for these  matters,  the final
outcome may exceed the estimates  used in  establishing  those  reserves and may
have  a  material  adverse  effect  on  the  Company's   consolidated  financial
condition, liquidity and results of operations.

Year 2000 Issues
Many computer systems were not designed to handle any dates beyond the year 1999
and, therefore, computer hardware and software will need to be modified prior to
the year 2000 in order to remain  functional;  this is the so-

<PAGE>

called "Year 2000" problem.  The Company's primary  applications systems used to
manage  the  manufacturing,  shipment  of  product,  control  of  inventory  and
performance of the accounting  function have been vendor  certified as Year 2000
compliant and the Company does not anticipate any material Year 2000 issues with
respect to these primary  systems.  However,  the Company  utilizes  third-party
vendor network equipment, telecommunications products, manufacturing and testing
equipment and other third-party  hardware and software products which may or may
not be Year 2000 compliant.  In addition,  the Company's customers and suppliers
may or may not face serious Year 2000 issues.  The Company is formulating a plan
to evaluate the impact of, and if necessary to remediate the impact of, the Year
2000 issue on the Company. The Company expects that its plan will be in place in
the next several months and that its evaluation and remediation, if any, will be
completed  before the end of 1999. The Company is not currently able to estimate
the expenses it may incur in evaluating and  remediating any Year 2000 problems,
but does not currently expect those expenses to be material.  Costs and expenses
of  evaluating  and  remediating  Year 2000  issues will be expensed as they are
incurred.  Any failures of the  Company's  internal  systems or any  significant
interruptions of the business of its major suppliers or customers because of the
Year  2000  problem  could  have a  material  adverse  effect  on the  Company's
business,   consolidated  results  of  operations  and  consolidated   financial
condition, as well as result in significant expenses.

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

<PAGE>

Capital Resources and Liquidity
                                         DECEMBER 31,           December 31,
(In millions)                              1997                   1996
--------------------------------------------------------------------------------
Cash and short-term investments          $ 33.3                 $ 29.7
Working capital                            60.1                   48.2
Long-term debt                              4.8                    5.1
Shareholders' equity                      100.9                  100.1
--------------------------------------------------------------------------------

Working Capital
The Company's combined cash and short-term  investments were $33.3 million as of
December 31, 1997  compared to $29.7  million a year  earlier.  The $3.6 million
increase  primarily  reflects  $5.0 million of cash  generated  from  operations
during  1997 offset by $1.3  million of capital  expenditures.  Working  capital
increased $11.9 million primarily from the  reclassification  of $3.6 million of
recall related and litigation expenses to long-term liabilities (Refer to Note L
of the Notes to  Consolidated  Financial  Statements)  and the net  income  from
operations adjusted for noncash expenditures.
      During 1997,  the Company  spent $1.3 million for  machinery and equipment
and facility enhancements as compared to $8.4 million for 1996. The acquisitions
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.
These  additions in all years were made from the cash generated from  operations
without incurring  additional  borrowing.  The Company anticipates spending less
than  $5.0  million  for  machinery  and  equipment  acquisitions  and  facility
enhancements during the year ending December 31, 1998.

Liquidity
On August 7, 1997,  the  Company  amended  its  working  capital  line of credit
agreement to replace one of its  financial  covenants  related to  profitability
with a working capital  covenant  effective June 30, 1997. 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.  From time to
time  the  Company  has  been  granted  amendments  and  waivers  to its  credit
agreements.
      At December 31, 1997 the Company had $14.85 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
are  contingent  upon the number of claims filed within  certain  categories and
will not occur  until all  claims  are  processed  and  settlement  amounts  are
recommended by the Special  Master.  In February  1998,  the Company's  stand-by
letters of credit were reduced by $3.15 million to reflect its  additional  cash
deposits  made  pursuant to the August 1997 Court Order.  Refer to Note 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.  Effective
December 31, 1996,  the Company  received from its lender  waivers to its credit
agreements  with  respect  to  one  of  its  financial   covenants   related  to
profitability. In the event that the Company is unable to obtain future waivers,
if needed,  the Company's debt would be  reclassified as short-term debt and the
Company could lose its availability to cash under its line of credit.
      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.  Accordingly,  all
EPS  information  presented in this report has been restated to comply with this
new standard.

<PAGE>

      For  fiscal  years   beginning  after  December  15,  1997  the  Financial
Accounting  Standards  Board is  requiring  that  comprehensive  income  and its
components be included as part of general-purpose financial statements. SFAS No.
130 defines  comprehensive  income as "the  change in equity  (net  assets) of a
business  enterprise  during a period  from  transactions  and other  events and
circumstances from nonowner sources.  It includes all changes to equity during a
period except those resulting from  investments by owners and  distributions  to
owners."

<PAGE>

           ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
                                      DATA

                           Copley Pharmaceutical, Inc.
                           CONSOLIDATED BALANCE SHEETS

                                                DECEMBER 31,      December 31,
(In thousands, except  share data)                1997              1996
------------------------------------------------------------------------------
Assets
Current assets:
     Cash and cash equivalents                $ 13,847        $ 15,974
     Available-for-sale securities              19,498          13,757
     Accounts receivable, trade, net of
        allowances for doubtful accounts
        of $500 and $500, respectively          30,170          26,963
     Accounts receivable, related party             --              61
     Inventories                                23,286          27,131
     Current deferred tax assets                 5,239           6,548
     Other current assets                        4,189           4,241
                                              ---------       ---------
        Total current assets                    96,229          94,675
                                              ---------       ---------
Property, plant and equipment, net              46,450          52,355
Deferred tax assets                                 --             215
Other assets                                     3,065           4,482
                                              ---------       ---------
Total assets                                  $145,744        $151,727
                                              ---------       ---------

