<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-K/A
                                (AMENDMENT NO. 1)


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

                   For the fiscal year ended December 31, 1998

                                       OR

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

             For the transition period from __________ to __________

                           Commission File No. 0-15242

                          DURAMED PHARMACEUTICALS, INC.

Incorporated Under the                                        IRS Employer I.D.
 Laws of the State                                             No. 11-2590026
   of Delaware
                              7155 East Kemper Road
                             Cincinnati, Ohio 45249
                                 (513) 731-9900

Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value;  Preferred Stock Purchase Rights

Indicate by checkmark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.   Yes X     No
                           ---      ---

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $2,555,066 as of April 15,
1999. As of April 15, 1999, 21,398,679 shares of Common Stock with a par value
of $.01 per share were outstanding.

                   Documents Incorporated by Reference - None



<PAGE>   2


                                     PART I

ITEM 1.     BUSINESS.
---------------------

GENERAL

Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") currently develops,
manufactures and markets a line of prescription drug products in tablet, capsule
and liquid forms to customers throughout the United States. Products sold by the
Company include those of its own manufacture and those it markets under
arrangements with other drug manufacturers. The Company sells its products to
drug store chains, drug wholesalers, private label distributors, health
maintenance organizations, hospitals, nursing homes, retiree organizations, mail
order distributors, other drug manufacturers, mass merchandisers and
governmental agencies.

On March 24, 1999, the Company received U.S. Food and Drug Administration
("FDA") marketing approval of its first branded prescription product.
Cenestin(TM) (synthetic conjugated estrogens, A) Tablets is a new plant-derived
synthetic conjugated estrogens product for the treatment of moderate-to-severe
vasomotor symptoms associated with menopause. Duramed anticipates initiating
clinical work in the near future to evaluate Cenestin in additional dosage
strengths and for the prevention of osteoporosis. The approval of Cenestin is
expected to permit Duramed to move ahead with its long-term product development
program designed to make the Company a leader in women's health and the hormone
replacement market, in part by developing a family of hormone products.
Opportunities in this market area include:

         -        additional branded products that include Cenestin in
                 combination with other therapeutic drugs,
         -        other branded pharmaceuticals developed by Duramed alone or in
                 conjunction with strategic partners, and
         -        selected generic pharmaceuticals that have the potential to be
                 marketed as part of a brand identity program.

While working toward the approval of Cenestin, which is expected to become the
Company's single largest source of revenue, the Company has executed a product
development program designed to generate a stream of new product offerings. The
Company's strategy has been, and will remain, to focus its product development
activities primarily on prescription drugs with attractive market opportunities
and potentially limited competition due to technological barriers to entry,
principally hormone replacement therapy ("HRT") products.

In addition to the women's health and HRT markets, Duramed will continue to seek
to obtain products, either through strategic alliances or internal development,
that take advantage of the Company's core competencies and are logical
extensions of the Company's existing product line due to their marketing or
production characteristics. The Company's product development capabilities
include modified release technologies as well as controlled substances
development.


                                      -1-
<PAGE>   3

Duramed invested substantial resources in the development of its synthetic
conjugated estrogens product. An Abbreviated New Drug Application ("ANDA") for
the product was filed with the FDA in 1994. In May 1997, the Company was
notified by the FDA that, at that time, it would not approve a generic
conjugated estrogens product, although the product had been developed by Duramed
based on the guidance established by the FDA in 1991 and then current official
USP compositional standards. Following that decision, Duramed management
decided, in addition to appealing the FDA's decision, to pursue a New Drug
Application ("NDA") branded product strategy. In February 1998, the Company
announced the successful completion of a multi-center, double-blind,
placebo-controlled trial to evaluate Cenestin in the treatment of postmenopausal
vasomotor symptoms in women. This trial provided Duramed with the clinical data
that constituted the basis for the filing of an NDA with the FDA on March, 30,
1998. As noted above, on March 24, 1999, the FDA granted Duramed approval to
market Cenestin (synthetic conjugated estrogens, A) Tablets for the treatment of
moderate-to-severe vasomotors symptoms associated with menopause in two dosage
strengths -- 0.625 mg and 0.9 mg. The Company anticipates that Cenestin will be
available by prescription by July 1999.

MARKET AND COMPETITION

The approval of Cenestin means that, for the first time, Duramed will compete in
the brand name pharmaceutical market. Cenestin, an estrogen replacement therapy
("ERT"), will compete with other ERT/HRT products in a market approaching $2
billion in the U.S. alone. According to NDC(R) Health Information Services, a
leading pharmaceutical market data provider, the combined ERT/HRT market is
growing at a projected annual rate of 15%.

