<PAGE>

        As filed with the Securities and Exchange Commission on June 30, 1997

                        SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549

                         --------------------------------
                                   FORM 10-K

        /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                       FOR THE FISCAL YEAR ENDED MARCH 31, 1997

                                      OR

             / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER 33-30999
                        -------------------------------

                             R.P. SCHERER CORPORATION
              (Exact name of Registrant as specified in its charter)

           DELAWARE                              13-3523163
    (State of Incorporation)     (I.R.S. Employer Identification Number)

              2075 WEST BIG BEAVER ROAD, TROY, MICHIGAN    48084
          (Address of principal executive offices)       (Zip code)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (248) 649-0900

                        ---------------------------------
             Securities registered pursuant to Section 12(b) of the Act:

   Title of each class             Name of each exchange on which registered

 COMMON STOCK, $.01 PAR VALUE                 NEW YORK STOCK EXCHANGE
 6 3/4% SENIOR NOTES DUE 2004                 NEW YORK STOCK EXCHANGE

        Securities registered pursuant to Section 12(g) of the Act: None


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 the 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.  YES /X/    NO / /

The aggregate market value of all shares of common stock held by 
non-affiliates of the Registrant as of June 25, 1997 was approximately 
$1,321,244,000 (based on closing price of $54.69 per share as of June 25, 
1997).

Number of shares outstanding of each class of the Registrant's common stock as
of June 25, 1997: 24,277,927 shares of common stock, par value $.01.

                        DOCUMENTS INCORPORATED BY REFERENCE:
                                           
Portions of the Registrant's proxy statement relating to the 1997 annual
meeting of shareholders to be held on September 11, 1997, are incorporated by
reference in Part III of this Annual Report on Form 10-K.

<PAGE>

                                      PART I
ITEM  1  BUSINESS

GENERAL

The R.P. Scherer Corporation (the "Company") is a leading international 
manufacturer and developer of drug delivery systems.  The Company is the 
world's largest producer of softgels for the pharmaceutical and nutritional 
supplements markets and holds, or is developing, several other innovative 
drug delivery technologies.  The two most significant drug delivery systems 
center around RP SCHERERSOL -TM- and ZYDIS-Registered Trademark- technologies. 
The Company's proprietary drug delivery systems improve the therapeutic 
effectiveness of drugs by controlling the rate, time and place of release of 
the drug in the body.

The Company produces several thousand products in softgel form, including a 
wide variety of pharmaceutical, vitamin, cosmetic and recreational products. 
R.P. Scherer has a broad domestic and international base of softgel 
customers, including manufacturers and wholesalers of pharmaceutical, health 
and nutritional, cosmetic and recreational products, with approximately 
one-half of the Company's sales made to the pharmaceutical industry.  To meet 
the needs of its multinational customers and to serve new markets, the 
Company operates 19 softgel manufacturing facilities in 12 countries 
throughout the world and manufactures hardshell capsules in three of these 
countries.  Approximately two-thirds of the Company's fiscal 1997 sales and 
operating income were derived from operations outside the United States.

The Company's Scherer DDS division focuses on the development of advanced 
drug delivery systems including ZYDIS-Registered Trademark- and other 
technologies. ZYDIS-Registered Trademark- is an oral dosage form which 
dissolves instantaneously on the tongue and does not require water to aid 
swallowing. Other technologies under development include the PASSCAL dry 
powder inhalation system, the OPTIDYNE ophthalmic drug delivery system and 
the PULSINCAP-Registered Trademark- technology which enables the contents of 
a capsule to be released at a predetermined time in contact with a liquid.  
The Company is actively searching for promising new drug delivery systems 
which complement the Company's existing technologies.

The Company's Advanced Therapeutic Products Group ("ATP") manages the
development and registration of new pharmaceutical products by applying the
Company's drug delivery technologies to off-patent compounds.  The Company
expects that ATP will help it service the growing global demand for
therapeutically improved, cost-effective pharmaceutical products.

SOFTGEL PRODUCTS AND MARKETS

Softgel products accounted for 90% of the Company's fiscal 1997 sales.  
Softgel capsules are one-piece soft elastic gelatin capsules typically 
containing water or oil soluble liquids, pastes or solids in solution or 
suspension.  Softgel products are used in a wide range of pharmaceutical, 
nutritional, cosmetic and recreational products.

First developed by Robert Pauli Scherer in 1933, softgel technology is the 
only widely accepted process for encapsulating oils, liquids or suspended 
solids in an oral dosage form.  Importantly, the rapid dissolution or 
disintegration characteristics of softgel capsules often result in improved 
bioavailability and efficacy versus tablets or hardshell capsule 
formulations.  Other advantages of softgels include ease of use, precise 
dosage control, minimal ingredient loss during manufacturing, effective taste 
masking, improved product stability, tamper resistance and longer shelf life.

The Company continues to advance softgel technology with the recent 
introduction of patentable shell barrier and "bead" technologies.  The new 
shell barrier technology significantly broadens potential softgel 
encapsulation opportunities to include dermatological and cosmetic 
applications with high water content fill material.  Dual-action bead 
technology combines the benefit of immediate release liquid softgels with 

                                       1

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sustained release beads, all in one softgel capsule.  Developed in 
collaboration with a customer, this unique presentation is patentable and 
ideal for reinforcing brand image.  The Company expects the launch of the 
first commercial bead technology softgel product in fiscal 2000.

The Company produces softgel capsules for the following markets: (i) 
prescription and over-the-counter ("OTC") pharmaceuticals; (ii) health and 
nutritional; and (iii) other, primarily cosmetics and recreational.

PHARMACEUTICAL.  The world's various pharmaceutical markets are relatively 
similar due to the high degree of regulation worldwide, together with the 
increasing globalization of the pharmaceutical industry.  The Company 
performs especially well in highly regulated environments where the 
customers' emphasis is on quality and service rather than price.  In fiscal 
1997, roughly one-half of the Company's softgel sales were derived from the 
sale of pharmaceutical products.

The Company works closely with its customers to identify product 
opportunities and to develop and commercialize new softgel products.  The 
Company's RP SCHERERSOL -TM- softgel systems consist of various liquid 
formulation technologies which improve the bioavailability of pharmaceutical 
compounds which are inconsistently, incompletely or too slowly absorbed from 
traditional oral dosage forms.  These proprietary systems also broaden the 
range of pharmaceutical products to which softgel technology may be 
effectively applied.  The technology, most of which is patented, often 
enables pharmaceutical companies to combine the advantages of drugs in liquid 
solution with the convenience and dosage accuracy of oral softgels.  
Importantly, RP SCHERERSOL -TM- technologies' unique, patented dosage delivery 
system can help protect pharmaceutical compounds against generic drug 
competition throughout the life of the RP SCHERERSOL -TM- patents.

To date, the most significant product reformulated using RP SCHERERSOL -TM- 
systems are Novartis Ltd.'s  NEORAL-Registered Trademark- and 
SANDIMMUN-Registered Trademark- softgel products.  These cyclosporin-A 
products are immunosuppressants which are administered daily to organ 
transplant patients throughout their lives to prevent post-operative organ 
rejection.  The Company's softgel formulation of these drugs improves patient 
compliance by increasing ease of use, masking cyclosporin-A's unpleasant 
taste and better regulating dosage.  NEORAL-Registered Trademark-, a new 
formulation of cyclosporin-A developed and patented by the Company and 
Novartis Ltd., provides a significant improvement in the bioavailability of 
cyclosporin-A providing more consistent and reliable dosing for organ 
transplant patients.  NEORAL-Registered Trademark-is also intended to expand 
the use of cyclosporin-A to additional indications, including rheumatoid 
arthritis and psoriasis.  NEORAL-Registered Trademark- has received approval 
in Europe for the treatment of psoriasis and is pending approval in the 
United States for the treatment of rheumatoid arthritis. Novartis Ltd.'s 
annual worldwide sales of SANDIMMUN-Registered Trademark- and 
NEORAL-Registered Trademark- are currently estimated to exceed $1 billion. 
The Company believes that a majority of SANDIMMUN-Registered Trademark- and 
NEORAL-Registered Trademark- sales are in softgel form.  SANDIMMUN-Registered 
Trademark- and NEORAL-Registered Trademark- combined represented approximately 
3% of the Company's fiscal 1997 softgel sales.

The Company currently anticipates that its customers will launch several
important new pharmaceutical softgel products over the next three years,
although the Company cautions that such forward-looking estimates as to
probability and timing of successful product launches by its customers are
subject to numerous risks, the most relevant of which are outlined on page 8,
"Forward Looking Information."

The Company's softgel technologies have proven especially successful in the 
formulation of the new anti-HIV protease inhibitors and the Company currently 
anticipates that three of the top five new protease inhibitors will be 
marketed in softgel form in fiscal 1998 and 1999, one of which is Hoffmann-La 
Roche's INVIRASE-TM-.  Hoffmann-La Roche has indicated that, at the dosage 
used in clinical trials, the new INVIRASE-TM-  softgel formulation provides 
eight-to-nine times the drug exposure of the existing formulation.  The 
improved bioavailability of the softgel form of these products may 
substantially reduce the number of times that patients must take these 
products each day, thereby enhancing patient compliance and minimizing 
adverse side effects.

                                       2

<PAGE>

Five significant additional launches of softgel pharmaceutical products are 
anticipated over the next six to 24 months, including:  an American Home 
Products ibuprofen softgel, FDA approval of Novartis' NEORAL-Registered 
Trademark- for rheumatoid arthritis, three protease inhibitors and a hormone 
replacement therapy softgel to be produced for Schering Plough.

British Biotech's promising new anti-cancer agent MARIMASTAT is currently in 
phase II trials.  British Biotech believes that the drug may potentially 
exceed $2 billion per year in sales.  The Company believes that MARIMASTAT 
may begin providing product revenue as early as fiscal 2000 and may provide 
significant revenues three to four years thereafter.

The Company continues to develop new softgel products for the OTC market.  In 
addition to the anticipated launch of American Home Products' 
ADVIL-Registered Trademark- ibuprofen pain reliever in softgel form in the 
latter half of fiscal 1998, the Company projects the launch of additional 
ibuprofen cough-cold combination softgels for American Home Products in 
fiscal 2000.  The market's favorable response to softgel formulations of A.H. 
Robins' DIMETAPP-Registered Trademark- and ROBITUSSIN-Registered Trademark-  
and Burroughs Wellcome's SUDAFED-Registered Trademark- has resulted in 
similar product line extension strategies for Schering-Plough's 
DRIXORAL-Registered Trademark-, Miles Laboratories' ALKA-SELTZER 
PLUS-Registered Trademark- and Pfizer's UNISOM SLEEPGELS-Registered 
Trademark-, among others.

HEALTH AND NUTRITIONAL.  Health and nutritional softgel products consist 
primarily of vitamins, minerals, herbal supplements, and plant and fish oils 
and extracts.  Some of the Company's products involve relatively simple 
encapsulation of oils, such as vitamin E and cod liver oil, while many more 
complex formulations are specifically formulated to customer requirements.  
Some health and nutritional products can only be formulated in softgel form 
and other products are formulated in softgel form for convenience and quality 
product line image.  Health and nutritional products represented 36% of the 
Company's fiscal 1997 softgel sales.

OTHER-COSMETICS AND RECREATIONAL.  Other softgel products, consisting 
primarily of cosmetic and recreational softgel products, comprised 8% of  
fiscal 1997 softgel sales, with 4% of softgel sales attributable to cosmetics 
and 4% of softgel sales to recreational products.

The Company's cosmetics softgel products consist principally of specially 
shaped softgels containing topical oils and creams, and bath pearls or 
capsules containing oils and fragrances.  Additionally, the Company's 
cosmetics customers have introduced facial products using special twist-off 
softgel capsules which provide unit dosing and prevent oxidation of the 
products before use.  The Company continues to develop and market new 
products for the growing cosmetic market.  Examples include the fragrance 
softgel TRUSCENT-Registered Trademark-, which represents an economical, 
biodegradable twist-off sampler providing a unit dose of perfume and new skin 
care capsules containing a combination of vitamin C and retinol, a form of 
vitamin A.

The Company also manufactures paintball softgels for use in recreational 
"paintball games."  Various colors of water-soluble paint are encapsulated in 
softgels and sold by the Company to qualified distributors. Originally 
established in the United States, this sport is now also growing in 
popularity internationally.  The Company is the world's leading producer of 
recreational paintball softgels.

SCHERER DDS

Formed as a separate division of the Company in 1991, Scherer DDS focuses on 
the development and commercialization of advanced drug delivery systems.  
Scherer DDS represents a broadening of the Company's business and reflects 
the Company's commitment to the rapidly growing drug delivery market segment. 
The Company believes that demand for advanced drug delivery systems will 
continue to grow as the pharmaceutical industry recognizes limitations to 
improving drug efficacy and tolerance with conventional dosage forms.  In 
addition, novel and patented formulation and delivery technologies can 
often extend the product life cycle of major drugs for many years, thereby 
maximizing return on the customers' significant investment.

                                       3

<PAGE>

Scherer DDS Technologies include ZYDIS-Registered Trademark- as well as 
several other novel advanced drug delivery technologies which are under 
development. ZYDIS-Registered Trademark- is an oral dosage form which 
dissolves instantaneously on the tongue and does not require water to aid 
swallowing. Other technologies currently under development include the 
PASSCAL dry powder inhalation system, the OPTIDYNE ophthalmic drug delivery 
system and the PULSINCAP-Registered Trademark- technology which enables the 
contents of a capsule to be released at a predetermined time in contact with 
a liquid.  The Company is continually engaged in the search for other 
advanced drug delivery systems which would complement the Company's existing 
technologies.

ZYDIS-Registered Trademark-.  ZYDIS-Registered Trademark- is a freeze-dried, 
porous wafer containing a drug substance which dissolves instantaneously on 
the tongue making the product particularly suitable for improving compliance 
among groups such as children and the elderly who frequently experience 
difficulties in swallowing conventional dosage forms.  The ZYDIS-Registered 
Trademark- system has been patented in major markets extending through the 
year 2007 or later, with such patent protection extending to the active 
ingredients being delivered using ZYDIS-Registered Trademark-.  Products 
incorporating ZYDIS-Registered Trademark-technology have received approvals for 
use in 25 countries.

The Company's customers received U.S. Food and Drug Administration ("FDA") 
approval and launched two new ZYDIS-Registered Trademark- products in fiscal 
1997, including American Home Product's DIMETAPP-Registered Trademark- COLD 
AND ALLERGY children's product launched in Fall 1996 and Schering-Plough 
Corporation's CLARITIN-Registered Trademark- REDITABS-TM- launched in Spring 
1997.  In addition to DIMETAPP-Registered Trademark- and CLARITIN-Registered 
Trademark- REDITABS-TM-, the Company currently produces five other 
ZYDIS-Registered Trademark- products, including:  Pfizer's FELDENE 
MELT-Registered Trademark-  and FELDENE FAST-Registered Trademark- 
(piroxicam), Merck's PEPCIDIN RAPITAB-Registered Trademark- (famotidine), 
Janssen's IMODIUM LINGUAL-Registered Trademark- (loperamide) and two 
tranquilizer products containing lorazepam and oxazepam for Wyeth-Ayerst 
International.  At present, such products are sold in Europe and Latin 
America.  There are currently 12 major products encompassing ZYDIS-Registered 
Trademark- technology in different stages of development and regulatory 
approval, including Glaxo's ZOFRAN-Registered Trademark- (ondansetron) and 
Janssen's MOTILIUM (domperidone). Because patents covering active compounds 
in many of these products have expired or will expire within the next few 
years, the manufacturers of such products in many cases have been seeking 
alternative patent-protected dosage forms.  In general, agreements with 
customers call for customers to pay license fees to the Company for product 
class and/or other forms of exclusivity as well as to pay certain of the 
costs for development, clinical testing, obtaining regulatory approvals and 
commercialization of the products.  The Company will receive royalties, as 
well as manufacturing revenues, assuming such products are successfully 
commercialized.  The Company recognized fiscal 1997 revenues of $23.0 million 
related to ZYDIS-Registered Trademark- products.

OTHER TECHNOLOGIES.  In-vitro development work and, in certain cases clinical 
development work, has proceeded for all three of the emerging drug delivery 
technologies.  Recent in-vitro development work has confirmed the ability of 
PASSCAL, a unique powder-processing technology, to improve overall inhalation 
performance and reproducibility using a variety of dry powder inhalers.  The 
OPTIDYNE system is a pocket-sized device that delivers precise, 
sensation-free droplets of medicine to the eye.  Despite its advantages over 
conventional dispensers, Scherer decided that the potential development 
timetables and financial returns did not warrant the Company's further 
investment in this ophthalmic technology.  OPTIDYNE was put up for sale in 
fiscal 1997 and Scherer is currently negotiating a purchase agreement with a 
buyer having a major interest in the eye-care market.  Finally, PULSINCAP 
technology enables the contents of a capsule to be released at a 
predetermined time in contact with a liquid.  In March 1997, the Company and 
Oxoid Limited entered into a License and Supply agreement covering the 
exclusive worldwide use of patented PULSINCAP technology in test kits for the 
detection of specific bacterial contamination in foods.  The use of the 
PULSINCAP capsules in the Oxoid test kits is expected to reduce the time 
required to test foods for bacterial contamination by up to one-half, thereby 
resulting in considerable cost savings for food manufacturers. The Company 
has ceased PULSINCAP development work for pharmaceutical applications.