Liabilities and shareholders' equity
Current liabilities:
     Accounts payable, trade                  $  2,583        $  6,360
     Accounts payable, related party            13,668          10,948
     Current portion of long-term debt             300             300
     Accrued compensation and benefits           1,275           1,398
     Accrued rebates                             9,071           6,908
     Accrued income taxes                          374             883
     Accrued recall related and litigation
        expenses                                 8,048          17,839
     Accrued expenses                              830           1,860
                                              ---------       ---------
        Total current liabilities               36,149          46,496
                                              ---------       ---------
Accrued recall related and litigation expenses   3,645              --
Deferred tax liabilities                           269              --
Long-term debt                                   4,800           5,100
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                 78,063          77,875
     Unrealized holding (loss) on
         available-for-sale securities             (16)             --
     Retained earnings                          35,133          34,569
     Treasury stock, at cost, 6,235,978
        and 6,266,258 shares
        outstanding, respectively              (12,553)        (12,567)
                                              ---------       ---------
        Total shareholders' equity             100,881         100,131
                                              ---------       ---------
Total liabilities and shareholders' equity    $145,744        $151,727
                                              ---------       ---------

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>

                           Copley Pharmaceutical, Inc.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                          YEAR ENDED   Year ended   Year ended
                                          DECEMBER 31, December 31, December 31,
(In thousands, except per share data)         1997         1996         1995
--------------------------------------------------------------------------------
Net sales:
     Manufactured products                   $  70,873   $  79,201   $  76,279
     Distributed products                       50,610      44,260      65,879
                                             ---------   ---------   ---------
        Net sales                              121,483     123,461     142,158
                                             ---------   ---------   ---------
Cost of goods sold:
     Manufactured products                      52,725      64,233      58,104
     Distributed products                       39,103      29,798      42,785
                                             ---------   ---------   ---------
        Cost of goods sold                      91,828      94,031     100,889
                                             ---------   ---------   ---------
           Gross profit                         29,655      29,430      41,269
                                             ---------   ---------   ---------
Operating expenses:
     Research and development                   11,672      13,682      13,299
     Selling, marketing and distribution         4,590       6,388       5,384
     General and administrative                  7,110       9,721      10,940
     Recall related and litigation               3,687      12,343      17,830
     Restructuring                                 170       3,526        --
                                             ---------   ---------   ---------
        Income (loss) from operations            2,426     (16,230)     (6,184)
                                             ---------   ---------   ---------
Interest and other investment income             1,442         723       1,089
Interest expense                                  (580)       (241)       (285)
Other income (expense), net                     (1,603)       (144)       (175)
                                             ---------   ---------   ---------
        Income (loss) before income taxes        1,685     (15,892)     (5,555)
Provision (benefit) for income taxes             1,121      (3,219)     (3,012)
                                             ---------   ---------   ---------
Net income (loss)                            $     564   $ (12,673)  $  (2,543)
                                             ---------   ---------   ---------
Weighted average common shares outstanding:
     Basic                                      19,127      19,081      18,977
     Diluted                                    19,222      19,081      18,977

Earnings (loss) per share:
     Basic                                   $    0.03   $   (0.66)  $   (0.13)
     Diluted                                      0.03       (0.66)      (0.13)

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>

<TABLE>
<CAPTION>
                           Copley Pharmaceutical, Inc.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                     For the years ended December 31, 1995, 1996 and 1997

                                                     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, 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
NET INCOME (LOSS)                       --     --        --        564         --           --          --         564
ACQUISITION OF TREASURY
   STOCK BY EMPLOYEE STOCK
   PURCHASE PLAN                        --     --       188         --         --          (30)         14         202
CHANGE IN UNREALIZED
   HOLDING GAIN (LOSS) ON
   AVAILABLE-FOR-SALE SECURITIES        --     --        --         --        (16)          --          --         (16)
                                    ------   ----   -------    -------    --------       -----    ---------   ---------
BALANCE, DECEMBER 31, 1997          25,371   $254   $78,063    $35,133    $   (16)       6,236    $(12,553)   $100,881
                                    ------   ----   -------    -------    --------       -----    ---------   ---------
<FN>
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                           Copley Pharmaceutical, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                      YEAR ENDED        Year ended        Year ended
                                                                     DECEMBER 31,      December 31,      December 31,
(In thousands)                                                          1997              1996              1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                <C>                <C>
Cash flows from operating activities:
   Net income (loss)                                                  $    564           $(12,673)          $ (2,543)
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
     Depreciation and amortization                                       7,144              7,092              5,775
     Realized losses on disposals of assets                              1,349              4,795              3,025
     Deferred income taxes                                               1,793             (2,379)            (1,398)
     Tax benefit from stock option exercises                                --                 80                185
   Provision for doubtful accounts                                          --                696                 --
   Proceeds from sale of trading securities                                 --                601                 --
   Equity in loss (earnings) of unconsolidated affiliates                   (7)                54                 --
   Changes in operating assets and liabilities:
     Decrease (increase) in accounts receivable                         (3,146)             5,745             (6,680)
     Decrease (increase) in inventories                                  3,845                 95             11,236
     Decrease (increase) in other current assets                            52                548             (1,885)
     Decrease (increase) in other assets                                   121               (951)             1,598
     Increase (decrease) in accounts payable                            (1,057)            (2,184)             3,536
     Increase (decrease) in accrued income taxes                          (509)             4,142                (59)
     Increase (decrease) in accrued expenses                            (5,136)            10,476               (494)
                                                                      --------           --------           --------
   Net cash provided by operating activities                             5,013             16,137             12,296
                                                                      --------           --------           --------
Cash flows from investing activities:
   Capital expenditures                                                 (1,260)            (8,401)           (21,123)
   Investments in unconsolidated affiliates                               (360)            (2,252)              (753)
   Proceeds from sales of property, plant and equipment                    201                113                500
   Purchases of available-for-sale securities                          (18,448)           (13,695)           (24,172)
   Proceeds from sales of available-for-sale securities                     --                114             42,416
   Proceeds from maturities of available-for-sale securities            12,825              5,000              3,224
                                                                      --------           --------           --------
   Net cash provided by (used in) investing activities                  (7,042)           (19,121)                92
                                                                      --------           --------           --------
Cash flows from financing activities:
   Proceeds from short-term borrowings                                      --                 --              4,542
   Payments of short-term borrowings                                        --                 --             (4,542)
   Payments of long-term debt                                             (300)              (300)              (300)
   Stock option exercises                                                   --                  2                344
   Issuance of common stock to Employee Stock Purchase Plan                202                306                301
                                                                      --------           --------           --------
Net cash provided by (used in) financing activities                        (98)                 8                345
                                                                      --------           --------           --------
Net increase (decrease) in cash and cash equivalents                    (2,127)            (2,976)            12,733
Cash and cash equivalents at beginning of year                          15,974             18,950              6,217
                                                                      --------           --------           --------
Cash and cash equivalents at end of year                              $ 13,847           $ 15,974           $ 18,950
                                                                      --------           --------           --------
<FN>
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</FN>
</TABLE>