ERT/HRT therapies are prescribed for women entering or in menopause; the average
age for women entering menopause is 51. According to the American College of
Obstetrics and Gynecology, the first wave of "baby boomer" women (born between
1945-1960) is now entering menopause and another 20 million will reach menopause
in the next decade. Currently more than 40 million women in the U.S. are over 50
and eligible to take either ERT (estrogen only) or HRT (estrogen with
progestin).

There are several brand name products that compete in the ERT/HRT therapeutic
category the largest of which is Premarin(R), marketed by Wyeth-Ayerst
Pharmaceuticals. These products are supported by the resources of larger and
more experienced firms with substantially greater resources than Duramed.
Duramed believes that it will be able to compete with these companies by
leveraging the distinctive characteristics of its product. Cenestin is a new
plant-derived synthetic conjugated estrogens product. Duramed management
believes that women will respond favorably to having a choice in ERT therapies,
since Cenestin uses potentially preferable raw ingredients -- plants -- as well
as state-of-the-art production technology. To help communicate Cenestin's
availability and favorable characteristics, Duramed has announced that it will
partner with Cardinal MarketFORCE, a wholly owned subsidiary of Dublin, Ohio
based Cardinal Health, Inc., for launch-related and ongoing sales, marketing and
distribution support. See "Cenestin Marketing and Distribution Agreement."



                                      -2-
<PAGE>   4

In addition to Cenestin and other branded products which may be developed or
acquired by the Company, for the foreseeable future, generic drugs will continue
to contribute to Duramed sales. Generic drugs are the chemical and therapeutic
equivalents of brand name drugs that have gained market acceptance while under
patent protection. In general, prescription generic drug products are required
to meet the same governmental standards as brand name pharmaceutical products
and must receive FDA approval prior to manufacture and sale. Generic drug
products are marketed after expiration of patents held by the innovator company,
generally on the basis of FDA approved ANDAs submitted by the generic
manufacturers. Generic drug products typically sell at prices substantially
below those of the equivalent brand name products. The increasing emphasis on
controlling health care costs, the growth of managed care organizations and the
significant number of drugs for which patents will expire in the next few years
are expected to offer the Company opportunities to selectively grow its generic
product portfolio.

According to Warburg Dillon Read LLC, generic pharmaceutical market
opportunities remain strong. In addition to about $7 billion in major
pharmaceutical products already off-patent, but without generic competition,
over the next five years patents will expire for branded products with more than
$20 billion in total sales.

Competition in the generic industry is intense. The Company competes with other
generic drug product manufacturers, brand name pharmaceutical companies that
manufacture generic drug products and the original manufacturers of brand name
drug products that continue to produce those products after patent expirations.

As other manufacturers introduce generic products in competition with the
Company's existing products, market share and prices with respect to such
existing products typically decline. Similarly, the Company's potential for
profits is reduced if competitors introduce products prior to the Company.
Accordingly, the level of revenue and gross profit generated by the Company's
current and prospective products depends, in part, on the number and timing of
introductions of competing products and the Company's timely development and
introduction of new products.

The Company believes that the primary competitive factors in the generic market
are the ability to develop new products on a timely basis, price, product
quality, customer service, breadth of product line and reputation. Many of the
Company's competitors have greater financial and other resources than the
Company and are able to expend more for product development and marketing.










                                      -3-
<PAGE>   5

PRODUCTS

A summary, by therapeutic classification, of the products manufactured or
marketed by the Company at December 31, 1998 is given below. Chemical entities
and dosage forms discontinued by the Company in 1998 are not included.

<TABLE>
<CAPTION>
                                                                             Marketed
                                                     Duramed                    for
    Therapeutic Category                           Manufactured               Others                   Total
-------------------------------------------- ------------------------- ----------------------  ----------------------
                                               Chemical     Dosage       Chemical    Dosage      Chemical    Dosage
                                               Entities      Forms       Entities    Forms       Entities    Forms
                                             ========================= ======================  ======================
<S>                                          <C>          <C>          <C>          <C>        <C>          <C>
Adrenal Cortical Steroids                    1            1            -            -          1            1
Analgesic                                    1            1            2            4          3            5
Anti-Emetic                                  1            2            -            -          1            2
Anti-Tuberculosis                            1            1            -            -          1            1
Anti-Viral                                   -            -            1            1          1            1
Cardiovascular Therapy                       -            -            2            7          2            7
Cough/Cold/Decongestant                      6            6            11           13         17           19
Diabetes                                     1            2            -            -          1            2
Gastrointestinal Stimulants                  -            -            4            4          4            4
Hormonal Replacement                         1            4            1            2          2            6
Oncology                                     -            -            1            1          1            1
Vascular Headaches                           1            1            1            1          2            2
                                             ------------------------- ----------------------- ----------------------
TOTALS                                       13           18           23           33         36           51
                                             ========================= ======================  ======================
</TABLE>

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

The following list provides the name, approval date and other information
pertaining to Duramed products approved by the FDA in 1998 and the first three
months of 1999.