All these technologies are the subject of numerous patents and patent 
applications around the globe.  Discussions are proceeding with potential 
licensing partners with proven marketing skills and expertise in the 
respective areas.  Current development plans, however, indicate that, with 
the exception of PULSINCAP,  the earliest commercialization date for these 
technologies would be no earlier than the year 2000.

                                       4

<PAGE>

ADVANCED THERAPEUTIC PRODUCTS GROUP

The Company believes that changes currently affecting worldwide 
pharmaceutical markets will enhance the commercial value of pharmaceutical 
products which demonstrate therapeutic and cost benefits over existing 
therapies.  To capitalize on these market trends, the Company formed ATP 
within its Scherer DDS subsidiary to manage the development and registration 
of new pharmaceutical products which are based on the reformulation of 
off-patent compounds and which utilize the Company's proprietary drug 
delivery technologies.  

Unlike the development work it currently performs on behalf of its customers, 
the Company intends to plan and execute much of the clinical development of ATP 
products and take these products through the regulatory process in the 
various markets for its own account.  The Company believes that engaging in 
the development of products using its technologies is a logical extension of 
the Company's expertise in the drug delivery business and is complementary to 
its ongoing customer-sponsored drug delivery activities.  The Company has 
hired key executive and technical personnel with extensive expertise in 
pharmaceutical development, clinical testing and regulatory affairs to manage 
the activities of ATP.  The Company does not intend to build a sales and 
marketing infrastructure for ATP products, but rather will license marketing 
rights to pharmaceutical companies with well-developed distribution 
capabilities.  The Company believes that license fees, royalties and/or 
profit sharing resulting from the development of ATP products will be 
significantly greater than those that can be obtained on customer-directed 
work.

ATP products involve the reformulation of existing compounds whose patent 
protection has expired or is near expiration.  Five products are currently 
under development by ATP using RP SCHERERSOL-Registered Trademark- and 
ZYDIS-Registered Trademark- drug delivery systems.  The Company anticipates 
that the development, clinical testing and regulatory approval process for 
ATP products will involve a shorter time period than that normally associated 
with a new chemical entity, as the drugs used in the ATP formulation already 
have established records for safety, toxicity and tolerability.

Initial revenue related to ATP developed products began in Fiscal 1997 
resulting from the licensing of ZYDIS-Registered Trademark- selegiline to 
Athena Neurosciences, Inc., a unit of Elan Corporation plc.   Revenues 
related to other ATP products are expected to begin no earlier than fiscal 
1999, assuming the development and commercialization of such products is 
successful.  Expenses associated with ATP totaled $8.0 million in fiscal 1997 
and are expected to increase significantly in fiscal 1998 due to costs 
related to certain clinical trials.  The Company anticipates that ATP group 
expenses will represent a significant portion of the Company's total R&D 
spending over the next few years. The Company further anticipates that ATP 
product sales and royalty revenues will exceed ATP group expenses no earlier 
than fiscal 2000, assuming that the development and commercialization of such 
ATP products is successful.

INTERNATIONAL OPERATIONS

To serve new markets and to meet the needs of its multinational customers, 
the Company operates softgel manufacturing facilities in 12 countries 
throughout the world and manufactures hardshell capsules in three of these 
countries.  For financial reporting purposes, the Company's operations are 
divided into three geographical areas:  United States, Europe and Other 
International.  Europe represents operations in the United Kingdom, France, 
Italy and Germany.  Other International consists of operations in Canada, 
Australia, Japan, Brazil and Argentina.  The Company has the flexibility to 
transfer some of its production from one plant to another within its 
worldwide network. See Note 13 to the consolidated financial statements for 
financial information concerning the Company's geographic segments. 

Currently, the Company is not subject to significant government restrictions 
as to the availability of material cash flows from its foreign subsidiaries. 
However, transfer of profits from foreign subsidiaries could be subject to 
foreign exchange controls and to regulations of foreign governments which may 
be in effect from time to time.  In addition, the consolidated results of the 
Company's operations are affected by foreign currency fluctuations.  Laws or 
regulations have been proposed or enacted in various foreign countries which, 
among other things, specify the number of national directors and restrict 
borrowing by foreign-owned companies.

                                       5

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COMPETITION

The Company's various drug delivery technologies compete with a growing 
number of new drug delivery technologies and with continued refinements to 
existing delivery technologies.  Major pharmaceutical companies have become 
increasingly interested in the development and commercialization of both 
existing and newly developed pharmaceutical products incorporating advanced 
drug delivery systems. In recent years, a number of companies have been 
formed to develop new drug formulations, products and drug delivery systems, 
many of which compete, either directly of indirectly, with the Company's 
products or technologies.

The greatest competition to the Company's pharmaceutical softgel dosage form 
is from the manufacturers of tablets and hardshell capsules.  The Company 
believes that the most significant competitive disadvantages of softgel 
capsules versus tablets or hardshell capsules are the higher cost of softgels 
and the lack of direct control by the originating manufacturers over the 
softgel manufacturing process.  However, because a relatively high unit 
volume is necessary to manufacture softgels economically, no significant 
pharmaceutical manufacturer and only one significant health and nutritional 
product manufacturer produce softgels internally.

The Company is the world's largest manufacturer of softgels.  The Company 
believes it has a competitive advantage in the softgel business due to its 
greater experience in the manufacture of softgels, its advanced formulation 
technologies and expertise, its extensive participation in customer product 
development, its strong acceptance by customers and its geographic breadth.  
The Company's principal softgel competitors are several manufacturers with 
substantially smaller softgel operations.  Although the Company faces varying 
degrees of competition in each of its geographic markets, it believes it has 
a leading market position in each of its major softgel markets.  The Company 
is committed to continual investment in people, plant and technology to 
further strengthen its competitive position.

Competition in hardshell capsules is comprised primarily of two multinational 
pharmaceutical manufacturers each of which have substantially greater assets 
and sales than the Company.  In addition, the Company competes in various 
countries with smaller hardshell manufacturers.

Competition to the Company's ZYDIS-Registered Trademark- quick dissolve drug 
delivery systems centers on five drug delivery manufacturers, none of which 
has successfully received regulatory approval for or commercialized a 
prescription pharmaceutical product.  The Company believes that its 
ZYDIS-Registered Trademark- technology and proven pharmaceutical 
manufacturing capacity places it in a leading position in the quick dissolve 
drug delivery segment.

PRODUCT INFORMATION

The Company's business is not dependent upon a single product or a few 
products. No product represents 10% or more of the Company's sales.

CUSTOMERS

No material part of the Company's business is considered to be dependent upon a
single customer or a few customers and no single customer represents 10% or more
of the Company's sales.

                                       6

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SOURCES OF MATERIALS

The principal raw material used in the manufacture of softgels and hardshell 
capsules is gelatin. The Company has never experienced any significant 
shortage of gelatin or other significant raw materials. Gelatin is obtained 
primarily regionally and in most instances is available from multiple sources 
(and is generally purchased on a coordinated worldwide basis by the Company 
to obtain favorable terms as to pricing and quantities). 

Various regulatory agencies in the United States and elsewhere have been 
reviewing the risk of human exposure to a group of diseases known as 
transmissible spongiform encephalopathies ("TSEs") from a variety of food and 
pharmaceutical products derived from animals, including certain types of 
gelatin.  Most of the attention on this matter to date has been focused on 
gelatin manufactured from parts of cattle imported from countries with 
reported cases of one particular form of TSE, bovine spongiform 
encephalopathy ("BSE"), commonly referred to as "mad cow disease". There is 
no evidence whatsoever that such gelatin could contain the BSE agent, or if 
it did, that the human consumption of such gelatin products could result in 
transmission of the disease.

In April 1997, a United States Food and Drug Administration ("FDA") advisory 
panel recommended that the FDA reinstate a restriction on the use of gelatin 
manufactured from bovine materials from certain countries known to have cases 
of BSE. The FDA is not obligated to follow recommendations of the advisory 
panel, and has not yet expressed its position on, or otherwise acted upon, 
such recommendation.  Other regulatory bodies, including the World Health 
Organization and the European Community Commission have undertaken similar 
reviews and implemented various measures regulating the production, export, 
and use of gelatin and its source materials.  While the Company believes that 
a substantial majority of the gelatin it uses will not be affected by these 
regulatory measures, it is possible that the supply of certain types of 
gelatin could become limited, which may result in an increase in the cost of 
gelatin.

Management believes that any effects from the BSE-related gelatin issues will 
not be material to the Company's business.

PATENTS

The Company has a number of active patents on its specialized machinery, 
processes,  products and drug delivery systems.  In addition, a number of 
patent applications are pending and numerous trademarks are held.  In the 
opinion of management, the Company's businesses are not dependent upon any 
one patent or trademark.

SEASONAL BUSINESS

No material portion of the Company's business is seasonal.  However, second 
fiscal quarter operating results are generally below the results of other 
quarters due to the regularly scheduled vacation and annual summer 
maintenance shutdown of substantially all northern hemisphere softgel 
facilities.

BACKLOG

The backlog of unfilled orders was approximately $157.1 million at March 31, 
1997, as compared to approximately $ 137.5 million at March 31, 1996.  The 
Company believes that such backlog of orders at March 31, 1997 is firm and 
will be filled within the next 12 months.  The increase in the backlog 
primarily reflects the strengthening of softgel demand in the United States.

GOVERNMENT REGULATION

The Company's products and manufacturing processes and services are subject 
to the applicable Good Manufacturing Practice standards for the 
pharmaceutical industry and to other regulations by governmental agencies or 
departments in each of the countries in which it operates.  In the United 
States, the Company's encapsulation products and manufacturing and packaging 
services are subject to the Federal Food, Drug and Cosmetic Act, the 
Comprehensive Drug Abuse Prevention and Control Act of 1970 and various rules 
and regulations of the Bureau of Alcohol, Tobacco and Firearms of the United 
States Department of Treasury, the Bureau of Narcotics of the United States 
Department of Justice and state narcotic regulatory agencies.  In other 
countries, the Company's products and services are subject to analogous 
regulation.

The Company is regularly subjected to testing and inspection of its products 
and facilities by representatives of various Federal agencies and in 
addition, the Company comes under the regulation of various state, municipal 
and foreign health agencies.

The Company is also generally required to obtain FDA approval for sales in 
the United States, as well as approval of the appropriate agencies in other 
jurisdictions, prior to commencing the sale of many of the proprietary 
products under development.

                                       7

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The Company believes that it is in compliance in all material respects with 
applicable environmental laws and regulations.  Compliance with Federal, 
state and local provisions relating to the protection of the environment has 
had no material effect upon the capital expenditures, earnings or competitive 
position of the Company and its subsidiaries.  The Company was informed in 
August 1992 that soil at a manufacturing facility in North Carolina owned and 
operated by the Company from 1975 to 1985 contained levels of 
tetrachlorethene and other substances which exceeded environmental standards. 
The Company voluntarily conducted a remedial investigation and remedial and 
removal actions by the Company and the current owner of the facility are 
ongoing.  The Company will continue to perform additional studies and 
remediation of the area, including testing and removal of groundwater, which 
may indicate the necessity for additional remedial and removal actions in the 
future.  On the basis of the results of investigations performed to date, the 
Company does not believe that potential future costs associated with either 
the investigation or any potential remedial or removal action will ultimately 
have a materially adverse impact on the Company's business or financial 
condition.  Based on current information, no other significant expenditures 
for environmental compliance are contemplated in the foreseeable future.

RESEARCH AND DEVELOPMENT

Costs incurred in connection with the development of new products and 
manufacturing methods, including both Company and customer-sponsored 
expenditures, amounted to $27.8 million, $28.1 million and $24.4 million in 
fiscal 1997, 1996 and 1995, respectively.

EMPLOYEES

At March 31, 1997, the Company employed approximately 3,500 full-time 
employees. The Company considers its relations with its employees to be good.

FORWARD LOOKING INFORMATION

The Company's Annual Report to Shareholders and Annual Report on Form 10-K 
contain various forward looking statements including statements regarding its 
market position, results of product development activities of the Company and 
its customers, financial position and results of operations.  These forward 
looking statements are based on current expectations.  Certain important 
factors could cause the Company's actual results to differ materially from 
expected and historical results, including, but not limited to, the 
following: the relative strength of key nutritional products markets; generic 
competition to key customer pharmaceutical products; successful formulation, 
scale-up, development and commercialization of customer and company products 
within the time frame outlined; global economic factors; regulatory matters 
related to product testing and approvals for the Company and its customers; 
competitive products and pricing; and product and drug delivery system 
development and other technological issues.

                                       8

<PAGE>

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The name, age and employment history, including all positions held 
concurrently or successively in the past five years, of each of the Company's 
executive officers and directors are as follows:

<TABLE>
<CAPTION>
                                                           PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME                      AGE                                AND FIVE-YEAR EMPLOYMENT HISTORY (1)

<S>                       <C>         <C>
Aleksandar Erdeljan        47         Chairman and Chief Executive of the Company since March 1996.  President of the Company
                                      since August 1991 and Director of the Company since June 1990. President and Director of
                                      R.P. Scherer International Corporation from 1989 to February 1995. President of Pharmaphil
                                      Group, Inc. from January 1987 to June 1989.  Director of Corporate Development of the
                                      Company from June 1985 to January 1987.

Nicole S. Williams         52         Executive Vice President, Finance, Chief Financial Officer and Secretary of the Company
                                      since January 1992 and for R.P. Scherer International Corporation from January 1992
                                      through February 1995.  Treasurer of the Company from June 1993 through May 1996 and
                                      of R.P. Scherer International Corporation from June 1993 through February 1995.
                                      Executive Vice President-Worldwide Operations, SPSS, Inc. from December 1990 to
                                      January 1992.

Thomas J. Stuart           36         Senior Vice President, Corporate Planning and Development since April 1996.  Vice
                                      President and Controller of the Company from June 1994 to April 1996 and of R.P. Scherer
                                      International Corporation from June 1994 to February 1995.  Controller of the Company from
                                      August 1991 to June 1994 and of R.P. Scherer International Corporation from May 1990 through
                                      February 1995.  Manager, Detroit office of Arthur Andersen & Co. from June 1987 to May 1990.

Dennis R. McGregor         44         Treasurer of the Company since May, 1996. Director of Tax Operations of the Company since
                                      August 1993 and of R.P. Scherer International Corporation from August 1993 through February
                                      1995.  Assistant Treasurer of the Company from August 1993 through May 1996 and of R.P.
                                      Scherer International Corporation from August 1993 through February 1995.  Manager of Tax
                                      Audit and Planning, Allied-Lyons North America from December 1991 to August 1993.
                                      International Tax Manager for Great Lakes Chemical from September 1990 to November 1991.

Joseph E. Mitchell         43         General Counsel and Assistant Secretary of the Company since April 1996.  Associate General
                                      Counsel for Hiram Walker & Sons, Inc. from September 1994 to February, 1996 and Senior
                                      Commercial and Corporate Counsel from April 1991 to September 1994.

Ronald E. Pauli            36         Corporate Controller of the Company since June 1996. Assistant Treasurer of Kmart Corporation
                                      from January 1996 to June 1996, Assistant Controller Financial Planning of Kmart 
                                      Corporation from January 1995 to January 1996, Assistant Director Investor Relations of 
                                      Kmart Corporation from March 1994 to January 1995 and Assistant Controller Corporate 
                                      Reporting of Kmart Corporation from November 1990 to January 1994.

Lori G. Koffman            38         Director of the Company since September 1989 and of R.P. Scherer International from
                                      September 1989 through February 1995.  Assistant Secretary of the Company from December 1989
                                      to May 1996.  Managing Director, CIBC Wood Gundy Capital since April 1995.  Senior Vice
                                      President, Lehman from 1990 to December 1994.  Also a director of LifeCell Corporation,
                                      Sinclair Montrose Healthcare plc, Collegiate Health Care, Inc., Mulberry Child Care
                                      Centers, Inc. and iVillage Inc.

Frederick Frank            65         Director of the Company since June 1990 and of R.P. Scherer International Corporation from
                                      August 1988 through February 1995. Vice Chairman of Lehman Brothers.  Also a director of
                                      Pharmaceutical Product Development, Inc., Physicians Computer Network and Diagnostic
                                      Products, Inc.

</TABLE>

                                       9

<PAGE>

<TABLE>
<CAPTION>

                                                           PRESENT PRINCIPAL OCCUPATION OF EMPLOYMENT
NAME                      AGE                                 AND FIVE-YEAR EMPLOYMENT HISTORY (1)

<S>                       <C>         <C>
James A. Stern             46         Director of the Company since June 1990 and of R.P. Scherer International Corporation from
                                      June 1990 through February 1995.  Chairman of The Cypress Group LLC, a private merchant bank,
                                      since April 1994.  Managing Director of Lehman and head of its Merchant Banking Group from
                                      1989 to 1994.  Also a director of Noel Group, Inc., K & F Industries Inc., Lear Corporation,
                                      Cinemark USA, Inc., and AMTROL Inc.