<PAGE>

                           Copley Pharmaceutical, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Nature of Business

Copley Pharmaceutical,  Inc. (the "Company") develops,  manufactures,  markets
and distributes a broad range of multi-source  pharmaceutical  products. These
products  include  prescription  and  over-the-counter  ("OTC")  drugs and are
available in a variety of dosage forms.
      The Company's customers include retail chains, wholesalers,  distributors,
hospitals,   health  maintenance  organizations  ("HMOs"),  other  managed  care
entities and government agencies.  For the year 1997, one customer accounted for
13.9% of total net sales and no other single  customer  accounted  for more than
10% of total  net  sales.  For the  years  1996 and  1995,  no  single  customer
accounted for more than 10% of total net sales.
      The  Company  not  only   distributes   multi-source   products   that  it
manufactures,  but also,  as part of a  distribution  arrangement,  markets  and
distributes  multi-source  versions  of certain  drugs  manufactured  by Hoechst
Marion  Roussel,  Inc.  ("HMRI"),  a  subsidiary  of Hoechst  Aktiengesellschaft
("Hoechst  AG"), the Company's  indirect 51% fully diluted  shareholder.  One of
these drugs, glyburide,  accounted for 25.2% and 27.1% of the Company's 1997 and
1996 net sales, respectively. This product had limited competition until late in
1995, when competing products became available, resulting in significant erosion
of this product's selling price and related gross profit. Given this intensified
competitive environment,  management expects continued decline in this product's
net  sales  and  related  gross  profit  in 1998.  Refer  to Note J for  further
discussion of the distribution arrangements.
      Historically,  the Company's sales have been  predominantly  in the United
States.  During 1995, the Company  formed a wholly-owned  subsidiary to focus on
foreign expansion  opportunities.  Refer to Note J for further discussion of the
Company's  foreign  investments.  Because  of the  length  of time it  takes  to
establish,  register and receive approvals to manufacture or distribute products
in a foreign  country,  it may be an extended  period of time before the Company
generates material international revenue.
      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 three 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.

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'

<PAGE>

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, 1997 and 1996 the estimated incurred costs were $3.7 million and
$2.4 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.

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 do not 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
Research and development costs are expensed as incurred.

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

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

<PAGE>

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. Accordingly all EPS
information presented has been restated to comply with this new standard.

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

C. Securities

Available-for-Sale Securities

<TABLE>
<CAPTION>
                                                   1997                                               1996
                                                  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                     $ 1,000        $--       $ --     $ 1,000    $ 8,136        $ 7        $--     $ 8,143
     U.S. Treasury and
      government agencies             17,814          5        (18)     17,801      4,871          1         (5)      4,867
Other securities:
     Bank certificates of deposit        700         --         (3)        697        750         --         (3)        747
                                     -------        ---       -----    -------    -------        ---        ----    -------
Total current available-
     for-sale securities             $19,514        $ 5       $(21)    $19,498    $13,757        $ 8        $(8)    $13,757
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Gross  gains  of  $0  and  gross  losses  of  $0  were   realized  on  sales  of
available-for-sale  securities in 1997,  gross gains of $75,000 and gross losses
of $0 were realized on sales of available-for-sale  securities in 1996 and gross
gains of  $275,000  and  gross  losses of  $409,000  were  realized  on sales of
available-for-sale securities during 1995.

Trading Securities
At December 31, 1995, the Company reclassified 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  reclassification 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.

D. Inventories

                                                DECEMBER 31,    December 31,
(In thousands)                                      1997            1996
------------------------------------------------------------------------------
Raw materials                                       $ 6,596         $12,580
Work in process                                       5,282           4,390
Finished goods                                       11,408          10,161
                                                   ---------        ---------
     Total inventories                              $23,286         $27,131
------------------------------------------------------------------------------

<PAGE>

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)                                      1997            1996
------------------------------------------------------------------------------
Land                                               $  3,335        $  3,335
Building and improvements                            31,882          31,700
Machinery and equipment                              31,393          31,020
Motor vehicles                                           44              58
Furniture and fixtures                                5,144           4,940
Leasehold improvements                                   --             100
                                                  ----------      ----------
                                                     71,798          71,153
Less: accumulated depreciation and amortization     (26,154)        (19,109)
                                                  ----------      ----------
                                                     45,644          52,044
Construction in process                                 806             311
                                                  ----------      ----------
     Total property, plant and equipment           $ 46,450        $ 52,355
------------------------------------------------------------------------------

      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  and  amortization  of fixed  assets was $7.1  million,  $7.1
million and $5.7 million for 1997, 1996 and 1995, 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, 1997 and
1996 are as follows:

                                                DECEMBER 31,    December 31,
(In thousands)                                      1997            1996
------------------------------------------------------------------------------
Deferred tax assets:
     Acquired joint product development rights      $   914         $   973
     Tender offer costs                               1,974           1,972
     Recall and litigation accrual                    1,615           3,257
     Operating loss and tax credit carryforwards      1,796           1,235
     Charitable contribution carryforwards              741             620
     Difference in accounting for inventory and
        accounts receivable                             596             871
     Difference in cost recognition basis,
        accrual for books and cash for tax              490             565
                                                    -------        --------
        Total deferred tax assets                     8,126           9,493
Deferred tax liabilities:
     Depreciation                                    (3,156)         (2,730)
                                                    -------        --------
Total net deferred tax assets                       $ 4,970        $  6,763
------------------------------------------------------------------------------

Deferred tax assets are expected to be realized through the reversal of existing
deferred tax  liabilities  and from the  recognition of future  taxable  income.
Realization  of the deferred tax assets is  dependent on  generating  sufficient
future  taxable income or the  availability  of carryback  provisions.  Although
realization is not assured,  management believes that it is more likely than not
that all of the deferred tax assets will be realized and,  accordingly,  has not
provided a valuation  allowance.  The amount of deferred  tax assets  considered
realizable  could be reduced  in the near term if  estimates  of future  taxable
income are reduced.

<PAGE>

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

                                        YEAR ENDED    Year ended    Year ended
                                        DECEMBER 31,  December 31,  December 31,
(In thousands)                              1997          1996          1995
--------------------------------------------------------------------------------
Current income taxes (benefit):
     Federal                                $(1,149)      $(1,033)      $(1,701)
     State                                      477           193            87
                                            -------       -------       -------
                                               (672)         (840)       (1,614)
                                            -------       -------       -------
Deferred income tax expense (benefit):
     Federal                                  2,102        (1,272)          (26)
     State                                     (309)       (1,107)       (1,372)
                                            -------       -------       -------
                                              1,793        (2,379)       (1,398)
                                            -------       -------       -------
Total:
     Federal                                    953        (2,305)       (1,727)
     State                                      168          (914)       (1,285)
                                            -------       -------       -------
                                            $ 1,121       $(3,219)      $(3,012)
--------------------------------------------------------------------------------

The income tax expense  (benefit) for the years 1997,  1996 and 1995 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>
                                                   YEAR ENDED         Year ended        Year ended
                                                  DECEMBER 31,       December 31,      December 31,
(In thousands)                                        1997                1996             1995
-------------------------------------------------------------------------------------------------------
<S>                                              <C>       <C>     <C>      <C>      <C>      <C>
Statutory rate                                   $  590    35%     $(5,562) (35)%    $(1,944) (35)%
Increases (decreases)
   in taxes resulting from:
     State income taxes, net of
        federal tax benefit                         109     6%        (594)  (4)%       (835) (15)%
     Research tax credits                            --    --         (200)  (1)%       (163)  (3)%
     Tax-exempt interest and dividends             (263)  (16)%       (136)  (1)%       (102)  (2)%
     Non-deductible portion of recall related
        and litigation expenses                     650    39%       3,127   20%          --   --
     Other, net                                      35     2%         146    1%          32    1%
                                                 ------   ----     -------  -----    -------- -----
                                                 $1,121    66%     $(3,219) (20)%    $(3,012) (54)%
-------------------------------------------------------------------------------------------------------
</TABLE>

At December  31,  1997,  the Company had net  operating  loss  carryforwards  of
approximately  $8,737,000  which are  available to offset  future state  taxable
income  through the year ended  December 31, 2002. In addition,  at December 31,
1997,  the Company had  approximately  $1,834,000,  $938,000 and  $1,003,000  of
charitable  contribution   carryforwards,   research  credit  carryforwards  and
investment  credit  carryforwards,  respectively,  that are  available to offset
future taxable income through the years 2002, 2012 and 2000, respectively.

G. Debt

                                                DECEMBER 31,      December 31,
(In thousands)                                      1997              1996
--------------------------------------------------------------------------------
Industrial Development Revenue Bonds (a)         $5,100            $5,400
Less: current portion                              (300)             (300)
                                                --------          ---------
                                                 $4,800            $5,100
--------------------------------------------------------------------------------
(a) Interest is payable  monthly at a floating rate based on the prime rate. The
effective  interest rate for the Bonds  approximated 4.5%, 4.3% and 4.7% for the
years 1997, 1996 and 1995, respectively.

The  Industrial  Development  Revenue  Bonds (the  "Bonds")  were issued for the
initial acquisition and construction of the Company's headquarters and principal
manufacturing site at 25 John Road, Canton, Massachusetts.  The Bonds would have
originally  matured on August 1,  2004;  however,  in July 1990,  the Bonds were
amended to extend the maturity date to August 1, 2014.  Scheduled  repayments of
the debt are: 1998, $300,000;  1999, $300,000;  2000, $300,000;  2001, $300,000;
2002, $300,000; 2003 and thereafter, $3,600,000.
      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

<PAGE>

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 $301,000  and $319,000 at December 31, 1997 and December
31, 1996, respectively, is included in other assets.
      On August 7, 1997, the Company  amended its working capital line of credit
agreement to replace one of its  financial  covenants  related to  profitability
with a working  capital  covenant  effective June 30, 1997. On July 31, 1996 the
Company  amended its working  capital  line of credit  agreement to increase its
maximum  borrowing  capacity from $20.0 million to $30.0 million.  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, 1997
and 1996, the Company had $14.85 and $17.1 million, respectively, in outstanding
standby  letters of credit  related to the Albuterol  Settlement  Trust Fund. In
February,  1998 the Company's  stand-by  letters of credit were reduced by $3.15
million to reflect its additional cash deposits made pursuant to the August 1997
court order.  Refer to Note 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  8.50%,  8.25%  and  8.50%  at  December  31,  1997,  1996  and  1995,
respectively.  Borrowings are collateralized by the Company's properties located
in  Canton  and South  Boston,  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 1996, 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, 1997 the Company had 1,964,888  shares of common stock  reserved
for future  issuance in connection  with the Company's  stock option plans.  The
Board of Directors  has not assigned  any terms to the  authorized  but unissued
3,000,000 shares of preferred stock.