(1)  Oxycodone and Acetaminophen Tablets USP, 5mg/325mg, an analgesic product
     bioequivalent and therapeutically interchangeable with Percocet(R), was
     approved by the FDA on July 1, 1998.
(2)  Cimetidine HCL Oral solution, completely interchangeable with Tagamet(R)
     Liquid, was approved by the FDA on June 19, 1998.
(3)  Hydroxyurea Capsules, 500mg, the generic equivalent to Hydrea(R), was
     approved by the FDA on August 3, 1998. See description of Kiel
     Laboratories, Inc. joint development agreement on page 13 below.
(4)  Oxycodone and Acetaminophen Capsules USP, 5mg/500mg, the generic equivalent
     to Tylox(R), was approved by the FDA on March 18, 1999.
(5)  Cenestin (synthetic conjugated estrogens, A) Tablets, 0.625 mg and 0.9 mg,
     was approved by the FDA on March 24, 1999.




                                      -4-
<PAGE>   6

Methylprednisolone, which is manufactured by Duramed, accounted for
approximately 26%, 37% and 41%, respectively, of the Company's sales in 1998,
1997 and 1996.

The Company's generic products do not have patent protection and trademarks are
of relatively minor importance at this time. Cenestin is a trademark name for
the Company's synthetic conjugated estrogens product and the Company has a
formulation patent application pending with the U.S. Patent and Trademark
office. Additionally, under the provisions of the Federal Food Drug and Cosmetic
Act Duramed is granted three year non-patent market exclusivity for Cenestin,
see "Synthetic Conjugated Estrogens Background," page 11.

In 1997, the Company was granted its first U.S. patent for controlled release
technology. This patented technology will be used in a controlled release
product for which an application currently is on file with the FDA. Duramed has
two additional patent applications pertaining to drug delivery systems pending
with the U.S. Patent and Trademark Office. All of the modified release patents
relate to technologies that would be used in the development of proprietary
products.

MANUFACTURING

Duramed currently manufactures 13 chemical entities in 18 dosage forms for its
line of prescription generic drug products. Manufacturing occurs primarily in
the Company's Cincinnati, Ohio facility, which has highly specialized
containment facilities for the production of HRT and other products requiring
special handling. Cenestin, the Company's newly approved HRT product, will be
manufactured at that facility. The Company believes that manufacturing capacity
exists to meet demand for Cenestin for the foreseeable future.

Specialized manufacturing capabilities exist at the Company's research and
development facility in Somerset, New Jersey. The Company obtained a DEA license
for this facility in January 1998 and utilizes the facility to manufacture
products containing controlled substances as well as certain other
pharmaceutical products.

WARNER-LAMBERT COMPANY AGREEMENT

In September, 1997 Duramed entered into a ten year renewable manufacturing
agreement with Warner-Lambert Company ("Warner-Lambert"). Under the terms of the
agreement, Duramed will manufacture a name brand pharmaceutical product for
Warner-Lambert, at its Cincinnati manufacturing facility. The provisions of the
agreement include a monthly lease payment for the term of the agreement, as well
as reimbursement of the costs of Duramed personnel involved in the project. A
batch manufacturing fee will be paid to Duramed when validation for the product
commences. This agreement contributed to the fourth quarter 1997 results, made a
significant contribution in 1998 and is expected to continue to do so over the
term of the agreement assuming the NDA is approved by the FDA.




                                      -5-
<PAGE>   7

DISTRIBUTION AGREEMENTS

The Company's business strategy includes enhancing its market position by
entering into strategic alliance agreements. The Company has agreements with
several manufacturers whereby the Company markets and distributes 23 generic
prescription drug products in 33 dosage forms. The terms of these agreements
vary, but typically provide for a sharing of profits between the Company and the
manufacturer.