Louis Lasagna, M.D.        74         Director of the Company since September 1991 and of R.P. Scherer International Corporation
                                      from June 1992 through February 1995. Dean for Scientific Affairs, Tufts University School
                                      of Medicine, since 1995. Dean, Sackler School of Graduate Biomedical Sciences, Tufts
                                      University; Professor of Psychiatry and Professor of Pharmacology, Tufts University, in each
                                      case since 1984.  Independent consultant since 1965. Director of Tufts University Center for
                                      the Study of Drug Development since 1975.  Chairman of the Board of Astra USA. Member of the
                                      Board of Trustees of International Life Sciences Institute/Nutrition Foundation since 1980
                                      and Chairman since 1991. Director of the Foundation for Nutritional Advancement since 1980.

Robert H. Rock             47         Director of the Company since September 1991 and of R.P. Scherer International Corporation
                                      from June 1992 through February 1995. Chairman of Metroweek Corporation since December 1988.
                                      President of MLR Holdings LLC since October 1987.  Chairman and Chief Executive Officer of
                                      the Hay Group from October 1986 to October 1987.  Also a director of the Penn Mutual Life 
                                      Insurance Company, Hunt Manufacturing Company, Alberto-Culver Company, Quaker Chemical 
                                      Corporation and the Wistar Institute.

John E. Avery              68         Director of the Company since January 1995.  Formerly Chairman of the Americas Society and 
                                      Council of the Americas through December 1996.  Assistant to the Chairman of Johnson & 
                                      Johnson from 1992 to 1993.  Company Group Chairman, Johnson & Johnson, from 1979 to 1992.
                                      Also a director of the American Society, Council of Americas and Argentine-American Chamber 
                                      of Commerce.  Member of the Dean's Council at the Yale University School of Medicine, the 
                                      operating board of TCW/Latin America Partners, LLC, and the Council on Foreign Relations.

Kenneth L. Way             57         Director of the Company since January 1997.  Chairman and Chief Executive Officer of Lear
                                      Corporation since 1988.  Also a director of Comerica Bank.

</TABLE>

    (1)  Where no starting date is given for a principal occupation or
         employment, such occupation or employment commenced prior to 1991.

All directors of the Company serve terms of one year and remain in office 
until the election of their respective successors.  Officers serve at the 
pleasure of the Board of Directors.

There are three committees of the Board of Directors of the Company:  the
Executive Committee, the Compensation Committee and the Audit Committee.  


ITEM 2   PROPERTIES

The Company develops and manufactures its products at 18 principal worldwide 
locations with an aggregate floor space of approximately 1.6 million square 
feet.  Fourteen of these facilities are owned in fee by the Company and four 
facilities, with an aggregate floor 

                                       10

<PAGE>

space of 537,000 square feet, are leased. The U.S. softgel manufacturing 
facilities total three, of which two totaling approximately 100,000 square 
feet, are leased.  The 15 foreign manufacturing facilities include 13 owned 
facilities with an aggregate floor space of 930,000 square feet and two 
leased facilities with 429,000 square feet aggregate floor space.  
Approximately 90% of the foreign facilities primarily manufacture softgels 
and other dosage delivery systems, while 10% of the foreign facilities 
produce hardshell capsules.  The foreign facilities are located in Argentina, 
Australia, Brazil, Canada, France, Germany (three facilities), Italy (two 
facilities), Japan, South Korea and the United Kingdom (three facilities). 
Portions of these facilities are also used for related research and 
development, administration and warehousing activities.

The Company's primary leased facility, a German manufacturing facility of 
approximately 389,000 square feet in size, has a lease term (including 
renewal options) extending through December 2008.  The Company also leases a 
production facility in Italy of approximately 100,000 square feet, with a 
lease term extending through May 2000.  Additionally the Company leases its 
executive offices in Troy, Michigan and sales offices, research facilities 
and warehouses at a variety of locations in the U.S. and abroad.  All leases 
generally provide for payment of taxes, utilities, insurance and maintenance 
by the Company and have terms extending for periods from one to fifteen 
years, including renewal options.

In the opinion of the Company, its principal properties, whether owned or 
leased, are well-maintained and in satisfactory condition, are adequately 
insured and are suitable and have capacities adequate for the purposes for 
which they are used.

ITEM 3        LEGAL PROCEEDINGS

On March 30, 1992, OCAP Acquisition Corp. ("OCAP") commenced an action in the 
Supreme Court of the State of New York, County of New York, against Paco 
Pharmaceutical Services, Inc. ("Paco"), certain of its subsidiaries, the 
Company and R.P. Scherer International Corporation (collectively, the 
"defendants"), arising out of the termination of an Asset Purchase Agreement 
dated February 21, 1992 (the "Purchase Agreement") between OCAP and the 
defendants providing for the purchase of substantially all the assets of 
Paco. On May 15, 1992, OCAP served an amended verified complaint (the 
"Amended Complaint"), asserting causes of action for breach of contract and 
breach of the implied covenant of good faith and fair dealing, arising out of 
defendants' March 25, 1992 termination of the Purchase Agreement, as well as 
two additional causes of action that were subsequently dismissed by order of 
the court.  The Amended Complaint sought $75 million in actual damages and 
$100 million in punitive damages, as well as OCAP's attorney fees and other 
litigation expenses, costs and disbursements incurred in bringing this 
action.  The Company and R.P. Scherer International Corporation asserted a 
counterclaim against OCAP for breach of contract and breach of the covenant 
of good faith and fair dealing arising out of the termination of the Purchase 
Agreement.  In April 1996, the court rendered a verdict in the Company's 
favor on all claims in the Amended Complaint and also dismissed the Company's 
counterclaim against OCAP.  OCAP has filed a notice of appeal for the 
dismissal of its claims and the Company has filed a notice of cross appeal 
for the dismissal of its counter claim.  In the opinion of management, the 
ultimate outcome of any potential appeals related to this decision will not 
have a material adverse effect on the Company's business or financial 
condition.

The Company was informed in August 1992 that soil at a manufacturing facility 
in North Carolina owned and operated by the Company from 1975 to 1985 
contained levels of tetrachlorethene and other substances which exceeded 
environmental standards.  The Company voluntarily conducted a remedial 
investigation and remedial and removal actions by the Company and the current 
owner of the facility are ongoing.  The Company will continue to perform 
additional studies and remediation of the area, including testing and removal 
of groundwater, which may indicate the necessity for additional remedial and 
removal actions in the future.  On the basis of the results of investigations 
performed to date, the Company does not believe that potential future costs 
associated with either the investigation or any potential remedial or removal 
action will ultimately have a materially adverse impact on the Company's 
business or financial condition.

The Company is a party to various other legal proceedings arising in the 
ordinary course of business, none of which is expected to have a material 
adverse effect on the Company's financial position, results of operations, 
liquidity or capital resources.

                                       11

<PAGE>

ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during 
the last quarter of its fiscal year ended March 31, 1997.                     

                                       12

<PAGE>


                                  PART II


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

The principal market for the Company's common shares is the New York Stock 
Exchange.  The following table indicates the high and low sales prices of the 
Company's common stock as reported on the composite tape of the New York 
Stock Exchange.

                                               MARKET PRICE
                                             __________________
                                             HIGH        LOW

         Year ended March 31, 1997:
              First Quarter                  $45.00      $39.00
              Second Quarter                 $50.63      $39.50
              Third Quarter                  $51.13      $43.38
              Fourth Quarter                 $62.00      $49.50

         Year ended March 31, 1996:
              First Quarter                  $50.25      $41.13
              Second Quarter                 $47.00      $37.25
              Third Quarter                  $49.13      $40.13
              Fourth Quarter                 $49.13      $37.75


The Company had 153 common shareholders of record at June 25, 1997.

The Company did not declare any dividends in the two year period ended March 
31, 1997.  Restrictions contained in certain of the Company's long-term debt 
agreements limit the payment of dividends.  The Company does not have any 
present plans to declare or pay cash dividends.

                                       13

<PAGE>

ITEM 6  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED MARCH 31,
                                                                         ______________________________________________________

                                                                          1997        1996        1995        1994       1993
                                                                         ______________________________________________________
                                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                      <C>          <C>         <C>         <C>        <C>

OPERATING DATA (1):
Net sales .......................................................        $588,699     $571,710    $536,682    $449,297   $398,011
Cost of sales ...................................................         391,648      375,088     339,923     287,389    242,108
Selling and administrative expense ..............................          72,752       72,485      71,661      61,427     56,413
Research and development expense ................................          19,979       23,387      21,276      13,090     11,393
Restructuring and other charges (2)..............................             -         33,804         -         4,478        -  
Operating income (2).............................................         104,320       66,946     103,822      82,913     88,097
Interest expense ................................................          11,693       12,595      13,758      22,480     25,436
Net income (loss) from continuing operations ....................          56,968       30,703      44,859      30,914     28,960
Net income (loss) (3) ...........................................          56,968       30,703      44,859      15,094     20,895

Depreciation and amortization (4) ...............................          31,153       29,944      27,449      25,314     22,678
Capital additions ...............................................          69,887       56,195      54,076      39,503     33,192

PER COMMON SHARE:
Net income (loss) from continuing operations (2) ................           $2.31        $1.25       $1.83       $1.27      $1.20
Net income (loss) ...............................................            2.31         1.25        1.83        0.62       0.86

BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (5) .............................................        $113,854     $110,794    $113,656    $ 89,681   $ 82,874
Total assets ....................................................         728,245      707,381     711,373     613,414    532,184
Long-term debt, including current portion .......................         142,630      169,000     185,410     189,277    142,508
Minority interests ..............................................          35,762       37,268      42,706      35,354     32,369
Shareholders' equity ............................................         353,029      300,360     273,646     214,710    203,001

</TABLE>

NOTES TO SELECTED FINANCIAL DATA
     (1) Excludes the discontinued operations of Paco Pharmaceutical
         Services, Inc. ("Paco").
     (2) For the year ended March 31, 1996, includes restructuring and other
         charges totaling $33.8 million before tax effects ($0.94 per share
         after tax effects). Those charges include approximately $17.1 million
         of cash expenses, primarily for severance and other termination
         benefits and approximately $16.7 million for fixed asset write-downs
         and other non-cash costs primarily in connection with certain facility
         closures. For the year ended March 31, 1994, includes charges totaling
         $4.5 million for the accrual of a settlement of Paco Development
         Partners (PDP II) litigation, which had been outstanding since 1990
         and the write-down of buildings and property related to the relocation
         of operations in Australia.
     (3) Includes extraordinary loss of $15.8 million from debt extinguishment
         for the year ended March 31, 1994 and an extraordinary loss of $8.4
         million from early retirement of debt, a $0.7 million loss from the
         sale of Paco and a $1.0 million gain from cumulative effect of
         accounting change for the year ended March 31, 1993.
     (4) Includes amortization of deferred financing costs and debt discount of
         $0.3 million, $0.4 million, $0.5 million, $1.3 million and $1.8
         million for the years ended March 31, 1997, 1996, 1995, 1994 and
         1993, respectively. 
     (5) Includes notes payable but does not include current portion of 
         long-term debt.

                                       14

<PAGE>

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


GENERAL

The following discussion and analysis of financial results and condition 
covers the fiscal years ended March 31, 1997, 1996 and 1995.

A majority of the Company's sales, income and cash flows is derived from its 
international operations.  The financial position and the results of 
operations of the Company's foreign operations are measured using the local 
currencies of the countries in which they operate and are translated into 
U.S. dollars. Although the effects of foreign currency fluctuations are 
mitigated by the fact that expenses of foreign subsidiaries are generally 
incurred in the same currencies in which sales are generated, the reported 
results of operations of the Company's foreign subsidiaries are affected by 
changes in foreign currency exchange rates and as compared to prior periods 
will be higher or lower depending upon a weakening or strengthening of the 
U.S. dollar.  In addition, a substantial portion of the Company's net assets 
are based in its foreign operations and are translated into U.S. dollars at 
foreign currency exchange rates in effect as of the end of each period.  
Accordingly, the Company's consolidated shareholders' equity will fluctuate 
depending upon the strengthening or weakening of the U.S. dollar.

A summary of the Company's sales, operating income and identifiable assets by 
geographic segment is included in Note 13 to the consolidated financial 
statements.  The relationships between operating results and assets of the 
segments are not comparable due to a variety of factors.  These factors 
include: differing product sales mix, operating and capital costs associated 
with local regulatory requirements, the age of the Company's manufacturing 
facilities, whether capital assets are owned or leased, working capital 
needs, fluctuations in exchange rates and other reasons specific to each 
country in which the Company operates.

RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1997 AND 1996

SALES for the fiscal year ended March 31, 1997 were $588.7 million, a 3% 
increase versus the $571.7 million reported in the prior year.  The stronger 
U.S. dollar relative to most foreign currencies reduced fiscal 1997 sales as 
compared to the prior fiscal year.  Measured using constant foreign exchange 
rates, fiscal 1997 sales increased 6%.  The current year sales increase 
resulted primarily from a 40% increase in Zydis revenues and strong gains in 
Vitamin E and health and nutritional ("H&N") softgel sales in the United 
States, the United Kingdom and Australia, partially offset by weak demand for 
all types of softgel products in continental Europe, a 46% decline in 
world-wide sales of nifedipine and flat SANDIMMUNE-Registered Trademark- / 
NEORAL-Registered Trademark- volume as compared to the prior year which 
included pipeline loading related to the U.S. launch of NEORAL-Registered 
Trademark-.

GROSS MARGIN was $197.1 million, or 33.5% of sales, in fiscal 1997 versus 
$196.6 million, or 34.4% of sales in the prior fiscal year.  The lower gross 
margin rate in fiscal 1997 was due to a higher proportion of lower margin H&N 
product in the sales mix, including a 46% increase in sales of  Vitamin E 
softgels, and to a decline in sales of higher-margin pharmaceutical softgels 
in Europe resulting from the continuing weakness of key economies and from 
budgetary measures aimed at reducing government pharmaceutical spending.

SELLING AND ADMINISTRATIVE EXPENSES ("SG&A") were $72.8 million, or 12.4% of 
sales, in fiscal 1997 compared to the $72.5 million, or 12.7% of sales, 
reported in the prior fiscal year.  The improvement in the SG&A ratio was 
largely attributable to cost savings resulting from the fiscal 1997 closing 
of two softgel facilities and the elimination of certain administrative, 
marketing and development staff positions at other locations, partially 
offset by increased spending in North America and France.

                                         15

<PAGE>

NET RESEARCH AND DEVELOPMENT EXPENSE ("R&D") was $20.0 million in fiscal 
1997, a decrease of $3.4 million from fiscal 1996 expenditures of $23.4 
million.  While gross recurring softgel R&D expenses exceeded prior year 
levels, reduced PULSINCAP-TM- expenditures and a $3.1 million increase in 
customer reimbursement resulted in lower net recurring R&D expense versus 
fiscal 1996.  R&D expense related to the Company's Advanced Therapeutic 
Products group ("ATP") was $8.0 million and $8.5 million in fiscal 1997 and 
1996, respectively.  ATP is engaged in the development of pharmaceutical 
products incorporating off-patent drugs in the Company's proprietary drug 
delivery technologies.

OPERATING INCOME was $104.3 million for fiscal 1997 as compared to the $100.8 
million, exclusive of restructuring and other special charges, reported in 
the prior fiscal year.  On this same basis, fiscal 1997 operating income 
increased 4%, and increased 6% on a constant exchange rate basis.  Fiscal 
1997 operating income comparisons primarily reflect the benefit of cost 
reduction efforts and increased customer reimbursement of softgel R&D 
expense, partially offset by lower gross profit margins.

NET INTEREST EXPENSE was $8.8 million in fiscal 1997 versus the $10.3 million 
reported in the prior fiscal year.  The $1.5 million decline in net interest 
expense in fiscal 1997 resulted primarily from favorable short-term interest 
rates and lower average debt levels during fiscal 1997, reflecting the 
Company's ability to fund capital investment with internally generated funds.

INCOME TAX EXPENSE was $26.3 million with an effective rate of 28% in fiscal 
1997 as compared with $11.7 million with an effective rate of 21% in fiscal 
1996.  The prior year effective income tax rate benefited from a favorable 
income tax adjustment of $3.8 million resulting primarily from resolution of 
an Australian tax issue and also included certain tax benefits resulting from 
the restructuring.  Exclusive of such items, the Company's consolidated 
effective income tax rate in fiscal 1996 approximated 29%.  On this 
comparable basis, the slightly lower effective income tax rate in fiscal 1997 
reflects changes in the geographic mix of pretax income and the utilization 
of foreign tax credits and other tax benefits. 

MINORITY INTERESTS in the earnings of less than wholly-owned subsidiaries was 
$12.3 million in fiscal 1997 as compared to $14.3 million in fiscal 1996.  
The reduction in minority interests was due primarily to a decline in 
earnings of the Company's less-than-wholly-owned subsidiary in Germany.