I. Employee Benefits

Stock Option Plans
Under the 1992 Stock Plan ("1992 Plan"), the Compensation Committee of the Board
of Directors may recommend  that any employee,  consultant or officer be granted
incentive stock options or nonqualified  stock options to purchase the Company's
common stock.  The Board of Directors has the authority to select  optionees and
determine  the terms of the  options  granted.  Under the 1992 Stock  Plan,  the
options  generally  become  exercisable  cumulatively,  beginning on the date of
grant,  in equal annual  installments of 25%, and expire ten years from the date
of grant.  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, 1997 the Company had 713,175
shares available to grant under this plan.
      On May 24,  1995,  the Board of Directors  voted to allow all  non-officer
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
Director Stock Option Plan with the 1995 Non-Employee Director Stock Option Plan
(the  "Director  Plan").  Under the  Director  Plan,  upon  initial  election or
appointment to the Board, the Company  automatically  grants to its non-employee
directors,  excluding  directors of  affiliated  companies,  nonqualified  stock
options to purchase  15,000 shares of the Company's  common stock.  This initial
grant vests in equal  annual  installments  of 33 1/3%  beginning on the date of
grant.  After this initial 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

<PAGE>

expire  ten years  from the date of grant.  The  Director  Plan  authorized  the
issuance of 250,000 shares of common stock. At December 31, 1997 the Company had
208,336 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,
1997 the Company had 350,180 shares available to grant under this plan.

Stock option activity during 1995, 1996 and 1997 was as follows:

                                           Shares       Option Price Per Share
--------------------------------------------------------------------------------
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
                                           -----------  -----------------------
OPTIONS GRANTED                               64,999       6.38   -      7.56
OPTIONS FORFEITED                           (108,536)     14.25   -     23.50
                                           -----------  -----------------------
OUTSTANDING AT DECEMBER 31, 1997             693,197     $ 0.93   -    $23.50
--------------------------------------------------------------------------------

The following  table  summarizes  information  about the Company's stock options
outstanding at December 31, 1997.

Year of expiration                         Shares       Option Price Per Share
--------------------------------------------------------------------------------
1999                                       35,852              $ 0.93
2000                                       69,757                0.93
2002                                      216,819               10.00
2004                                      182,438               16.50 - 23.50
2005                                      116,666               14.00 - 17.25
2006                                        6,666               14.00
2007                                       64,999              $ 6.38 - $7.56
                                       -----------
                                          693,197
--------------------------------------------------------------------------------

At December  31,  1997,  1996 and 1995,  exercisable  options  totaled  634,447,
608,453 and  625,301,  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  has 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  $1,350,000,  $1,106,000 and
$1,618,000 for 1997, 1996 and 1995, respectively. Net income (loss) and earnings
(loss) per share would have been changed to the pro forma  amounts  indicated as
follows:
                                        YEAR ENDED    Year ended    Year Ended
                                       DECEMBER 31,  December 31,  December 31,
(In thousands, except per share data)     1997          1996          1995
--------------------------------------------------------------------------------
Net income (loss):
     As reported                       $  564          $(12,673)    $(2,543)
     Pro forma                           (241)          (13,333)     (3,508)

Diluted earnings (loss) per share:
     As reported                       $ 0.03          $  (0.66)    $ (0.13)
     Pro forma                          (0.01)            (0.70)      (0.18)
--------------------------------------------------------------------------------

As the  provisions of SFAS No. 123 have not yet 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.

<PAGE>

      The fair value of the  Company's  stock  options used to compute pro forma
net income  (loss) and  diluted  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 1997, 1996 and 1995,
respectively:  dividend yield of 0%, 0% and 0%; expected  volatility of 55%, 60%
and 60%;  a risk  free  interest  rate of 6.4%,  6.3% and 6.3% and the  expected
holding period of 5 years, 5 years and 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 assure a minimum
Company  contribution of at least 2% of qualified  compensation up to the limits
allowed by the Internal Revenue Service. The Company expensed $290,000, $123,000
and $500,000 for  contributions  under this plan for the years ended 1997,  1996
and 1995, respectively.

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

Employee Bonus Plan
The Company makes cash bonus awards to employees, at the discretion of the Board
of Directors,  based upon operating results and employee performance.  Net bonus
expense  was $0,  $315,000  and  $181,000  for the  years  1997,  1996 and 1995,
respectively.