For the years ended December 31, 1998, 1997 and 1996, respectively, the
percentages of the Company's sales comprised of products purchased from others
and resold were 46%, 37% and 35%. The gross profit generated by these sales was
approximately $5.4 million, $2.5 million and $2.6 million in 1998, 1997 and
1996, respectively. In 1998, sales volume and profitability for outsourced
products benefited from a price increase for Acetaminophen with Codeine,
instituted in May 1998, the timing of sales of products outsourced from
Ortho-McNeil (see "Order Backlog" below), and the inclusion of sales of
Hydroxyurea, approved in August 1998, which is manufactured by the Company's
business partner, Kiel Pharmaceuticals, Inc.

ORTHO-MCNEIL PHARMACEUTICAL CORPORATION -- In September 1997, a new agreement
was reached with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil") that
replaced previous agreements that were linked to Duramed's ANDA for conjugated
estrogens. The new agreement provided for the continuation of non-exclusive
distribution rights of the Ortho-McNeil products Acetaminophen with Codeine,
Tolmetin Sodium, Tolmetin Sodium DS, Oxycodone with Acetaminophen and
Estropipate through the end of 1998. The contractual relationship between
Duramed and Ortho-McNeil will end officially upon receipt of products for open
Duramed purchase orders which are scheduled to be shipped in April 1999. These
products represented 58%, 59% and 61% of net sales from products distributed on
behalf of other manufacturers during the years ended December 31, 1998, 1997 and
1996, respectively. Duramed has received FDA approval to manufacture and market
two of the products obtained from Ortho-McNeil, Acetaminophen with Codeine in
1997 and Oxycodone with Acetaminophen Capsules in March 1999. The Company has
plans in place to enable it to continue to supply substantially all of the
products currently supplied by Ortho-McNeil and, accordingly, does not
anticipate an adverse impact on the Company's operating results when the
Ortho-McNeil distribution agreement terminates. As the Company commences
marketing products it manufactures, profit sharing payments currently made to
Ortho-McNeil will not be required.

STASON PHARMACEUTICALS -- In July 1997, Duramed entered into an agreement with
Stason Pharmaceuticals, Inc. ("Stason"), an affiliate of Standard Chemical and
Pharmaceutical Company, Ltd. of Taiwan. Under the terms of the agreement,
Duramed has exclusive marketing rights for identified Stason products in the
U.S., and Stason has the right to market identified Duramed products through
Standard Chemical and Pharmaceutical Co. in Taiwan and selected other Asian
countries. The agreement with Stason provides for a variety of future ventures,
including technology transfer, access to key bulk chemicals, cooperative
research and development and an expansion of product lines within the companies'
respective territories.



                                      -6-
<PAGE>   8

ORDER BACKLOG

The dollar amount of the Company's open orders at March 1, 1999 was
approximately $0.4 million as compared with approximately $2.5 million at March
1, 1998. The higher backlog in March 1998 was principally attributable to delays
in receipt of product from Ortho-McNeil and other manufacturers. Subsequently,
the products were received from the manufacturers and substantially all of the
open orders were filled. Additionally, in 1998, inventory levels of certain
products were adjusted to improve customer service. The Company's backlog may
not be indicative of net sales during the following reporting period.

SALES AND MARKETING

Duramed sells its products to a broad range of customers located throughout the
United States. These customers include direct buying retail chains, drug
wholesalers, private label distributors, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and government agencies. Despite recent
consolidations among its customers, Duramed continues to effectively penetrate
the market by selling to more than 200 different outlets.

In 1998, Cardinal Health, Inc. and Walgreen Co. accounted for 11% and 10%,
respectively, of the Company's net sales. In 1997, Walgreen Co. accounted for
12% of the Company's net sales. In 1996, no single customer accounted for more
than 10% of the Company's net sales. The breakdown of sales by major category
reflects the growth of Duramed's direct distribution activities and
strengthening relationships with drug wholesalers.

<TABLE>
<CAPTION>
                       1998              1997              1996
                     ------            ------            ------
<S>                   <C>               <C>               <C>  
Chains                 39.2%             48.8%             41.1%
Wholesalers            37.0              25.3              26.4
Distributors           21.6              23.5              30.8
Other                   2.2               2.4               1.7
                     ------            ------            ------
Total                 100.0%            100.0%            100.0%
                     ======            ======            ======
</TABLE>

The Company markets its products under the Duramed label and under private
labels. On all prescription products that it manufactures, Duramed is named on
the label as the manufacturer. Marketing and sales efforts for the generic
product line are conducted principally by Duramed employees. Duramed promotes
its products through catalogs, trade shows, publications, telemarketing and
direct sales.