NET INCOME was $57.0 million, or $2.31 per share, for the year ended March 
31, 1997 as compared to net income of $50.2 million, or $2.04 per share, in 
fiscal 1996, before the effects of the fiscal 1996 restructuring and other 
special items.  Such 13% increase in net income resulted primarily from 
increased sales and resulting gross margin, increased customer reimbursement 
of softgel R&D expense, lower net interest expense and a reduction in 
minority interests.  The strengthening of the U.S. dollar had the effect of 
reducing net income by $0.07 per share in the year ended March 31, 1997, as 
compared to the prior fiscal year.  After the effects of the restructuring 
and other special items, fiscal 1996 net income was $30.7 million, or $1.25 
per share.

FINANCIAL OUTLOOK

The Company's business strategy is focused on strengthening its presence and 
capabilities in the pharmaceutical industry.  Execution of this strategy will 
continue to require significant outlays for development and manufacturing 
resources, including new staff and state-of-the-art pharmaceutical 
development and production facilities.  These costs will, to a large extent, 
precede the related revenues from anticipated pharmaceutical product sales 
and, therefore, will continue to impact the Company's operating results for 
fiscal year 1998 and thereafter.

In addition to the substantial incremental infrastructure costs supporting 
the Company's pharmaceutical strategy, a number of other factors are expected 
to influence sales and earnings growth in fiscal 1998.

                                         16

<PAGE>

These factors include the recent strength of the U.S. dollar as compared to 
that experienced in fiscal 1997, the weak pharmaceutical and economic 
environments in certain European markets as well as the precise timing of new 
product launches, the conclusion of certain ATP licensing agreements and the 
timing and extent of ATP clinical trial expenditures.

FISCAL YEARS ENDED MARCH 31, 1996 AND 1995

SALES for the fiscal year ended March 31, 1996 were $571.7 million, a 7% 
increase over sales of $536.7 million in fiscal year 1995.  A portion of the 
fiscal 1996 sales increase resulted from the comparative weakness of the U.S. 
dollar relative to key foreign currencies during most of fiscal 1996.  
Exclusive of this effect, fiscal 1996 sales increased 3% on a constant 
exchange rate basis.  The majority of the sales gain resulted from a 13% 
increase in pharmaceutical softgel revenues, which comprised nearly one-half 
of fiscal 1996 sales.  Commercialization of the Company's Zydis 
fast-dissolving drug delivery device also progressed, with sales increasing 
40% to $16.2 million in fiscal 1996.  However, fiscal 1996 sales growth was 
dampened by a 2% decline in sales of non-pharmaceutical softgel products, 
primarily H&N softgels, as a result of the weakness of Europe and other key 
markets.

GROSS MARGIN was $196.6 million, or 34.4% of sales, in fiscal 1996 versus 
$196.8 million, or 36.7% of sales in the prior fiscal year.  The lower gross 
margin rate in fiscal 1996 was due primarily to increased staffing and fixed 
costs, including a $2.6 million increase in depreciation expense resulting 
from new and upgraded manufacturing facilities; and to reduced product 
pricing and sub-optimal capacity utilization resulting from competitive and 
market forces. These factors were partially offset by a shift in the sales 
mix to higher margin pharmaceutical products.

SELLING AND ADMINISTRATIVE EXPENSES of $72.5 million, or 12.7% of sales, were 
essentially unchanged in fiscal 1996 compared to the $71.7 million, or 13.4% 
of sales, reported in the prior fiscal year.

In January 1996, the Company announced a restructuring plan designed to 
enhance the Company's long-term profitability by reducing and rationalizing 
manufacturing and overhead structures which were primarily servicing 
non-pharmaceutical markets.  The restructuring plan included the closure of 
softgel manufacturing plants in Windsor, Canada and Neuvic, France, as well 
as the consolidation and elimination of administrative, marketing and 
development staff positions in several other locations.  A total of about 250 
people were affected by the plan, representing approximately 7% of the 
Company's total work force. As a result of the restructuring plan and other 
special charges (see Note 3 to the consolidated financial statements), the 
Company recorded a pre-tax provision of  $33.8 million in fiscal 1996, 
comprised of $17.1 million in cash expenses primarily for severance and other 
employee termination benefits and $16.7 million for fixed asset writedowns 
and other non-cash expenses.  The after tax cost of the restructuring plan 
and other special charges was $23.1 million, or $0.94 per common share.  The 
restructuring was completed in fiscal 1997 with the final cost of the program 
approximating the Company's original estimate.

NET RESEARCH AND DEVELOPMENT EXPENSE was $23.4 million in fiscal 1996, an 
increase of $2.1 million.  The fiscal 1996 increase resulted from a 42%, or 
$2.5 million, increase in spending by the Company's ATP group.

OPERATING INCOME was $66.9 million for fiscal 1996, as compared to $103.8 
million in the prior fiscal year.  Before the restructuring and other special 
charges, operating income for fiscal 1996 was $100.8 million, $3.0 million, 
or 3%, below the prior year.  The $3.0 million decrease in fiscal 1996 
operating income resulted primarily from increased R&D spending by the ATP 
group.

NET INTEREST EXPENSE was $10.3 million in fiscal 1996 versus the $12.2 
million reported in the prior fiscal year.  The decline in interest expense 
resulted from both lower average debt levels during fiscal 1996 and to an 
increase in interest costs capitalized on major construction projects.

                                         17

<PAGE>

MINORITY INTERESTS in the earnings of less than wholly-owned subsidiaries was 
$14.3 million in fiscal 1996 as compared to $16.4 million in fiscal 1995.  
The reduction in minority interests was primarily attributable to the 
restructuring and other special charges, a portion of which related to 
minority owned subsidiaries and, to a lesser extent, a decline in earnings of 
the Company's less-than-wholly-owned subsidiary in Japan.

INCOME TAX EXPENSE was $11.7 million with an effective rate of 21% in fiscal 
1996 as compared with $30.4 million with an effective rate of 33% in fiscal 
1995.  The effective income tax rate in fiscal 1996 benefited from a 
favorable income tax adjustment of $3.8 million, primarily related to the 
resolution of an Australian tax audit concerning the deductibility of certain 
intercompany interest expense.  Before the effects of this adjustment and the 
tax benefits of the restructuring and other special charges, the Company's 
consolidated effective income tax rate was 29% of pretax income, versus 33% 
of pretax income in the prior fiscal year.  The lower effective income tax 
rate in fiscal 1996 reflected changes in the geographic mix of pretax income, 
better utilization of foreign and other tax credits and the benefits derived 
from various tax planning strategies.

NET INCOME was $30.7 million, or $1.25 per share, for the year ended March 
31, 1996.  Before the effects of the restructuring and other special charges 
and the income tax reserve adjustment discussed above, fiscal 1996 net income 
was $50.2 million, or $2.04 per share, an increase of 11% from net income of 
$44.9 million, or $1.83 per share, earned in fiscal 1995.  Such improvement 
reflected a $1.9 million decline in net interest and other, a lower 
consolidated effective income tax rate in fiscal 1996 and a $2.1 million 
reduction in minority interests in earnings of subsidiaries.  The weaker U.S. 
dollar increased earnings by $.04 per common share for fiscal 1996 as 
compared to the prior fiscal year.

GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>

    (IN THOUSANDS)                        FOR THE YEARS ENDED MARCH 31,
                                --------------------------------------------
                                 1997     % CHANGE   1996(1)  % CHANGE    1995
                                 ----     --------   -------  --------    ---- 
    <S>                         <C>         <C>      <C>      <C>         <C>
    Sales:
     United States              $174,903     24.0    $141,100    9.5    $128,912
     Europe                      307,793     (3.7)    319,540    5.7     302,172
     Other International         106,003     (4.6)    111,070    5.2     105,598
                                --------             --------           -------- 
      Net sales                 $588,699      3.0    $571,710    6.5    $536,682
                                --------             --------           -------- 
                                --------             --------           -------- 
    Operating Income:
     United States              $36,667      7.1    $ 34,239   15.6    $ 29,612
     Europe                      59,812     (4.6)     62,677   (6.4)     66,973
     Other International         20,743      2.6      20,221   (5.6)     21,411
     Unallocated                (12,902)   (21.3)    (16,387)  15.6     (14,174)
                                -------             --------           -------- 
      Operating income         $104,320      3.5    $100,750   (3.0)   $103,822
                                -------             --------           -------- 
                                -------             --------           -------- 
</TABLE>

(1)  Fiscal 1996 operating income excludes restructuring and other charges.

UNITED STATES OPERATIONS consist of three softgel manufacturing facilities in 
St. Petersburg, Florida, including a main plant focused on pharmaceutical and 
over-the-counter ("OTC") softgel products and separate softgel production 
facilities dedicated to the production of H&N softgel products and to 
recreational paintball and cosmetic products.  The Company's United States 
operations generated a 24% sales gain in fiscal 1997, reflecting in part 
increased production of softgels for the Canadian market as a result of the 
Spring 1996 closing of the Windsor, Canada softgel facility.  However, the 
majority of the fiscal 1997 change resulted from a 42% increase in 
nutritional softgel sales, driven primarily by increased sales of Vitamin E 
softgel products resulting from favorable publicity regarding this product's 
health benefits. Total U.S. pharmaceutical softgel sales increased 3% versus 
the year ago period as an 11% increase in OTC pharmaceutical softgel sales 
resulting from fiscal 1997 OTC launches and a full year sales for the several 
OTC products launched in the prior year, partially offset reduced sales of 
nifedipine due to that product's continuing sales decline.  In the prior 
fiscal year, sales by the Company's United States operations increased 9% to 
$141.1 million.  Fiscal 1996 United States sales of pharmaceutical products 
rose 12%, paced by strong sales of Abbott Laboratories HYTRIN prescription 
drug for the treatment of hypertension and benign prostate enlargement, 
following its launch in 


                                         18

<PAGE>


softgel form in the latter part of fiscal 1995.  Sales of OTC softgel 
products also increased significantly during fiscal 1996 as a result of 
continued strong demand for branded cough/cold and other OTC softgels, 
including the launch of several new branded products.  Sales of H&N softgel 
products increased 17% in fiscal 1996, in spite of a decline in sales of 
low-margin Vitamin E softgels due to weak consumer demand as a result of 
adverse publicity during fiscal 1996.  

Fiscal 1997 operating income from United States operations increased 7%, or 
$2.4 million, yielding a 21.0% operating margin as compared with 24.3% in the 
prior year, exclusive of fiscal 1996 restructuring and other charges.  The 
increase in operating income resulted primarily from the strength of H&N 
softgel sales; however, operating margin was impeded by these products' lower 
margin. Exclusive of restructuring and other charges, fiscal 1996 operating 
income from United States operations increased 16%, or $4.6 million, 
primarily due to the 9% sales increase and a shift in the product mix to 
higher-margin pharmaceutical softgels as a result of both new product 
launches and reduced demand for Vitamin E.

EUROPEAN OPERATIONS consist of softgel manufacturing facilities in France, 
Italy and Germany, of softgel and Zydis production facilities in the United 
Kingdom and a hardcapsule manufacturing facility in Germany.  The region's 
softgel and hardshell operations are coordinated through a European 
headquarters located in Baar, Switzerland.  Sales of the Company's European 
segment declined 4% in fiscal 1997, and were flat on a constant dollar basis, 
as strong United Kingdom H&N sales gains were offset by weak sales throughout 
continental Europe.  Fiscal 1997 sales of the Company's German operations 
were adversely influenced by lower sales of nifedipine, by comparison against 
the prior year first-half launch of NEORAL-Registered Trademark- in the 
United States, and by weak first-half OTC pharmaceutical softgel sales.  
Economic weakness throughout continental Europe contributed to an 18% 
decrease in sales of cosmetic and H&N softgel products in the region.  Fiscal 
1996 sales of the Company's European segment increased 6%, to $319.5 million, 
from $302.2 million in fiscal 1995.  A majority of the fiscal 1996 sales 
growth resulted from strong pharmaceutical product sales and the financial 
statement effect of the weaker average U.S. dollar.  The most significant 
product sales advance related to SANDIMMUNE-Registered Trademark- and 
NEORAL-Registered Trademark- CYCLOSPORIN-A softgels, which are produced by 
the Company for Novartis Ltd.  Sales of SANDIMMUNE-Registered Trademark- and 
NEORAL-Registered Trademark- grew nearly 40% in fiscal 1996, primarily as a 
result of the U.S. Food and Drug Administration granting marketing approval 
for NEORAL-Registered Trademark- in July 1995.  Fiscal 1996 sales growth in 
Europe was restrained by generally weak nutritionals markets.  Markets 
serviced by the Company's United Kingdom softgel operation, where sales 
declined 12%, were especially weak experiencing both lower demand for 
nutritional products at the consumer level and, to a lesser extent, reduced 
pricing in response to competitive pressures.  

As a result of the weak fiscal 1997 sales described above, European operating
income decreased 5%, and was flat in constant dollars, in fiscal 1997, and the
operating margin fell to 19.4% of sales versus 19.6% of sales in fiscal 1996. 
Fiscal 1996 operating income decreased 6%, largely as a result of lower
profitability in the Company's United Kingdom softgel operation.

OTHER INTERNATIONAL OPERATIONS represent softgel business units operating in 
Japan, Korea, Australia, Brazil and Argentina and hardcapsule facilities in 
Canada and Brazil.  Fiscal 1997 sales of the Company's Other International 
segment declined 5% versus the prior fiscal year due primarily to the 
transfer of Canadian softgel production to the United States and the weakness 
of the Japanese yen versus the U.S. dollar, partially offset by strong H&N 
sales in Australia and Japan.  Excluding the effect of Canadian softgels, 
Other International sales on a constant dollar basis increased 8% due 
primarily to the strengthening of H&N softgel markets in Australia and Japan 
and strong demand for the Company's hardshell capsules.  The Company's Other 
International segment reported fiscal 1996 sales of $111.1 million, a 5% 
increase over fiscal 1995 sales.  A majority of the fiscal 1996 sales 
increase was produced by the Company's Argentinean softgel operation and the 
Canadian hardshell capsule division.  Fiscal 1996 sales of other operations 
in this geographic segment increased marginally as growth was constrained by 
the impact of recessionary and competitive conditions on nutritional softgel 
sales in Japan and Australia and lower Canadian softgel sales.  

                                         19

<PAGE>

The Other International group's fiscal 1997 operating margin increased to 
19.6% of sales versus 18.2% of sales last year due to improved profitability 
in Australia, Japan and the hardshell business as well as the spring 1996 
closing of the less profitable Canadian softgel facility.  Fiscal 1996 
operating income decreased 6% due primarily to declining profitability at the 
Canadian softgel facility and weakness in Japan and Australian H&N markets, 
partially offset by strong growth in the Canadian hardshell manufacturing 
plant.

CASH FLOWS

CASH AND CASH EQUIVALENTS increased by $3.9 million in fiscal 1997, as 
compared with a decrease of $12.7 million and an increase of $17.1 million in 
fiscal 1996 and 1995, respectively.

NET CASH PROVIDED BY OPERATIONS totaled $106.7 million, $75.5 million and 
$89.2 million during fiscal years 1997, 1996 and 1995, respectively.  The 
$31.2 million improvement in operating cash flow in fiscal 1997 resulted 
primarily from increased income, a reduction in taxes receivable and modest 
growth in working capital requirements as working capital freed by the 
closing of two facilities was shifted to faster growing segments of the 
business.  Cash provided by operations decreased $13.7 million in fiscal 1996 
due primarily to increased value-added and other tax-related receivables, 
partially offset by increased earnings before restructuring and other non-cash 
charges.

NET CASH USED BY INVESTING activities was $67.4 million, $59.1 million and 
$54.8 million for fiscal 1997, 1996 and 1995, respectively.  In all periods 
presented, net cash used by investing activities is comprised primarily of 
capital expenditures for expansion or improvement of dedicated, 
"best-in-class" pharmaceutical softgel facilities and for the 
ZYDIS-Registered Trademark-production facility in the United Kingdom as well 
as for general facility and equipment upgrades and renovations.  Fiscal 1997 
expenditures focused on the expansion and upgrade of softgel production 
facilities in France and Japan and the addition of ZYDIS-Registered 
Trademark- production capacity.  Fiscal 1996 softgel expenditures included 
outlays resulting from the modernization initiative in France and the major 
upgrade and renovation of the German softgel facility.   Fiscal 1995 softgel 
activities included expenditures in North America related to the completion 
of a dedicated nutritional softgel product facility, in France for the 
initial expansion and upgrade of softgel production facilities and in 
Australia for the construction of a replacement manufacturing facility.

NET CASH USED BY FINANCING ACTIVITIES was $34.2 million, $27.3 million and 
$20.4 million in fiscal 1997, 1996,  and 1995, respectively.  The Company's 
financing activities primarily include net borrowings under the Company's 
bank credit facilities and dividends paid to minority shareholders of 
subsidiaries.  Net repayments on the Company's bank credit facility total 
$23.2 million, $13.3 million and $8.5 million in fiscal 1997, 1996 and 1995, 
respectively.  Dividends paid to holders of minority interests in 
subsidiaries were $8.2 million, $13.5 million and $11.5 million in fiscal 
1997, 1996 and 1995, respectively.  The decline in dividends paid to holders 
of minority interests in fiscal 1997 was primarily a result of lower 
profitability in Germany during fiscal 1996.