J. Related Party Transactions

In November 1993, Hoechst Corporation ("HC"),  through an indirect  wholly-owned
subsidiary,  completed  a tender  offer and  acquired  51% of the fully  diluted
shares of the Company.
      On July 18,  1995,  HC completed  its purchase of Marion  Merrell Dow Inc.
("MMD") and changed MMD's name to Hoechst Marion  Roussel,  Inc.  ("HMRI").  The
acquisition  of MMD and  the  formation  of HMRI  resulted  in a  related  party
relationship between the Company and its customer, Rugby Laboratories ("Rugby"),
which was a subsidiary of MMD and  subsequently  a subsidiary of HMRI. Net sales
to Rugby were approximately $17,000, $1.0 million and $4.1 million for the years
1997, 1996 and 1995, respectively.  Total amounts due from Rugby at December 31,
1997  and  1996  were  approximately  $0 and  $61,000,  respectively.  Effective
February 27, 1998, Rugby was sold by HMRI to an unrelated third party.
      In  connection  with HC's  acquisition  of its  majority  interest  in the
Company, the Company is a party to a Product Agreement with HC pursuant to which
the Company is afforded the opportunity under specified conditions to distribute
and  market  the   generic   version  of   products   sold  by   Hoechst-Roussel
Pharmaceuticals Inc. ("HRPI"),  which was an indirect majority-owned  subsidiary
of HC. This Product Agreement 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  became  available for generic
distribution  and these  separate  contracts  now continue in effect  beyond the
expiration of the product agreement. In order to assure continuity of supply and
to provide other competitive  benefits,  the Company, in 1997,  renegotiated the
distribution  contracts  relating to glyburide and  micronized  glyburide;  as a
result, the profit contribution of these products decreased in 1997. In 1997 the
Company entered into an agreement to distribute HMRI's  pentoxifylline  product.
For the years 1997, 1996 and 1995,  approximately  $39,555,000,  $30,814,000 and
$42,470,000,  respectively,  of generic versions of products were purchased from
HMRI.  The  Company  does not  expect to  distribute  or market  any  additional
products under the Product Agreement.
      As part of the  relationship  with HC, the Company  also is  afforded  the
opportunity to purchase  generic bulk  pharmaceutical  ingredients from entities
related to HC under  certain  circumstances.  During 1997 and 1996,  the Company
purchased  approximately  $151,000 and $230,000,  respectively,  of generic bulk
products under these agreements.  The Company is aware that HC has announced its
intention to deemphasize the generic bulk pharmaceutical  manufacturing business
and the Company is pursuing alternative sources.
      The  Company  obtains  its  comprehensive   general   liability,   product
liability,  umbrella liability and all risks property insurance coverage through
an insurance and risk-sharing  arrangement  with HC and its parent,  Hoechst AG,
and its various subsidiaries.  Insurance coverage is provided by HC, through its
wholly-owned  insurance

<PAGE>

subsidiary,  as well as by external parties.  Total premiums paid by the Company
for these insurance policies aggregated approximately $4,763,000, $5,140,000 and
$3,210,000 for the years 1997, 1996 and 1995, respectively.
      For  the  years  ended  1997,   1996  and  1995,  the  Company   purchased
approximately  $26,000,  $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 1997 and 1996,  the  Company  invested  approximately
$360,000 and $59,000 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 was written off in June 1997 in the amount
of approximately $955,000. The write-off was included in other income (expense).
The Company  plans to continue to  manufacture  and market  products for sale in
certain republics of the former Soviet Union through MIR Pharmaceutical.
      At  December  31,  1997,  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 $2.4 million at December 31, 1997
and 1996, 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.

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, 1997       December 31, 1996
                                  CARRYING     FAIR       Carrying     Fair
(In thousands)                      VALUE     VALUE         Value     Value
--------------------------------------------------------------------------------
Cash and cash equivalents         $13,847   $13,847       $15,974   $15,974
Available-for-sale securities      19,498    19,498        13,757    13,757
Long-term debt                      5,100     5,100         5,400     5,400
--------------------------------------------------------------------------------

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 1996 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 $797,000,  $1,053,000 and $1,720,000 for 1997, 1996
and 1995,  respectively,  which  included  related  party rental  expense of $0,
$180,000 and $171,000, respectively.

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

<PAGE>

(In thousands)
------------------------------------------------------------------------------
1998                                                              $  661
1999                                                                 535
2000                                                                 535
2001                                                                 484
2002                                                                   1
Thereafter                                                            --
------------------------------------------------------------------------------
      Total minimum lease payments                                $2,216
------------------------------------------------------------------------------

Albuterol Class Action Lawsuits
In connection  with the Company's  December 1993 and January 1994 product recall
of albuterol sulfate inhalation  solution,  0.5% ("albuterol"),  the Company 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 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. This Order has become final and nonappealable.
      The settlement agreement requires 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.   The  Company  negotiated
agreements with its insurers pursuant to which the Company and its insurers have
agreed to pay defined  percentages of required  settlement  payments and related
expenses. 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
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 were  reduced by a like  amount.  The balance was funded by one of the
Company's insurers.  These cash contributions made by the Company totaling $7.35
million are nonrefundable pursuant to the terms of the settlement agreements.
      In August 1997,  the Wyoming  District  Court  ordered the Company to make
additional cash deposits totaling $3.15 million to fund the Company's portion of
payments of settlement amounts for class action cases alleging wrongful death as
well as the settlement of opt-out cases,  legal fees and other related expenses.
The  Company's  stand-by  letters of credit  were  reduced  by a like  amount in
February  1998. In addition,  one of the Company's  insurers paid $17.85 million
and its letter of credit was released.
      Approximately 5,540 proofs of claim (including  approximately 560 alleging
wrongful  death) have been filed with the Special Master  appointed by the Court
to oversee the Albuterol  Settlement Trust Fund. The Special Master has approved
approximately  3,800 class action claims totaling  approximately $55 million. No
awards have been made to  approximately  1,500 non-death class action claims and
the District  Court gave these  claimants  until December 31, 1997 to supplement
their  claims.  In  addition,  approximately  820  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.
      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
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

<PAGE>

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 less than five people who properly  opted out of the class action.  In
May 1997, a settlement was concluded in two lawsuits involving  approximately 45
of these opt-out claimants.  The Company also has settled approximately 35 other
lawsuits or claims brought by people who opted out of the class action suit. The
settlements  were previously  reserved and did not have a material impact on the
current year's earnings.