LIQUIDITY AND FINANCIAL CONDITION

During the next several years, a significant portion of the Company's cash 
flow will be used to fund capital expenditures, to fund research and 
development, to service indebtedness and, depending on market conditions, to 
repurchase up to 5% of the Company's outstanding common stock.  The Company 
believes that future cash flow from operations, together with cash and 
short-term investments aggregating $28.2 million at March 31, 1997 and 
amounts available under existing bank credit facilities totaling $174.1 
million at March 31, 1997 will be adequate to meet anticipated capital 
investment, working capital, stock repurchase and debt service requirements.  
The Company does not currently have plans to declare or pay cash dividends.  
At March 31, 1997 the Company's debt-to-equity ratio was 32%.  The Company 
has as one of its long-term financial objectives maintenance of a 
debt-to-equity ratio within the range of  35% to 40%.

Capital expenditures are currently anticipated to approximate $90 million in 
each of fiscal 1998 and fiscal 1999 and to decline to a lower level per year 
thereafter.  Such expenditures will be used to upgrade and expand the 

                                         20

<PAGE>

"best-in-class" pharmaceutical softgel production facilities in France, 
Japan, Germany and the United States to meet anticipated customer demand and 
to ensure compliance with increasingly stringent pharmaceutical Good 
Manufacturing Practices (GMP) standards worldwide.  In addition, a 
significant portion of capital spending will include the further expansion of 
production facilities for the ZYDIS-Registered Trademark- advanced drug 
delivery system.  As of March 31, 1997, the Company had approximately $17.8 
million of commitments for future capital expenditures.

The Company will also continue to increase its spending for research and 
development activities for its advanced drug delivery systems, as well as to 
develop new drug delivery technologies and to fund the Company's ATP 
initiative. The Company believes that changes currently affecting worldwide 
pharmaceutical markets will enhance the commercial value of products which 
demonstrate therapeutic and cost benefits over existing therapies.  Through 
ATP, the Company intends to capitalize upon these trends by creating new 
products which reformulate existing compounds utilizing the Company's 
proprietary drug delivery technologies.  Expenses associated with ATP totaled 
$8.0 million in fiscal 1997 and are expected to increase significantly in 
fiscal 1998 due to costs related to certain clinical trials.  The Company 
anticipates that ATP group expenses will represent a significant portion of 
the Company's total R&D spending over the next few years.  The Company 
further anticipates that ATP product sales and royalty revenues will exceed 
ATP group expenses no earlier than fiscal 2000, assuming that the development 
and commercialization of such ATP products is successful.

The Company periodically reviews drug delivery technologies and other 
businesses for potential investment, consistent with its strategic 
objectives.  Such investments will not necessarily involve significant 
initial funding or funding commitments by the Company.  Management intends 
that any acquisition which would require significant funding would be 
financed using a combination of available cash and short-term investments 
and, depending upon market conditions,  the issuance of common stock.  
Management further intends that the Company's financing of any such 
acquisition would not materially increase the Company's debt-to-equity ratio 
over its stated long-term objective of 35% to 40%.

At March 31, 1997, the Company's outstanding long-term indebtedness consisted 
of approximately $99.5 million of 6 3/4% senior notes (net of a $0.5 million 
discount) due in February 2004, $28.5 million of borrowings under the 
Company's bank credit facility, $6.4 million of industrial development 
revenue bonds and approximately $8.2 million of other indebtedness.

The Company's bank credit facility provides access to revolving credit 
borrowings, in various currencies, totaling $175.0 million and expires April 
1, 1999.  At March 31, 1997, the Company had outstanding $28.5 million under 
the bank credit facility.  Interest is payable at LIBOR plus .575%, with a 
further reduction in the interest rate spread to LIBOR plus .475% possible 
during the term of the facility based on certain financial performance 
criteria, or at the bank's prime rate.  Unused borrowing availability is 
subject to annual commitment fees of 1/4%.   Pursuant to other revolving 
credit arrangements, the Company may borrow up to $28.3 million.  As of March 
31, 1997, the Company had outstanding $0.7 million under these revolving 
credit arrangements.

See Notes 2 and 15 to the consolidated financial statements for information 
regarding the use of financial instruments and derivatives thereof, including 
foreign currency hedging instruments.  As a matter of policy, the Company 
does not engage in "speculative" transactions involving derivative financial 
instruments.

INFLATION AND ACCOUNTING POLICIES

In the view of management, the effects of inflation and changing prices on 
the Company's net results of operations and financial condition were not 
significant.

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128") 
and Statement of Financial Accounting Standards No. 129 "Disclosure of 
Information about Capital Structure" ("FAS 129").  Both statements are 
effective for fiscal years ending after December 15, 1997.   FAS 128 
supersedes existing generally accepted 

                                         21

<PAGE>

accounting principles relative to the calculation of earnings per share and 
requires restatement of all prior period earnings per share information upon 
adoption.  Generally, FAS 128 requires a calculation of basic earnings per 
share, which takes into consideration income available to common shareholders 
and the weighted average of common shares outstanding.  FAS 128 also requires 
the calculation of a diluted earnings per share, which takes into effect the 
impact of all additional common shares that would have been outstanding if 
all dilutive potential common shares relating to options, warrants, and 
convertible securities had been issued, as long as their effect is dilutive, 
with a related adjustment of income available for common shareholders, as 
appropriate.  FAS 128 requires dual presentation of basic and diluted 
earnings per share on the face of the statement of operations and requires a 
reconciliation of the numerator and denominator of the basic earnings per 
share computation.  FAS 129 requires, among other disclosure requirements, a 
reconciliation of the numerators and denominators of the basic and diluted 
per share calculations and a description of transactions which occur after 
the end of the reporting period but before the issuance of the financial 
statements which would have materially changed the number of common, or 
potential common, shares outstanding.  The Company does not expect the effect 
of its adoption of FAS 128 or FAS 129 to be material.

                                         22

<PAGE>

ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   R.P. SCHERER CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENT OF INCOME
                                           
<TABLE>
<CAPTION>

                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                            FOR THE YEARS ENDED MARCH 31,
                                        --------------------------------------
                                            1997          1996         1995
                                            ----          ----         ---- 
<S>                                       <C>           <C>          <C>
Net sales                                 $588,699      $571,710     $536,682
Cost of sales                              391,648       375,088      339,923
Selling and administrative expenses         72,752        72,485       71,661
Restructuring and other charges (Note 3)      -           33,804         - 
Research and development expenses, net      19,979        23,387       21,276
                                           -------      --------     --------
Operating income                           104,320        66,946      103,822

Interest expense                            11,693        12,595       13,758
Interest earned and other                   (2,885)       (2,281)      (1,523)
                                           -------      --------     --------
Income before income taxes and
 minority interests                         95,512        56,632       91,587

Income taxes                                26,275        11,655       30,352
Minority interests                          12,269        14,274       16,376
                                           -------      --------     --------
Net income                                 $56,968       $30,703      $44,859
                                           -------      --------     --------
                                           -------      --------     --------
Per Common and Common Equivalent Share:
   Net income                                $2.31         $1.25        $1.83
                                           -------      --------     --------
                                           -------      --------     --------

            The accompanying notes are an integral part of this statement.

</TABLE>

                                         23

<PAGE>


                      R.P. SCHERER CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF FINANCIAL POSITION
        
<TABLE>
<CAPTION>
                                   
                                                            (IN THOUSANDS)
                                                            AS OF MARCH 31,
                                                       ----------------------
                                                            1997       1996
<S>                                                       <C>          <C>    
     
                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                              $ 24,955    $  21,007
  Short-term investments                                    3,262        4,880
  Receivables, less reserves of:  1997 - $3,500,000 
     1996 - $4,800,000                                    127,717      129,472
  Inventories                                              59,280       59,718
  Other current assets                                      8,620        6,659
                                                         --------     --------
                                                          223,834      221,736
                                                         --------     --------
PROPERTY:
  Property, plant and equipment, at cost                  439,069      411,396
  Accumulated depreciation and reserves                  (119,895)    (124,676)
                                                         --------     --------
                                                          319,174      286,720
                                                         --------     --------
OTHER ASSETS:
  Goodwill and intangibles, net of amortization           168,772      175,622
  Other assets                                             16,465       23,303
                                                         --------     --------
                                                          185,237      198,925
                                                         --------     --------

                                                         $728,245     $707,381
                                                         --------     --------
                                                         --------     --------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt    $  1,499     $  5,834
  Accounts payable                                         61,026       57,985
  Accrued liabilities                                      37,329       41,839
  Accrued income taxes                                     10,934        9,632
                                                         --------     --------
                                                          110,788      115,290
                                                         --------     --------
LONG-TERM LIABILITIES AND OTHER:
  Long-term debt                                          141,822      164,652
  Other long-term liabilities                              50,758       57,329
  Deferred income taxes                                    36,086       32,482
  Minority interests in subsidiaries                       35,762       37,268
                                                         --------     --------
                                                          264,428      291,731
                                                         --------     --------

COMMITMENTS AND CONTINGENCIES (Note 12)

SHAREHOLDERS' EQUITY:
 Preferred stock, 500,000 shares authorized, none issued     -             -  
 Common stock, $.01 par value, 50,000,000 shares
   authorized, shares issued: 1997 - 23,568,255;
   1996 - 23,460,453                                          236          235
  Additional paid-in capital                              242,500      239,705
  Retained earnings                                       122,673       65,705
  Currency translation adjustment                         (12,380)      (5,285)
                                                         --------     --------
                                                          353,029      300,360
                                                         --------     --------


                                                         $728,245     $707,381
                                                         --------     --------
                                                         --------     --------

            The accompanying notes are an integral part of this statement.

</TABLE>

                                         24

<PAGE>
                   R.P. SCHERER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                              (IN THOUSANDS)
                                                                       FOR THE YEARS ENDED MARCH 31,
                                                                     ----------------------------------
                                                                       1997         1996         1995
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>

OPERATING ACTIVITIES:
 Net income                                                          $ 56,968     $ 30,703     $ 44,859
 Adjustments to reconcile net income to net cash provided 
  by operating activities:
   Depreciation                                                        25,131       23,586       20,998
   Amortization of intangible assets and debt discount                  6,022        6,358        6,451
   Non-cash restructuring and other charges (Note 3)                     -          16,690         -
   Minority interests in net income                                    12,269       14,274       16,376
   Deferred tax provision and other                                     7,130      (10,942)       3,579
   Increase in receivables                                             (3,823)     (13,865)     (10,626)
   (Increase) decrease in inventories and other current assets         (2,306)       4,763       (3,936)
   Increase in accounts payable and accrued liabilities                 5,347        3,948       11,465
                                                                     --------     --------     --------
Net cash provided by operating activities                             106,738       75,515       89,166
                                                                     --------     --------     --------
INVESTING ACTIVITIES:
 Purchases of plant and equipment                                     (69,887)     (56,195)     (54,076)
 Other                                                                  2,488       (2,906)        (779)
                                                                     --------     --------     --------
Net cash used by investing activities                                 (67,399)     (59,101)     (54,855)
                                                                     --------     --------     --------
FINANCING ACTIVITIES:
 Proceeds from other long-term borrowings                              32,363       29,585       70,255
 Other long-term debt retirements and payments                        (57,628)     (42,649)     (78,726)
 Short-term borrowings, net                                              (729)        (721)        (439)
 Cash dividends paid to minority shareholders of subsidiaries          (8,214)     (13,504)     (11,528)
                                                                     --------     --------     --------
Net cash used by financing activities                                 (34,208)     (27,289)     (20,438)
                                                                     --------     --------     --------
Effect of currency translation on cash and cash equivalents            (1,183)      (1,833)       3,266
                                                                     --------     --------     --------
Net increase (decrease) in cash and cash equivalents                    3,948      (12,708)      17,139

Cash and cash equivalents, beginning of year                           21,007       33,715       16,576
                                                                     --------     --------     --------
Cash and cash equivalents, end of year                               $ 24,955     $ 21,007     $ 33,715
                                                                     ========     ========     ========
</TABLE>

        The accompanying notes are an integral part of this statement.

                                      25
<PAGE>
                   R.P. SCHERER CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                              (IN THOUSANDS)
                                                                       FOR THE YEARS ENDED MARCH 31,
                                                                     ----------------------------------
                                                                       1997         1996         1995
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>

COMMON STOCK:
 Balance at beginning of year                                        $    235     $    233     $    233
 Issuance of common stock for stock option exercises                        1            2            -
                                                                     --------     --------     --------
  Balance at end of year                                             $    236     $    235     $    233
                                                                     ========     ========     ========
ADDITIONAL PAID-IN CAPITAL:
 Balance at beginning of year                                        $239,705     $235,383     $234,157
 Stock options exercised, net of related tax effects                    2,795        4,322          557
 Compensation expense related to stock options granted                      -            -          669
                                                                     --------     --------     --------
  Balance at end of year                                             $242,500     $239,705     $235,383
                                                                     ========     ========     ========
RETAINED EARNINGS (DEFICIT):
 Balance at beginning of year                                        $ 65,705     $ 35,002     $ (9,857)
 Net income                                                            56,968       30,703       44,859
                                                                     --------     --------     --------
  Balance at end of year                                             $122,673     $ 65,705     $ 35,002
                                                                     ========     ========     ========
CURRENCY TRANSLATION ADJUSTMENT:
 Balance at beginning of year                                        $ (5,285)    $  3,028     $ (9,823)
 Adjustment for the year                                               (7,095)      (8,313)      12,851
                                                                     --------     --------     --------
  Balance at end of year                                             $(12,380)    $ (5,285)    $  3,028
                                                                     ========     ========     ========
TOTAL SHAREHOLDERS' EQUITY                                           $353,029     $300,360     $273,646
                                                                     ========     ========     ========
</TABLE>

        The accompanying notes are an integral part of this statement.

                                      26
<PAGE>
                   R.P. SCHERER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     NATURE OF OPERATIONS

R.P. Scherer Corporation (the "Company"), a Delaware corporation, is a 
leading international developer and manufacturer of drug delivery systems.  
The Company's proprietary advanced drug delivery systems improve the efficacy 
of drugs by regulating their dosage, rate of absorption and place of release. 
Customers for the Company's products include global and regional 
manufacturers of prescription and over-the-counter pharmaceutical products, 
nutritional supplements, cosmetics and recreational products.

2.     SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include 
the accounts of the Company and all of its domestic and foreign subsidiaries, 
some of which are less than wholly-owned.  All intercompany accounts and 
transactions have been eliminated.

Prior to February 28, 1995, a wholly-owned subsidiary of the Company, R.P. 
Scherer International Corporation ("Scherer International"), directly owned 
all operations of the Company and the Company's only asset was its investment 
in Scherer International.  For administrative reasons, on February 28, 1995, 
the Company merged Scherer International into the Company, through which the 
assets and liabilities of Scherer International were assumed by the Company.  
Such merger did not have any impact on the Company's results of operations or 
financial position.

REVENUE RECOGNITION - Revenues from sales of the Company's products to its 
customers are recognized primarily upon shipment.

TRANSLATION OF FOREIGN CURRENCIES - A majority of the Company's sales, income 
and cash flows is derived from its international operations.  With the 
exception of operations in highly inflationary economies, which are measured 
in U.S. dollars, the financial position and the results of operations of the 
Company's foreign operations are measured using the local currencies of the 
countries in which they operate and are translated into U.S. dollars.  
Although the effects of foreign currency fluctuations are mitigated by the 
fact that expenses of foreign subsidiaries are generally incurred in the same 
currencies in which sales are generated, the reported results of operations 
of the Company's foreign subsidiaries are affected by changes in foreign 
currency exchange rates and, as compared to prior periods, will be higher or 
lower depending upon a weakening or strengthening of the U.S. dollar.  In 
addition, a substantial portion of the Company's net assets are based in its 
foreign subsidiaries and are translated into U.S. dollars at the foreign 
currency exchange rates in effect at the end of each period.  Accordingly, 
the Company's consolidated shareholders' equity will fluctuate depending upon 
the strengthening or weakening of the U.S. dollar.

Foreign currency transaction and translation adjustments (reflecting 
primarily the translation of net assets at historical exchange rates for 
operations in highly inflationary economies) included in net income resulted 
in a net decrease in income of $0.1 million for the year ended March 31, 
1997, a net increase of $0.2 million in fiscal 1996 and a net decrease of 
$2.8 million in 1995.  Aggregate sales of operations in highly inflationary 
economies represented less than 5% of consolidated sales for each period 
presented in the consolidated statement of income.

FOREIGN CURRENCY HEDGING - Borrowings under long-term foreign currency loans 
are used to partially hedge against declines in the value of net investments 
in certain foreign subsidiaries.  The Company also periodically enters into 
foreign currency exchange contracts to hedge certain exposures related to 
selected transactions that are relatively certain as to both timing and 
amount (see Note 15 for further discussion).

                                      27
<PAGE>

RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with the 
development of new products and manufacturing methods are charged to income 
as incurred.  Customer reimbursements in the amount of $8.0 million, $4.7 
million and $3.1 million were received for the fiscal years ended March 31, 
1997, 1996 and 1995, respectively.  Research and development expenses 
reflected in the consolidated statement of income are net of such 
reimbursements.