Grand Jury Investigation
On May 28, 1997, the Company announced that it had entered into a plea agreement
pursuant to which it agreed to waive  indictment and plead guilty to a one count
Information charging a violation of Title 18, United States Code, Section 371, a
conspiracy to defraud the United  States and one of its  agencies,  the Food and
Drug Administration ("FDA"). The Information alleged that Copley made changes in
the manufacturing processes for four drugs (only two of which,  procainamide 500
mg tablets and potassium  chloride tablets,  currently are being manufactured by
the  Company)  without  proper  notification  to the FDA and signed  false batch
records with respect to two of these drugs. As part of the plea  agreement,  the
Company agreed to pay a fine of $10.65 million,  $3.55 million of which was paid
in June 1997, with the remainder due in two equal  installments plus interest in
June 1998 and June 1999.  The plea was  accepted by the United  States  District
Court for the District of Massachusetts on June 19, 1997.
      The plea agreement  followed a nearly three-year  investigation  and grand
jury subpoenas from the United States  Attorney's  Office in  Massachusetts  for
documents focusing particularly on albuterol and Brompheril(R)  products,  which
were recalled by the Company in December 1993 and September 1994,  respectively,
but extending beyond these products. The Company complied with the subpoenas and
cooperated  with  federal   authorities   throughout  the   investigation.   The
investigation   continues  with  respect  to  individuals,   some  of  whom  are
indemnified by the Company for legal fees and related expenses.
      Also on May 28, 1997 the  Company  announced  that it had entered  into an
agreement  with the FDA  providing  for an  independent  audit of 20 of Copley's
ANDAs. The Company is cooperating  fully with the FDA, and the independent audit
commenced in July and has been substantially  completed. The FDA has agreed that
during this audit it will continue to review the Company's pending ANDAs, accept
new ANDAs from the Company and, where appropriate, approve Copley's ANDAs.
      On  November 3, 1997 the Company  received  notification  that the Defense
Logistics  Agency  ("DLA") has  proposed  the Company be debarred  from  federal
government contracting and from directly or indirectly receiving the benefits of
certain federal  assistance  programs.  The reason for the proposed debarment is
the Company's  guilty plea described above. The Company has advised the DLA that
it believes the proposed  debarment is not  warranted.  The  Company's  possibly
affected sales to the federal government are not material.

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
notification  of  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  off-patent
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

<PAGE>

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.  A further appeal by MMD to the United
States  Supreme Court was filed and in December  1997, the Supreme Court refused
to grant MMD's application to appeal.
      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
consolidated financial condition or results of operations.

SmithKline Beecham Lawsuit
In August 1997,  the Company filed an ANDA for nabumetone  which  certified that
SmithKline  Beecham  Corporation's  ("SB")  patent  relating to  nabumetone  was
invalid and  unenforceable  and that the Company was entitled to manufacture and
sell  nabumetone  prior to the December 13, 2002  expiration of SB's  nabumetone
patent.  As a result,  on October 31, 1997 the Company was served with a summons
and  complaint  in a patent  infringement  action  entitled  SmithKline  Beecham
Corporation  and Beecham  Group  p.l.c.  v. Copley  Pharmaceutical,  Inc. in the
United States District Court for the District of Massachusetts. In their action,
plaintiffs  allege that because the Company seeks approval of its ANDA to engage
in the  commercial  manufacture,  use and sale of nabumetone as claimed in their
patent  before  the  patent's  expiration,   the  Company  has  infringed  their
nabumetone patent. Plaintiffs seek damages and an injunction against approval of
the Company's  nabumetone ANDA and its sale of nabumetone  prior to December 13,
2002.  The  manufacturer  and  supplier of the  nabumetone  that the Company has
designated  for use in its ANDA has agreed to defend the  Company in this action
and to indemnify  the Company for any damages that might be assessed as a result
of the Company's sale of nabumetone obtained from the manufacturer. Although the
Company  believes  that this  complaint  is without  merit and the  Company  has
meritorious  defenses  to these  actions,  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  consolidated  financial condition or results of
operation.

Other Legal Proceedings
The Company has $11.7 million of estimated recall related and legal  contingency
reserves  accrued at December 31, 1997.  These  reserves  reflect the  Company's
estimates of its exposure at December 31, 1997 in its various legal  proceedings
described above.  Actual settlements  amounts may differ from amounts estimated.
In addition,  the Company is from time to time subject to claims  arising in the
ordinary course of business. While the outcome of the claims cannot be predicted
with  certainty,  management  does not expect  these  matters to have a material
adverse  effect on the results of  operations  and  financial  condition  of the
Company.

M. Supplemental Cash Flow Information

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

                                        YEAR ENDED    Year ended    Year ended
                                       DECEMBER 31,  December 31,  December 31,
(In thousands)                            1997          1996          1995
--------------------------------------------------------------------------------
Cash paid (received)
   during the period for:
     Interest                             $ 374       $   241       $   280
     Income taxes                          (163)       (5,062)       (1,741)
--------------------------------------------------------------------------------

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. The Company had a second reduction in labor force
during the second quarter of 1997.

<PAGE>

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)       1997             1997           1997            1997          1997
------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>             <C>            <C>           <C>
Net sales                                    $25,816        $25,500         $36,475        $33,692       $121,483
Gross profit                                   4,829          6,848          10,341          7,637         29,655
Recall related and litigation expenses           200          2,167             227          1,093          3,687
Net income (loss)                               (363)        (1,514)          1,754            687            564
Net income (loss) per share                  $ (0.02)       $ (0.08)        $  0.09        $  0.04       $   0.03
------------------------------------------------------------------------------------------------------------------------
</TABLE>

<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)
------------------------------------------------------------------------------------------------------------------------
<FN>
Quarterly results are not an indication of future results.

(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.
</FN>
</TABLE>

                           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, 1997
and 1996 and the related  consolidated  statements of operations,  shareholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   1997.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the 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, 1997 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.


KPMG Peat Marwick LLP
Boston, Massachusetts
January 29, 1998

<PAGE>

               MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

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


Ken E. Starkweather
Vice President, Chief Financial Officer and Treasurer

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

There have been no changes in or disagreements with accountants on accounting or
financial disclosure matters during the Company's two most recent fiscal years.