INCOME TAXES - Deferred U.S. and foreign income taxes are provided based on 
enacted tax laws and rates on earnings of the parent and earnings of 
subsidiary companies which are intended to be remitted to the parent company 
in the future. Unremitted earnings of subsidiary companies on which deferred 
taxes have not been provided would, if remitted, be taxed at substantially 
reduced effective rates due to the utilization of foreign or other tax 
credits.  

EARNINGS PER COMMON SHARE - The computation of earnings per share is based on 
income divided by the weighted average number of shares of common stock and 
dilutive common stock equivalents outstanding (consisting solely of stock 
options) of 24,668,752, 24,535,222 and 24,518,528 shares for the years ended 
March 31, 1997, 1996 and 1995, respectively.

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128") 
and Statement of Financial Accounting Standards No. 129 "Disclosure of 
Information about Capital Structure" ("FAS 129").  Both statements are 
effective for fiscal years ending after December 15, 1997.   FAS 128 
supersedes existing generally accepted accounting principles relative to the 
calculation of earnings per share and requires restatement of all prior 
period earnings per share information upon adoption.  Generally, FAS 128 
requires a calculation of basic earnings per share, which takes into 
consideration income available to common shareholders and the weighted 
average of common shares outstanding.  FAS 128 also requires the calculation 
of a diluted earnings per share, which takes into effect the impact of all 
additional common shares that would have been outstanding if all dilutive 
potential common shares relating to options, warrants, and convertible 
securities had been issued, as long as their effect is dilutive, with a 
related adjustment of income available for common shareholders, as 
appropriate.  FAS 128 requires dual presentation of basic and diluted 
earnings per share on the face of the statement of operations and requires a 
reconciliation of the numerator and denominator of the basic earnings per 
share computation.  FAS 129 requires, among other disclosure requirements, a 
reconciliation of the numerators and denominators of the basic and diluted 
per share calculations and a description of transactions which occur after 
the end of the reporting period but before the issuance of the financial 
statements which would have materially changed the number of common, or 
potential common, shares outstanding.  The Company does not expect the effect 
of its adoption of FAS 128 or FAS 129 to be material.

CASH EQUIVALENTS - For purposes of reporting cash flows, all highly liquid 
investments which are readily convertible to known amounts of cash and which 
have a maturity of three months or less when purchased are considered cash 
equivalents.

INVENTORIES - Inventories are stated at the lower of cost or market with cost 
determined on a first-in, first-out basis for substantially all inventories. 
Market is the lower of replacement cost or estimated net realizable value. 
Finished goods and work-in-process inventories include material, labor and 
manufacturing overhead costs.

                                      28
<PAGE>

The components of inventories are as follows:

     (IN THOUSANDS)                         1997           1996
                                          --------       --------
     Raw materials and supplies           $ 32,886       $ 30,892
     Work in process                         8,604         10,593
     Finished goods                         17,790         18,233
                                          --------       --------
                                          $ 59,280       $ 59,718
                                          ========       ========

PROPERTY, PLANT & EQUIPMENT - Property, plant and equipment are recorded at 
cost and are depreciated over their related estimated useful lives primarily 
using the straight-line method for financial reporting and accelerated 
methods for tax reporting.  Maintenance and repair costs are expensed as 
incurred.  Interest cost capitalized as part of the construction cost of 
capital assets amounted to $2.1 million, $3.1 million and $1.2 million in 
fiscal years 1997, 1996 and 1995, respectively.  A summary of property, plant 
and equipment follows:

     (IN THOUSANDS)                         1997           1996
                                          --------       --------
     Land and improvements                $ 17,772       $ 18,582
     Building and equipment                 99,011        106,685
     Machinery and equipment               277,310        259,437
     Construction in progress               44,976         26,692
                                          --------       --------
                                          $439,069       $411,396
                                          ========       ========

GOODWILL AND INTANGIBLES - Goodwill represents the excess of cost over the 
fair value of identifiable net assets of businesses acquired, primarily 
related to the acquisition of the Company in June 1989 and the acquisition of 
Pharmagel in July 1993.  Goodwill is amortized using the straight-line 
method, generally over forty years. Other intangible assets include deferred 
financing fees, patents, licenses and trademarks.  Deferred financing fees 
are amortized over the life of the related obligations using the effective 
interest method.  Other intangible assets, totaling $2.5 million and $3.2 
million net of accumulated amortization as of March 31, 1997 and 1996, 
respectively, are recorded at cost and amortized over their expected useful 
lives using the straight-line method.  In accordance with generally accepted 
accounting principles, goodwill and other intangibles are periodically 
reviewed to assess recoverability from future operations using anticipated 
undiscounted future cash flows.  Any permanent diminution in the value of 
goodwill or other intangibles would be recognized as a charge against 
earnings when identified.  The accumulated amortization of goodwill and other 
intangibles is $43.6 million and $40.7 million as of March 31, 1997 and 1996, 
respectively. 

PREFERRED STOCK - The Company is authorized to issue 500,000 shares of 
preferred stock in one or more series and to fix as to any series the 
dividend rate, redemption prices, preferences in liquidation or dissolution, 
sinking fund terms, if any, conversion rights, voting rights and any other 
preference or special rights and qualifications.  The issuance of preferred 
stock in certain circumstances may have the effect of delaying, deferring or 
preventing a change in control of the Company, may discourage bids for the 
Company's common stock at a premium over the market price of the common stock 
and may adversely affect the market price of and other rights of the holders 
of common stock.  The Company has no present plans to issue any shares of 
preferred stock.

SALE OF COMMON STOCK AND RELATED TRANSACTIONS - In December 1994, the Company 
completed a secondary offering of 7.0 million shares of its common stock.  
The shares were sold by certain merchant banking partnerships affiliated with 
Lehman Brothers, Inc. (collectively "Lehman").  The offering did not result 
in any additional shares outstanding of the Company's common stock and the 
Company did not receive any proceeds from the offering.  As a result of the 
offering, Lehman no longer has any beneficial ownership of the Company.

                                      29
<PAGE>

USE OF ESTIMATES - The financial statements are prepared in conformity with 
generally accepted accounting principles and, accordingly, include amounts 
that are based on management's best estimates and judgments.

3.     RESTRUCTURING AND OTHER CHARGES

RESTRUCTURING - In the fourth quarter of fiscal 1996, the Company announced a 
restructuring plan designed to enhance the Company's long-term profitability 
by reducing and rationalizing manufacturing and overhead structures which 
were primarily servicing non-pharmaceutical markets (the "Restructuring").  
The Restructuring included the closure of softgel manufacturing plants in 
Windsor, Canada and Neuvic, France, as well as the consolidation and 
elimination of certain administrative, marketing and development staff 
positions in several other locations and was completed by mid-fiscal 1997.  
As a result of the Restructuring, the Company's total work force was reduced 
by approximately 250 employees, or 7%.  The Restructuring was completed in 
fiscal 1997 with the final cost of the program approximating the Company's 
original estimate.

In the fourth quarter of fiscal 1996, the Company recorded special provisions 
totaling $33.8 million before income tax effects related to the Restructuring 
and other charges discussed below.  On an after-tax basis, the cost of the 
Restructuring and other charges was approximately $23.1 million, or $0.94 per 
common share.  Of this amount, approximately $17.1 million represented cash 
charges and $16.7 million represents non-cash charges.

OTHER CHARGES- In the fourth quarter of fiscal 1996, the Company recognized 
other pretax charges totaling $7.3 million for matters not related to the 
Company's Restructuring, including $1.5 million related to retirement or 
severance costs for employees not included in the Restructuring, $1.9 million 
related to a long-term asset write-off resulting from a pension plan 
termination and a $2.8 million write-off of an intangible asset for which 
recoverability was determined to be impaired.  

A summary of fiscal 1997 activity related to the restructuring reserve 
follows:

<TABLE>
<CAPTION>

     (IN THOUSANDS)                      ORIGINAL      UTILIZED         UTILIZED        BALANCE AT
                                         RESERVE    IN FISCAL 1996   IN FISCAL 1997   MARCH 31, 1997
                                         --------   --------------   --------------   --------------
<S>                                      <C>        <C>              <C>              <C>
     Severance and other employee
      termination costs                   $12,000       $ 3,601          $ 8,399          $  -
     Fixed asset recovery reserves         13,100             -           13,100             -
     Other current assets                     490           191              299             -
     Other long-term assets                 3,040         3,040                -             -
     Contractual obligations                5,174         1,893            3,281             -
                                          -------       -------          -------          -------
                                          $33,804       $ 8,725          $25,079          $  -
                                          =======       =======          =======          =======
</TABLE>
                                      30
<PAGE>
4.  INCOME TAXES

A summary of income from continuing operations before income taxes, minority 
interests and extraordinary items is reflected below.  Such income is 
exclusive of various intercompany income/expense items, such as royalties, 
interest, dividends and similar items, which are taxable/deductible in the 
respective locations.  Therefore, the relationship of domestic and foreign 
taxes to reported domestic and foreign income is not representative of actual 
tax rates.

<TABLE>
<CAPTION>

(IN THOUSANDS)                                                         FOR THE YEARS ENDED MARCH 31,
                                                                     ----------------------------------
                                                                       1997         1996         1995
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>

Income before income taxes and  minority
 interests
  United States                                                      $ 26,641     $ 12,536     $ 10,105
  Foreign                                                              68,871       44,096       81,482
                                                                     --------     --------     --------
                                                                     $ 95,512     $ 56,632     $ 91,587
                                                                     ========     ========     ========
Provision for currently payable
 income taxes:
  United States                                                      $  1,697     $  4,516     $  5,443
  Foreign                                                              17,884       17,374       23,161
                                                                     --------     --------     --------
                                                                       19,581       21,890       28,604
                                                                     --------     --------     --------

Provision (credit) for deferred
 income taxes:
  United States                                                         6,319       (8,772)          (6)
  Foreign                                                                 375       (1,463)       1,754
                                                                     --------     --------     --------
                                                                        6,694      (10,235)       1,748
                                                                     --------     --------     --------
 Total income taxes                                                  $ 26,275     $ 11,655     $ 30,352
                                                                     ========     ========     ========
</TABLE>

The deferred tax provision for fiscal 1997 includes a net $3.7 million credit 
resulting from a decrease in deferred tax valuation allowances, as well as a 
$0.2 million charge resulting from changes in enacted statutory tax rates in 
certain countries.  The deferred tax provision for fiscal 1996 included a net 
$5.6 million credit resulting from a decrease in deferred tax valuation 
allowances.  The deferred tax provision for fiscal year 1995 included a net 
$0.4 million charge resulting from an increase in deferred tax valuation 
allowances, as well as a $0.3 million charge resulting from changes in 
enacted statutory tax rates in certain countries.  The components of deferred 
taxes as of March 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
     (IN THOUSANDS)                                         1997                            1996
                                                ----------------------------    ----------------------------
                                                DEFERRED TAX    DEFERRED TAX    DEFERRED TAX    DEFERRED TAX
                                                   ASSETS       LIABILITIES        ASSETS       LIABILITIES
                                                ------------    ------------    ------------    ------------
<S>                                             <C>             <C>             <C>             <C>

     Property, plant and equipment                $  2,690        $ 48,351        $  3,518        $ 40,609
     Foreign and other tax credit carryforwards      8,732            -             10,417            -
     Capital loss carryforwards                      6,379            -              6,379            -
     Restructuring and other charges (Note 3)         -               -              6,866            -
     Pensions and other postretirement benefits      6,341             803           6,736             849
     Stock options                                   3,610            -              3,843            -
     Defeasance of debt                              1,524            -              1,929            -
     Miscellaneous other                             6,466              63           4,495           2,762
                                                  --------        --------        --------        --------
       Subtotal                                     35,742          49,217          44,183          44,220
     Valuation allowances                          (16,322)           -            (20,068)           -
                                                  --------        --------        --------        --------
     Total deferred taxes                         $ 19,420        $ 49,217        $ 24,115        $ 44,220
                                                  ========        ========        ========        ========
</TABLE>

At March 31, 1997, net current future tax benefits of $2.8 million were 
included in other current assets, $3.5 million of net long-term future tax 
benefits were included in other assets and $36.1 million of net long-term 
liabilities were reflected in the accompanying consolidated statement of 
financial position.  At March 31, 1996, net current future tax benefits of 
$2.4 million were included in other current assets, $10.0 million of net 
long-term future tax benefits were included in other assets and $32.5 million 
of net long-term liabilities were reflected in the accompanying consolidated 
statement of financial position.

                                      31
<PAGE>

The capital loss carryforwards noted above expire in 2001.  The foreign tax 
credit carryforwards noted above expire through 1998.  At March 31, 1997, 
foreign earnings of approximately $97.6 million have been retained 
indefinitely by subsidiaries for reinvestment and accordingly no provision 
was made for income taxes that would be payable upon the distribution of such 
earnings.  It is not practicable to determine the amount of the related 
unrecognized deferred income tax liability, if any.

The difference between consolidated income taxes as computed at the United 
States statutory rate and as reported in the consolidated statement of income 
is summarized as follows:

<TABLE>
<CAPTION>

     (IN THOUSANDS)                                                    FOR THE YEARS ENDED MARCH 31,
                                                                     ----------------------------------
                                                                       1997         1996         1995
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>

     United States statutory tax                                     $ 33,429     $ 19,821     $ 32,056

     Increases (reductions) in taxes due to:
      Difference in effective foreign tax rates                        (1,032)      (1,883)      (3,620)
      Foreign tax credit carryforwards utilized                        (3,416)      (1,452)      (1,330)
      Other tax credit generation (utilization)                         1,200       (1,148)        -
      Goodwill amortization                                             1,481        1,532        1,532
      Translation losses                                                 (581)         (12)       1,739
      Changes in valuation allowances
       and other items, net                                            (4,806)      (5,203)         (25)
                                                                     --------     --------     --------
        Consolidated income taxes                                    $ 26,275     $ 11,655     $ 30,352
                                                                     ========     ========     ========
</TABLE>

Income tax payments, net of refunds, were $3.1 million, $24.6 million and 
$19.2 million for the fiscal years ended March 31, 1997, 1996 and 1995, 
respectively.

5.     SHORT-TERM BORROWINGS AND LINES OF CREDIT

At March 31, 1997, the Company had short-term line of credit arrangements 
with foreign banking institutions under which the Company and its 
subsidiaries may borrow up to $28.3 million, subject to limitations imposed 
by the bank credit facility (Note 7).  There are no compensating balance 
requirements related to these lines of credit.  The total indebtedness 
outstanding under such arrangements was $0.7 million and $1.5 million at 
March 31, 1997 and 1996, respectively.

Short-term borrowings, based on the amounts outstanding at the end of each 
month, were as follows:

<TABLE>
<CAPTION>

     (IN THOUSANDS)                                                            AS OF MARCH 31,
                                                                     ----------------------------------
                                                                       1997         1996         1995
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>

     Maximum amount outstanding                                      $  1,620     $  4,751     $  2,286
     Average amount outstanding                                         1,357        2,166        1,634
     Weighted average interest rate during the year                      7.3%         9.3%        13.8%
     Weighted average interest rate at March 31                         10.8%        11.3%        10.8%

</TABLE>

6.     ACCRUED AND OTHER LONG-TERM LIABILITIES

Accrued and other long-term liabilities consist of the following as of March 31,
1997 and 1996:

     (IN THOUSANDS)                                      1997         1996
                                                       --------     --------
     Accrued Liabilities:
      Salaries, wages and bonuses                      $ 13,721     $ 14,717
      Interest                                            1,528        1,955
      Other                                              22,080       25,167
                                                       --------     --------
                                                       $ 37,329     $ 41,839
                                                       ========     ========
     Other Long-Term Liabilities:
      Pension and welfare benefits (Note 9)            $ 34,194     $ 35,366
      Postretirement benefits (Note 9)                    6,568        6,304
      Other                                               9,996       15,659
                                                       --------     --------
                                                       $ 50,758     $ 57,329
                                                       ========     ========

                                      32
<PAGE>
7.    LONG-TERM DEBT

Long-term debt consists of the following as of March 31, 1997 and 1996:

     (IN THOUSANDS)                                         1997        1996
                                                          --------    --------
     6 3/4% Senior Notes due 2004 (net of discount of 
      $504 and $577 in fiscal 1997 and 1996, 
      respectively)                                       $ 99,496    $ 99,423
     Borrowings under bank credit agreement                 28,504      52,051
     Industrial development revenue bonds                    6,350       6,350
     Other                                                   8,280      11,176
                                                          --------    --------
                                                           142,630     169,000
     Less - current portion                                   (808)     (4,348)
                                                          --------     -------
                                                          $141,822    $164,652
                                                          ========    ========

The 6 3/4% Senior Notes ("Senior Notes") due February 1, 2004 are noncallable 
and are unsecured obligations, ranking PARI PASSU with all other unsecured 
and senior indebtedness of the Company.  Interest on the Senior Notes is 
payable February 1 and August 1.  The indenture under which the Senior Notes 
were issued contains certain covenants which, among other things, limit the 
ability of the Company and its subsidiaries to incur liens, to enter into 
sale and lease-back transactions, to engage in certain transactions with 
affiliates and to merge or consolidate with, or transfer all or substantially 
all, of its assets to another person.

The Company's bank credit facility allows for revolving credit borrowings up 
to an aggregate of $175.0 million, in various currencies and expires April 1, 
1999. Interest is payable at LIBOR plus .575% currently, with a possible 
further reduction in the interest rate spread to LIBOR plus .475% later 
during the term of the facility based on certain financial performance 
criteria, or at the bank's prime rate.  Unused borrowing availability is 
subject to annual commitment fees of 1/4%.  Borrowings under this agreement 
are unsecured and rank PARI PASSU with all other unsecured and senior 
indebtedness of the Company.  The bank credit facility requires that the 
Company satisfy various annual and quarterly financial tests, including 
maintenance on a consolidated basis of a specified minimum or maximum current 
level of tangible net worth and cash flow coverage, leverage and fixed charge 
ratios.  The agreement also restricts the Company's ability to incur 
additional indebtedness or liens, make investments and loans, dispose of 
assets, or engage in certain business combinations and limits the ability of 
the Company to pay dividends. As of March 31, 1997, the Company does not have 
plans to declare or pay any cash dividends.

At March 31, 1997 the Company had variable interest rate industrial 
development revenue bonds aggregating $6.3 million due in 2015.  The interest 
rate in effect at March 31, 1997, was 4%.

The annual maturities of long-term debt, excluding amounts payable under 
capitalized lease obligations, for the five succeeding fiscal years are: 1998 
-$0.8 million; 1999 - $0.5 million; 2000 - $29.7 million; 2001 - $ 0.7 
million; and 2002 - $0.7 million.  Interest paid was $13.8 million, $15.1 
million and $14.4 million for the years ended March 31, 1997, 1996 and 1995, 
respectively.

8.     LEASES

Total rental expense under operating leases was $7.9 million, $9.2 million 
and $8.5 million for the fiscal years ended March 31, 1997, 1996 and 1995, 
respectively.  The annual minimum rental commitments under long-term 
operating leases for the five succeeding fiscal years are: 1998 - $6.3 
million; 1999 -$5.9 million; 2000 - $5.8 million; 2001 - $5.1 million; 2002 - 
$4.4 million; and 2003 and thereafter - $26.8 million.  Future capitalized 
lease commitments are not significant.

                                      33

<PAGE>

9.     PENSIONS AND OTHER POSTRETIREMENT BENEFITS

PENSIONS - The Company has several pension plans covering substantially all 
salaried and hourly employees.  In general, the Company's domestic plans 
provide defined pension benefits based on years of service and level of 
compensation. Foreign subsidiaries provide for pension benefits in accordance 
with local customs or law.  The Company funds its pension plans at amounts 
required by the applicable regulations.  Pension expense included the 
following:

     (IN THOUSANDS)                              FOR THE YEARS ENDED MARCH 31,
                                                 -----------------------------
                                                     1997     1996     1995
                                                  --------  -------  --------
     Service cost of benefits earned during year   $ 4,499  $ 3,994  $ 3,722
     Interest cost on projected benefit obligation   5,166    4,800    4,754
     Actual return on plan assets                   (4,074)  (4,536)  (2,236)
     Net amortization and deferral                   1,028    1,889     (781)
                                                   -------  -------  -------
                                                   $ 6,619  $ 6,147  $ 5,459
                                                   =======  =======  =======

The following table shows the status of the various plans and amounts 
included in the Company's consolidated statement of financial position as of 
March 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                         1997                         1996
                                             ---------------------------- -----------------------------
                                              PLANS WHOSE    PLANS WHOSE   PLANS WHOSE     PLANS WHOSE
                                             ASSETS EXCEED   ACCUMULATED  ASSETS EXCEED    ACCUMULATED
                                              ACCUMULATED     BENEFITS     ACCUMULATED      BENEFITS
                                               BENEFITS     EXCEED ASSETS   BENEFITS      EXCEED ASSETS
                                             -------------  ------------- -------------   -------------
<S>                                          <C>            <C>           <C>             <C>

     Actuarial present value of:
      Vested benefit obligation                 $23,947        $35,071        $ 3,213        $54,189
      Non-vested benefit obligation                 125          5,250            264          5,834
                                                -------        -------        -------        -------
       Accumulated benefit obligation            24,072         40,321          3,477         60,023
     Effects of anticipated future
      compensation increases                        985          7,586            402          9,380
                                                -------        -------        -------        -------
       Projected benefit obligation              25,057         47,907          3,879         69,403
     Plan assets at fair value                   25,612          8,927          5,494         25,439
                                                -------        -------        -------        -------
       Projected benefit obligation in
        excess of (less than) plan assets          (555)        38,980         (1,615)        43,964
     Unamortized net loss                          (549)        (4,844)           (29)        (8,453)
     Unrecognized prior service cost               (202)            58           -              (145)
                                                -------        -------        -------        -------
     Accrued pension (asset) liability
      recorded in the consolidated
      statement of financial position           $(1,306)       $34,194        $(1,644)       $35,366
                                                =======        =======        =======        =======
</TABLE>

Plan assets consist primarily of marketable securities, equity securities, 
cash equivalents, U.S. government securities, foreign government securities 
and corporate bonds.

The average of the assumptions used as of March 31, 1997, 1996 and 1995 in 
determining the pension expense and benefit obligation information shown 
above were as follows:

                                                     1997     1996     1995
                                                  --------  -------  --------

     Discount rate                                   7.5%     7.4%      7.8%
     Rate of compensation increase                   4.3      4.5       4.7
     Long-term rate of return on plan assets        10.0      9.8       9.6

                                        34
<PAGE>

POSTRETIREMENT AND OTHER BENEFITS - The Company charges the expected cost of 
postretirement benefits to expense during the years that eligible employees 
render service.  The following table reconciles the status of the accrued 
postretirement liability as of March 31 (based on January 1 measurement 
dates):

     (IN THOUSANDS)                                         1997     1996
                                                           ------   ------
     Accumulated postretirement benefit obligation:
      Retirees                                             $1,816   $2,788
      Active employees                                      1,826    1,735
                                                           ------   ------
     Accumulated postretirement benefit obligation
      in excess of plan assets                              3,642    4,523
     Unrecognized net gain                                  3,126    1,981
                                                           ------   ------
     Accrued postretirement benefit liability (including
      $200 in current liabilities)                         $6,768   $6,504
                                                           ======   ======

Net postretirement benefits cost for the years ended March 31, 1997, 1996 and 
1995 included:

     (IN THOUSANDS)                                1997     1996     1995
                                                   ----     ----     ----
     Service cost                                  $210     $136     $168
     Interest cost on accumulated
      postretirement benefit obligation             204      186      228
                                                   ----     ----     ----
       Net postretirement benefit cost             $414     $322     $396
                                                   ====     ====     ====
For measurement purposes, annual rates of increase in the per capita costs of 
covered health care claims of 8%, 9% and 10% were assumed for 1997, 1996 and 
1995, respectively.  The rate was assumed to decrease by 1% in fiscal 1998 
and each year thereafter to a rate of 6% beyond 2001.  The health care cost 
trend rate assumption has a significant effect on the amounts reported.  To 
illustrate, increasing the assumed health care cost trend rate by one 
percentage point in each year would increase the accumulated postretirement 
benefit obligation as of the measurement date of January 1, 1997, by $0.6 
million and the aggregate of the service and interest cost components of net 
postretirement cost for fiscal 1997 by $0.1 million.  The discount rate used 
in determining the accumulated postretirement benefit obligation was 7.75% 
and 7.25% for fiscal years 1997 and 1996, respectively.

10.     STOCK COMPENSATION PLANS

The Company has elected to follow Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees" ("APB 25") and related 
interpretations in accounting for its employee stock options because, as 
discussed below, the alternative fair value accounting model provided for 
under Financial Accounting Standards Board Statement No. 123, "Accounting for 
Stock-Based Compensation" ("FAS 123"), requires the use of option valuation 
models that were not developed for use in valuing employee stock options.

1992 STOCK OPTION PLAN - In fiscal 1992, the Company adopted a management 
stock option plan designed to provide key management personnel stock options 
for maximizing shareholder value through improved Company financial 
performance. Under such plan, management participants are required to 
purchase options for common stock at a cost determined under the provisions 
of the plan at the beginning of the fiscal year.  The exercise price of such 
options is set at a value based on the provisions of the plan, net of the 
purchase cost, increased by a 10% annual rate compounded over five years.  
The number of stock options a participant is required to purchase is based 
upon a financial performance formula established by the Compensation 
Committee of the Board of Directors.

As an added incentive to increase shareholder value, participants are 
provided one standard stock option for each purchased stock option.  Each 
standard stock option is exercisable at an average market value per share at 
the beginning of the fiscal year and may only be exercised when the purchased 
option is exercised.  Both types of options vest after three years from the 
date of grant and expire four years after the date of vesting.

                                      35
<PAGE>

The following summarizes stock option activity over the past three years under
the 1992 Stock Option Plan:

<TABLE>
<CAPTION>
                                          1997                           1996                           1995
                                ------------------------       ------------------------       ------------------------
                                                WEIGHTED                       WEIGHTED                       WEIGHTED
                                                AVERAGE                        AVERAGE                        AVERAGE
                                NUMBER OF       EXERCISE       NUMBER OF       EXERCISE       NUMBER OF       EXERCISE
                                 SHARES          PRICE          SHARES          PRICE          SHARES          PRICE
                                ---------       --------       ---------       --------       ---------       --------
<S>                             <C>             <C>            <C>             <C>            <C>             <C>
Balance at beginning of year    1,648,385        $38.92        1,515,783        $35.11        1,043,700        $29.42
Option activity for the year:
 Granted for fiscal year          368,172        $53.85          222,239        $59.81          484,457        $47.28
 Exercised                        (98,752)       $27.33          (89,637)       $26.33          (12,374)       $22.05
 Canceled                            -                              -                              -
                                ---------                      ---------                      ---------        
Balance at end of year          1,917,805        $42.69        1,648,385        $38.92        1,515,783        $35.11
                                =========                      =========                      =========
</TABLE>

Under APB 25, no compensation expense was recognized for fiscal 1997, 1996 or 
1995 in connection with the 1992 Stock Option Plan.  As of March 31, 1997, no 
options for common shares were available for grant under the 1992 Stock 
Option Plan.

DIRECTOR STOCK OPTIONS - In fiscal 1997, 12,000 options, exercisable at 
$50.25 per share, were granted to an outside director of the Company.  In 
fiscal 1995, 48,000 options, exercisable at $45.38 per share, were granted to 
four outside directors of the Company.  In fiscal 1992, 36,000 options, 
exercisable at $18.00 per share, were granted to three outside directors of 
the Company.  Director options vest three years from the date of grant and 
expire seven years after the date of vesting.  During fiscal 1996 and 1995, 
respectively, 4,000 and 12,000 fiscal-1992 granted options were exercised.

1990 STOCK OPTION PLANS - In November 1990, the Company implemented three 
stock option plans under which a total of 1,239,612 options for shares of the 
Company's common stock were authorized for issuance to key management 
personnel. As a result of the Company's sale of common stock in October 1991, 
all options granted under such plans became fully vested.  From time-to-time 
additional grants are made under the 1990 Stock Option Plans.  Additional 
grants typically vest over the three years following the date of grant.  All 
such options expire ten years from the date of grant.  Information on the 
number of shares under option for the 1990 Plan, exercisable at $5.49 per 
share follows:

                                             1997        1996        1995

Balance at beginning of year              1,034,841   1,084,983   1,073,665
 Granted during year                         10,465        -         16,575
 Exercised                                   (9,050)    (50,142)     (5,257)
                                          ---------   ---------   ---------
  Balance at end of year                  1,036,256   1,034,841   1,084,983
                                          =========   =========   =========
In accordance with APB 25, the Company recognized compensation expense 
related to these grants of $0.1 million in fiscal 1997 and $0.3 million in 
fiscal 1995.

Options exercisable under the Company's three plans at each of March 31, 1997 
and March 31, 1996, totaled 1,534,742 and 1,637,362, respectively.  A summary 
of stock options outstanding at March 31, 1997, follows:

                                      36
<PAGE>

                                                        OPTIONS EXERCISABLE AT
     OPTIONS OUTSTANDING AT MARCH 31, 1997                  MARCH 31, 1997
-----------------------------------------------------   ----------------------
                                WEIGHTED     WEIGHTED                WEIGHTED
                                AVERAGE      AVERAGE                 AVERAGE
RANGE OF                        REMAINING    EXERCISE                EXERCISE
EXERCISE PRICES       OPTIONS   LIFE (YRS.)  PRICE        OPTIONS    PRICE
---------------       -------   -----------  --------     -------    --------
$5.49 to $18.00      1,051,124      4.9       $ 5.73     1,038,571    $ 5.73
$22.05 to $33.52       238,140      2.2        22.05       238,140     22.05
$33.53 to $59.81     1,744,797      5.4        45.72       258,031     33.53
                     ---------                           ---------
                     3,034,061      4.9       $29.74     1,534,742    $12.94
                     =========                           =========

PRO FORMA STOCK OPTION DATA - The Company measures stock compensation expense 
in accordance with APB 25 and related interpretations.  Had compensation cost 
been determined using the fair market value-based accounting method for 
options granted in fiscal 1997 and 1996, pro forma net income for fiscal 1997 
and 1996 would have been $55.3 million and $29.9 million, respectively, and 
pro forma net income per share for fiscal 1997 and 1996 would have been $2.24 
per share and $1.22 per share, respectively.  The fair value of these options 
was estimated using the Black-Scholes option pricing model with the following 
weighted average assumptions for fiscal 1997 and 1996, respectively:  risk 
free interest rates of 6.5% and 6.3%; dividend yield of 0%; volatility 
factors of the expected market price of the Company's common stock of 0.27 
and 0.28; and a weighted average expected life of the options of five years.  
The weighted average fair value of stock options granted, as calculated using 
the Black-Scholes option valuation model was $12.68 per share and $13.79 per 
share in fiscal 1997 and 1996, respectively.

For the pro forma disclosures, the options' estimated fair value was 
amortized over their expected life.  These pro forma disclosures are not 
indicative of anticipated future disclosures because FAS 123 does not apply 
to grants made prior to 1995.  The pro forma disclosures include only the 
first year of vesting for fiscal 1997 awards and the second year of vesting 
for fiscal 1996 awards. Additionally, the fair value of these options was 
estimated as of the date of grant using an option pricing model which was 
designed to estimate the fair value of options which, unlike employee stock 
options, can be traded at any time and are fully transferable.  The model 
requires the input of several highly subjective assumptions including the 
expected future volatility of the stock price.

11.     RELATED PARTY TRANSACTIONS

Certain foreign subsidiaries purchase gelatin materials and the Company's 
German subsidiary leases plant facilities, purchases other services and 
receives loans from time-to-time from a German company which is also the 
minority shareholder of the Company's German and certain other European 
subsidiaries.

Gelatin purchases, at prices comparable to estimated market prices, amounted 
to $24.6 million, $23.9 million and $21.6 million for the years ended March 
31, 1997, 1996 and 1995, respectively.  Rental payments amounted to $5.4 
million, $5.8 million and $5.3 million and purchased services amounted to 
$5.5 million, $5.9 million and $5.2 million for each of the respective years. 
 

12.     COMMITMENTS AND CONTINGENCIES

The Company was informed in August 1992 that soil at a manufacturing facility 
in North Carolina owned and operated by the Company from 1975 to 1985 
contained levels of tetrachlorethene and other substances which exceeded 
environmental standards.  The Company voluntarily conducted a remedial 
investigation and remedial and removal actions by the Company and the current 
owner of the facility are ongoing.  The Company will continue to perform 
additional studies and remediation of the area, including testing and removal 
of groundwater, which may indicate the necessity for additional remedial and 
removal actions in the future.  On the basis of the results of investigations 
performed to date, the Company does not believe that 

                                      37
<PAGE>

potential future costs associated with either the investigation or any 
potential remedial or removal action will ultimately have a materially 
adverse impact on the Company's business or financial condition.

The Company is a party to various other legal proceedings arising in the 
ordinary course of business, none of which is expected to have a material 
adverse effect on the Company's financial position, results of operations, 
liquidity or capital resources.

As of March 31, 1997, the Company has capital expenditure commitments related 
primarily to plant expansions amounting to approximately $17.8 million.

13.     SEGMENT DATA

The Company is engaged principally in the production of softgels, 
hardcapsules and other drug delivery systems for the pharmaceutical, health 
and nutritional and cosmetic products industries.  The Company's operations 
are divided into three geographical areas:  United States, Europe and Other 
International. Europe represents operations in the United Kingdom, France, 
Italy and Germany. Other International consists of operations in Canada, the 
Pacific and Latin America.