                                    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, 1997,  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,  1997,  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,  1997,  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, 1997,  under the heading  "Certain  Relationships  and
Related Transactions."

<PAGE>

                                     PART IV

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

(a)1. Consolidated Financial Statements
For the following financial information included herein see Part II. Item 8
      Consolidated Balance Sheets as of December 31, 1997 and 1996
      Consolidated Statements of Operations for the years ended December 31,
      1997, 1996 and 1995
      Consolidated Statements of Shareholders' Equity for the years ended
      December 31, 1997, 1996 and 1995
      Consolidated Statements of Cash Flows for the years ended December 31,
      1997, 1996 and 1995
      Notes to Consolidated Financial Statements
      Report of Independent Accountants


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


3. List of Exhibits
Exhibit No. Description
------------------------------------------------------------------------------
3.1(d)   Amended and Restated  Certificate of Incorporation  of the Company,  as
         amended.
3.2(a)   Amended and Restated By-Laws of the Company. 10.3(a) Industrial Revenue
         Bond Agreements executed by the Company dated July 15, 1989.
10.4(a)  1986 Incentive Stock Option Plan.
10.5(a)  1990 Stock Plan.
10.6(f)  Amended and Restated 1992 Stock Plan.
10.7(a)  1992 Non-Employee Director Stock Plan.
l0.8(a)  1992 Employee Stock  Purchase  Plan.
10.9(a)  Employee  Stock  Ownership  Plan.
10.10(d) Profit Sharing and 401(k) Savings Plan, as amended.
10.11(a) Research & Development Cross License and Option to Purchase with Copley
         R&D Limited Partnership II.
10.12(a) Form of Indemnity Agreement with Directors and Certain Officers.
10.13(b) Employment Agreement,  dated as of October 8, 1993, between the Company
         and Jane C.I. Hirsh.
10.14(b) Form of Employment Agreement between the Company and certain employees.
10.15(b) Acquisition  Agreement,  dated as of October 8, 1993,  by and among the
         Company, Hoechst Celanese and HCCP Acquisition Corporation.
10.16(d) 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(b) 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(b) Product  Agreement,  dated  as of  October  8,  1993,  between  Hoechst
         Celanese Corporation and the Company.
10.19(b) Confidentiality  Agreement, dated as of September 10, 1993, between the
         Company and Hoechst Celanese Corporation.
10.20(c) Amended and  Restated  Loan  Agreement  dated  August 17, 1993  between
         Copley Pharmaceutical, Inc. and The First National Bank of Boston.
10.21(e) Resignation  Agreement  dated  December  22,  1994  between  Anthony A.
         Bonelli and Copley Pharmaceutical, Inc.
10.22(f) 1995 Non-Employee Director Stock Option Plan.
10.23(f) First Amendment to Amended and Restated Loan Agreement dated as of June
         29, 1995 by and between  the  Company  and the First  National  Bank of
         Boston ("Bank of Boston").
10.24(f) First  Amendment  to Amended and Restated  Promissory  Note dated as of
         June 29, 1995 by and between the Company and Bank of Boston.
10.25(f) First Amendment to Reimbursement Agreement dated as of June 29, 1995 by
         and between the Company and Bank of Boston.
10.26(g) Agreement of Compromise and Settlement dated August 22, 1995.
10.27(g) Supplement to August 22, 1995 Agreement of Compromise and Settlement.
10.28(g) Escrow and Trust Agreement dated August 28, 1995.
10.29(g) Second  Amendment to Amended and Restated  Loan  Agreement  dated as of
         August 30, 1995 by and between the Company and Bank of Boston.
10.30(h) Stipulation of Compromise and Settlement dated November 17, 1995.
10.31(h) Third  Amendment to Amended and  Restated  Loan  Agreement  dated as of
         March 25, 1996 by and between the Company and Bank of Boston.
10.32(i) Fourth  Amendment to Amended and Restated  Loan  Agreement  dated as of
         July 31, 1996 by and between the Company and Bank of Boston.

<PAGE>

Exhibit No. Description
------------------------------------------------------------------------------

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

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

(b)Reports on Form 8-K
Form 8-K dated  January 13, 1997 - Item 5: Other Events.  The Company  announced
that  Kenneth N. Larsen has  retired as  President  for health  reasons but will
continue to serve on the Board of Directors and will remain its Chairman.

Form 8-K dated May 28, 1997 - Item 5: Other Events.  The Company  announced that
it  entered  into a plea  agreement  covering  all  issues  investigated  by the
Massachusetts U.S. Attorney during a nearly three-year-long review.

Form 8-K dated June 24, 1997 - Item 5: Other  Events.  The  Company  announced a
number of cost reduction  initiatives and the acceptance of the Company's guilty
plea.

No other reports on Form 8-K were filed during the year ended December 31, 1997.

(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.

<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
                                                Ken E. Starkweather
                                                Vice President, Chief
                                                Financial Officer and
                                                Treasurer



Date: March  30, 1998


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     Chairman of the Board and Director       March 30, 1998
Kenneth N. Larsen        (principal executive officer)

/s/Ken E. Starkweather   Vice President, Chief Financial Officer  March 30, 1998
Ken E. Starkweather      and Treasurer

/s/Robert P. Cook        Director                                 March 30, 1998
Robert P. Cook

/s/Judith Fensterer      Director                                 March 30, 1998
Judith Fensterer

/s/Jane C.I. Hirsh       President of Copley Pharmaceutical       March 30, 1998
Jane C.I. Hirsh          International, Inc. and Director

/s/William K. Hoskins    Director                                 March 30, 1998
William K. Hoskins

/s/Peter W. Ladell       Director                                 March 30, 1998
Peter W. Ladell

/s/Agnes Varis           Director                                 March 30, 1998
Agnes Varis

/s/Martin Zeiger         Director                                 March 30, 1998
Martin Zeiger