     (IN THOUSANDS)                            FOR THE YEARS ENDED MARCH 31,
                                               -----------------------------
                                                 1997      1996      1995
                                               --------  --------  ---------
     Sales:
      United States                            $174,903  $141,100  $128,912
      Europe                                    307,793   319,540   302,172
      Other International                       106,003   111,070   105,598
                                               --------  --------  --------
       Net sales 1                             $588,699  $571,710  $536,682
                                               ========  ========  ========
     Operating Income:
      United States                            $ 36,667  $ 33,453  $ 29,612
      Europe                                     59,812    39,330    66,973
      Other International                        20,743    12,960    21,411
      Unallocated 2                             (12,902)  (18,797)  (14,174)
                                               --------  --------  --------
       Operating income                        $104,320  $ 66,946  $103,822
                                               ========  ========  ========
     Identifiable assets:
      United States                            $104,750  $100,298  $ 90,036
      Europe                                    389,447   375,873   389,581
      Other International                       133,488   134,102   144,930
      Unallocated 3                             100,560    97,108    86,826
                                               --------  --------  --------
       Total assets                            $728,245  $707,381  $711,373
                                               ========  ========  ========

(1)   No single customer or product represents 10% or more of sales and
      intersegment sales are not significant.
(2)   Unallocated operating income includes $8.0 million, $8.8 million and
      $6.0 million of expenses associated with the Company's Advanced
      Therapeutic Products group in fiscal years 1997, 1996 and 1995,
      respectively.
(3)   Unallocated identifiable assets are principally cash, cash
      equivalents, short-term investments and other assets.

The net assets of foreign subsidiaries were $217.0 million, $216.3 million 
and $218.8 million at March 31, 1997, 1996 and 1995, respectively.  The 
Company's share of foreign net income was $36.5 million, $18.3 million and 
$41.6 million for the years ended March 31, 1997, 1996 and 1995, 
respectively, after deducting minority interests, income taxes on unremitted 
earnings and various charges billed by the parent company.

14.     QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                             FIRST QUARTER            SECOND QUARTER             THIRD QUARTER            FOURTH QUARTER
                         ---------------------     ---------------------     ---------------------     --------------------
                           1997         1996         1997         1996         1997         1996         1997          1996
                           ----         ----         ----         ----         ----         ----         ----          ----
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>           <C>

Net sales                $145,297     $148,378     $143,454     $133,511     $149,874     $137,582     $150,074      $152,239
Gross profit               48,809       54,693       44,253       44,194       50,923       47,380       53,066        50,354
Net income (loss)          13,593       13,695       11,466        8,324       15,084       13,254       16,825        (4,570)
Net income (loss) per
 common share 1            $0.56        $0.56        $0.47        $0.34        $0.61        $0.54        $0.68        ($0.19)
                         =====================     =====================     =====================     ======================
</TABLE>

                                      38
<PAGE>

(1) The fourth quarter of fiscal 1996, includes a $33.8 million pretax charge 
    ($0.94 per share after tax effects) for restructuring and other items (see 
    Note 3).

15.     FINANCIAL INSTRUMENTS

Summarized below are the carrying and estimated fair values for certain of 
the Company's financial instruments as of March 31, 1997 and 1996.  The 
carrying values of all other financial instruments in the consolidated 
statement of financial position approximate fair values.  The fair value of 
short-term investments approximates their carrying value, given the 
relatively short period to maturity of such instruments.  The fair value of 
the Senior Notes is estimated based upon the quoted market price for such 
securities, which are publicly traded on the New York Stock Exchange.  Fair 
values of other long-term debt, determined based on interest rates that are 
currently available to the Company for similar types of borrowings, 
approximate carrying value.  The fair value of the forward foreign exchange 
contracts reflects the estimated amount that the Company would receive/(pay) 
to terminate the contracts at the reporting date, thereby taking into account 
the unrealized gains or losses of open contracts.

<TABLE>
<CAPTION>
                                                       1997                            1996
                                              -------------------------       -------------------------
                                              CARRYING       ESTIMATED        CARRYING       ESTIMATED
                                               VALUE         FAIR VALUE        VALUE         FAIR VALUE
                                              --------       ----------       --------       ----------
<S>                                           <C>             <C>             <C>             <C>

Short-term investments                        $  3,262        $  3,333        $  4,880        $  4,953
Long-term debt (including current and
long-term portions and notes payable)          143,321         137,481         170,486         166,938

DERIVATIVE FINANCIAL INSTRUMENTS:
 Forward foreign currency exchange contracts      -                597            -                196

</TABLE>

Certain investments in marketable debt and equity securities are required to 
be recorded at fair value if held for trading purposes or otherwise available 
for sale, or at cost if held to maturity.  The Company categorizes all such 
investments as held-to-maturity and therefore carries all such investments at 
cost.

The Company periodically enters into forward foreign currency exchange 
contracts to hedge certain exposures related to identifiable foreign currency 
transactions that are relatively certain as to both timing and amount and 
does not engage in speculation.  Gains and losses on the forward contracts 
are recognized concurrently with the gains or losses from the underlying 
transactions.  At March 31, 1997 and 1996, the Company was party to forward 
foreign currency exchange contracts of $65.4 million and $14.2 million 
(notional amounts), respectively, denominated in European currencies.  The 
contracts outstanding at March 31, 1997 generally mature on various dates 
through fiscal 1998 and are intended to hedge various foreign currency 
commitments .  The Company is exposed to credit loss in the event of 
nonperformance by the counterparties to these contracts, but does not 
anticipate any such nonperformance given the financial soundness of such 
counterparties.

                                      39
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To R.P. Scherer Corporation:

We have audited the accompanying consolidated statement of financial position 
of R.P. SCHERER CORPORATION (a Delaware corporation) and subsidiaries as of 
March 31, 1997 and 1996 and the related consolidated statements of income, 
cash flows and shareholders' equity for each of the three years in the period 
ended March 31, 1997.  These financial statements and the schedule referred 
to below are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements and 
this schedule 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 financial statements referred to above present fairly, in 
all material respects, the financial position of R.P. Scherer Corporation and 
subsidiaries as of March 31, 1997 and 1996 and the results of their 
operations and cash flows for each of the three years in the period ended 
March 31, 1997, in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic 
financial statements taken as a whole.  The schedule of valuation allowances 
included herein is presented for purposes of complying with the Securities 
and Exchange Commission's rules and is not part of the basic financial 
statements. This schedule has been subjected to the auditing procedures 
applied in the audit of the basic financial statements and, in our opinion, 
fairly states in all material respects the financial data required to be set 
forth therein in relation to the basic financial statements taken as a whole.


Detroit, Michigan,                               ARTHUR ANDERSEN LLP
April 29, 1997.

                                      40
<PAGE>

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

There has not been any change of accountants or any disagreements on any 
matter of accounting practice or financial disclosure in the period for which 
this report is filed.

                                      41
<PAGE>

                                   PART III


ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

ITEM 11  EXECUTIVE COMPENSATION

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 
         AND MANAGEMENT

ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by Items 10 through 13 will be included in the R.P. 
Scherer Corporation Proxy Statement for 1997, which will be filed not later 
than 120 days after the close of the Company's fiscal year ended March 31, 
1997 and is hereby incorporated by reference to such proxy statement.  
Information with respect to Item 10 above is included on pages 8 through 10 
of this Annual Report on Form 10-K.

                                      42
<PAGE>

                                    PART IV

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

    (a)   1.   FINANCIAL STATEMENTS - the consolidated financial statements 
               of R.P. Scherer Corporation and Subsidiaries and the related 
               report of independent public accountants are included in Item 8 
               of this Annual Report on Form 10-K.

          2.   FINANCIAL STATEMENT SCHEDULES - the financial statement schedule 
               "Schedule II - Valuation Allowances" for R.P. Scherer Corporation
               is included herein.

          3.   EXHIBITS - The following exhibits are filed as part of this
               Annual Report on Form 10-K or, where indicated, were
               heretofore filed and are hereby incorporated by reference:

     EXHIBIT NUMBER           DESCRIPTION
     --------------           -----------

          3.1          Restated Certificate of Incorporation of the Company 
                       dated May 15, 1990. Incorporated by reference to 
                       Exhibit 3.1 filed with the Company's Registration
                       Statement on Form S-4, No. 33-30999.

          3.2          Certificate of Amendment of Restated Certificate of 
                       Incorporation of the Company dated August 21, 1991.  
                       Incorporated by reference to Exhibit 3.4 filed with the
                       Company's Registration Statement on Form S-1,
                       No. 33-42392.

          3.3          Certificate of Amendment of Restated Certificate of 
                       Incorporation of the Company dated October 11, 1991.  
                       Incorporated by reference to Exhibit 3.5 filed with the
                       Company's Registration Statement on Form S-1, 
                       No. 33-42392.

          3.4          Certificate of Correction of Restated Certificate of 
                       Incorporation of the Company dated November 25, 1991.  
                       Incorporated by reference to Exhibit 3.3 filed with the 
                       Company's Quarterly Report on Form 10-Q for the quarter 
                       ended December 31, 1991.

          3.5          Certificate of Ownership merging Scherer International 
                       into the Company, dated February 27, 1995.  Incorporated 
                       by reference to Exhibit 4.3 filed with the Company's 
                       Current Report on Form 8-K dated March 6, 1995.

          3.6          By-Laws of the Company.  Incorporated by reference to 
                       Exhibit 3.2 filed with the Company's Registration 
                       Statement on Form S-4, No. 33-30999.

          4.1          Indenture dated as of January 1, 1994, between 
                       Scherer International and Comerica Bank, Trustee.  
                       Incorporated by reference to Exhibit 2.1 filed with
                       Scherer International's Registration Statement on 
                       Form 8-A, dated May 2, 1994

          4.2          First Supplemental Indenture dated as of February 28, 
                       1995, between Scherer International, the Company and 
                       Comerica Bank, Trustee.  Incorporated by reference to 
                       Exhibit 4.1 filed with the Company's Current Report on 
                       Form 8-K, dated March 6, 1995.

          4.3          Stock Option Plan of the Company, Amended and Restated 
                       July, 1993.  Incorporated by reference to Exhibit B.2 
                       filed with the Company's Proxy Statement dated August 24,
                       1993.

          4.4          First Amendment to Stock Option Plan of the Company, 
                       dated July 28, 1994. Incorporated by reference to 
                       Exhibit A filed with the Company's Proxy Statement
                       dated August 26, 1994.

                                      43
<PAGE>

     EXHIBIT NUMBER           DESCRIPTION
     --------------           -----------

          4.5          Form of the Company's 1990 Nonqualified Stock Option 
                       Plan, 1990 Nonqualified Performance Stock Option Plan A 
                       and 1990 Nonqualified Performance Stock Option Plan B.
                       Incorporated by reference to Exhibits 10.6 through 10.8 
                       filed with the Company's Post-Effective Amendment No. 2 
                       to Form S-1 dated February 11, 1991.

          4.6          Amendments to 1990 Nonqualified Stock Option Plans, 
                       dated February 18, 1994 and September 1, 1994.  
                       Incorporated by reference to Exhibit B filed with the
                       Company's Proxy Statement dated August 26, 1994.

          4.7          Form of Outside Director Stock Option Agreements.  
                       Incorporated by reference to Exhibit 4.7 filed with the 
                       Company's Registration Statement on Form S-8 dated
                       February 1, 1995, No. 33-57555.

          4.8          Amended and Restated $175,000,000 Credit Agreement, 
                       dated as of March 30, 1994, among Scherer International, 
                       certain of its subsidiaries, Comerica Bank, NBD Bank,
                       N.A., Societe Generale, The Bank of Nova Scotia and ABN 
                       AMRO Bank N.V. Incorporated by reference to Exhibit 10.1
                       filed with R.P. Scherer International Corporation's 
                       Annual Report on Form 10-K for the year ended March 31,
                       1994.

          4.9          Assumption Agreement, dated as of February 28, 1995, 
                       among the Company, Comerica Bank, NBD Bank, N.A., 
                       Societe Generale, The Bank of Nova Scotia and ABN AMRO
                       Bank N.V.  Incorporated by reference to Exhibit 4.2 
                       filed with the Company's Current Report on Form 8-K 
                       dated March 6, 1995.

          10.1         Management Incentive Compensation Plan of the Company, 
                       Amended and Restated July, 1993.  Incorporated by 
                       reference to Exhibit A.2 filed with the Company's Proxy
                       Statement dated August 24, 1993.

          10.2         Employees' Retirement Income Plan of the Company 
                       effective August 6, 1986. Incorporated by reference to 
                       Exhibit 10.33 of the Company's Registration Statement 
                       on Form S-1, No. 33-30362.

          10.3         Employment Agreement, dated June 1, 1994, between the 
                       Company and John P. Cashman.  Incorporated by reference 
                       to Exhibit 10.7 of Scherer International's Annual Report
                       on Form 10-K as of March 31, 1994.

          10.4         Employment Agreement, dated June 1, 1994, between the 
                       Company and Aleksandar Erdeljan.  Incorporated by 
                       reference to Exhibit 10.8 of Scherer International's
                       Annual Report on Form 10-K as of March 31, 1994.

          10.5         Employment Agreement, dated June 1, 1994, between the 
                       Company and Nicole S. Williams.  Incorporated by 
                       reference to Exhibit 10.9 of Scherer International's
                       Annual Report on Form 10-K as of March 31, 1994.

          10.6         Supplemental Retirement Plan for Key Employees of the 
                       Company, dated December 16, 1994.  Incorporated by 
                       reference to Exhibit 10.6 of R.P. Scherer Corporation's 
                       Annual Report on Form 10-K as of March 31, 1995.

          10.7         Deferred Compensation Plan for Outside Directors, dated 
                       December 6, 1995. Incorporated by reference to Exhibit 10
                       of R.P. Scherer Corporation's Quarterly Report on 
                       Form 10-Q as of December 31, 1996.

          21           Subsidiaries of the registrant.  Filed herewith.

          23           Consent of Arthur Andersen LLP.  Filed herewith.

          27           Financial Data Schedule.  Filed herewith.

                                      44
<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, as amended, R.P. Scherer Corporation has duly caused 
this Report to be signed on its behalf by the undersigned, thereunto duly 
authorized, on June 25, 1997.

                                            R.P. SCHERER CORPORATION


                                       By:  /s/ Aleksandar Erdeljan
                                          -----------------------------------
                                                  Aleksandar Erdeljan
                                             Chairman, President and Chief
                                                   Executive Officer


Pursuant to the requirements of the Securities Act of 1934, as amended, this 
Report has been signed below by the following persons on behalf of R.P. 
Scherer Corporation in the capacities indicated on June 25, 1997:


                   SIGNATURES                        TITLE

            /s/  Aleksandar Erdeljan      Chairman, President and Chief
            ------------------------            Executive Officer
              Aleksandar Erdeljan


             /s/ Nicole S. Williams     Executive Vice President, Finance,
             ----------------------   Chief Financial Officer, and Secretary
               Nicole S. Williams


              /s/ Ronald E. Pauli              Corporate Controller
              -------------------         (Principal Accounting Officer)
                Ronald E. Pauli


               /s/ John E. Avery                     Director
               -----------------
                 John E. Avery


              /s/ Frederick Frank                    Director
              -------------------
                Frederick Frank


              /s/ Lori G. Koffman                    Director
              -------------------
                Lori G. Koffman


               /s/ Louis Lasagna                     Director
               -----------------
                 Louis Lasagna


               /s/ Robert H. Rock                    Director
               ------------------
                 Robert H. Rock


               /s/ James A. Stern                    Director
               ------------------
                 James A. Stern


               /s/ Kenneth L. Way                    Director
               ------------------
                 Kenneth L. Way


                                      45
<PAGE>

                   R.P. SCHERER CORPORATION AND SUBSIDIARIES
                      SCHEDULE II - VALUATION ALLOWANCES


<TABLE>
<CAPTION>

(IN THOUSANDS                               BALANCE AT    CHARGED TO        OTHER                         BALANCE AT
                                            BEGINNING      COSTS AND     CHANGES ADD                        END OF
DESCRIPTION                                 OF PERIOD      EXPENSES      (DEDUCT)(a)      DEDUCTIONS        PERIOD
-----------                                 ----------    ----------     -----------      ----------      ----------
<S>                                         <C>           <C>            <C>              <C>             <C>

FOR THE YEAR ENDED MARCH 31, 1997:
Valuation accounts deducted from
related assets -
 Reserve for doubtful accounts               $ 4,824        $   511        $  (170)        $(1,633)        $ 3,532
 Reserve for unmerchantable inventories        2,469          1,749            (87)         (1,805)          2,326

FOR THE YEAR ENDED MARCH 31, 1996:
Valuation accounts deducted from
related assets -
 Reserve for doubtful accounts               $ 3,934        $ 1,521        $  (570)        $   (61)        $ 4,824
 Reserve for unmerchantable inventories        1,748          1,971             34          (1,284)          2,469

FOR THE YEAR ENDED MARCH 31, 1995:
Valuation accounts deducted from
related assets -
 Reserve for doubtful accounts               $ 2,903        $ 1,449        $   309         $  (727)        $ 3,934
 Reserve for unmerchantable inventories        1,701          1,127            215          (1,295)          1,748

</TABLE>

(a)     Includes changes due to fluctuations in foreign currency exchange rates.

                                      46
<PAGE>

EXHIBIT DESCRIPTION                                                      PAGE
-------------------                                                      ----

Exhibit 21 - Subsidiaries                                                 48

Exhibit 23 - Consent of Arthur Andersen LLP                               50

Exhibit 27 - Financial Data Schedule                                      52

                                      47