The branded pharmaceutical market, which Duramed is entering following FDA
approval of Cenestin, presents challenges which are different from those of the
generic market. Generic pharmaceuticals generally are familiar to health care
professionals, such as physicians, pharmacists and payors. On the other hand,
newly approved branded products must be introduced to health care professionals
to create interest and demand.



                                      -7-
<PAGE>   9

CENESTIN MARKETING AND DISTRIBUTION AGREEMENT

On March 30, 1999, Duramed announced that it would partner with Cardinal
MarketFORCE, a wholly owned subsidiary of Dublin, Ohio-based Cardinal Health,
Inc. for launch-related and ongoing sales, marketing and distribution support
for Cenestin. Under the terms of the three-year agreement, Cardinal will
recruit, train and deploy a team of dedicated, full-time sales professionals and
experienced sales managers. The team will have the critical mass necessary to
reach the targeted women's health market. In addition, Cardinal's Distribution
Company will work with Duramed to maximize initial Cenestin stocking and product
awareness. In return, Duramed will compensate Cardinal according to a fixed
schedule with performance incentives for achievement of certain market share
targets. At the end of the three-year period, the sales team will transition to
full-time Duramed employees.

The Cardinal MarketFORCE management team for Duramed has substantial experience
in contract sales, pharmaceutical sales and women's health, having built a
number of contract sales forces in the past, ranging in size from 25 to 400
people. Cardinal will have the experienced sales force in place within two to
three months of the signing of the agreement. Duramed will be working closely
with Cardinal to ensure that all aspects of the product rollout are in place.
These steps include distributing product to pharmacies and arranging for
face-to-face visits with physicians, as well as initiating a comprehensive
advertising program.

Cardinal MarketFORCE provides contract sales and marketing services such as:
pre-launch market research; strategic and tactical planning; product management;
consulting; high quality contract sales force solutions; telemarketing; advanced
decision support systems; and outcomes management programs. Cardinal MarketFORCE
reaches a variety of customer segments including physicians, hospitals, national
accounts (managed care and trade), long-term care facilities, retail pharmacies
and government organizations.

PRODUCT DEVELOPMENT

The Company's product development expenditures decreased significantly during
1998, principally through reduced spending for bioequivalency studies, as the
Company conserved funds while it awaited approval of its NDA for Cenestin.
Additionally, product development expenses during the 1998 periods were impacted
by reduced spending on operations of the Company's subsidiary, Duramed Europe,
and by efficiencies obtained through the consolidation of the Company's product
development activities at its Somerset, New Jersey facility.

During the fiscal years ended December 31, 1998, 1997 and 1996, product
development expenditures were $5.3 million, $12.5 million, and $10.2 million,
respectively, net of $3.5 million for a write-off of conjugated estrogens
inventory in the first quarter of 1997 and an additional $8.6 million for the
1996 purchase of in-process research and development related to the acquisition
of Hallmark Pharmaceutical, now known as Duramed Somerset.




                                      -8-
<PAGE>   10

Product development expenditures through 1996 are net of reimbursements received
from Schein under an agreement for the development of a generic conjugated
estrogens product (see "Notes to Consolidated Financial Statements Note K").

The Company's product development strategy consists of separate but related
components:

*    an internal research and development staff, and
*    joint product development efforts with, or purchasing new product
     formulations from, other parties.

INTERNAL RESEARCH AND DEVELOPMENT EFFORTS -- In 1997, the Company reorganized
its research and development efforts to take advantage of the capabilities at
Duramed Somerset. The reorganization included the relocation, to Duramed
Somerset, of most of the research and development efforts that had been underway
at the Company's Cincinnati facility. Management believes the reorganization has
strengthened the Company's research and development efforts while reducing costs
via the elimination of redundant functions between the two facilities.

The technical expertise and capabilities with respect to advanced drug delivery
systems that are present at Duramed Somerset are expected to contribute
significantly to the Company's long-term product development program. These
provide the Company with enhanced development capabilities to pursue modified
release technologies as well as controlled substances development. Drug products
with complex drug delivery systems typically experience limited competition due
to the technical barriers to developing these products, and therefore generate
higher margins. See also, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Notes to Consolidated Financial Statements -- Note B."

Through the knowledge and experience attained through the pursuit of the
synthetic conjugated estrogens product, coupled with the development
capabilities at Duramed Somerset, the Company believes that it has assembled a
strong product development team with the ability to successfully and efficiently
formulate, file and commercialize a portfolio of new products. Supporting this
outlook, in 1997, the Company received its first U.S. patent for modified
release technology. Duramed has two additional patent applications pertaining to
drug delivery systems pending with the U.S. Patent and Trademark Office. All of
the modified release technology patents relate to capabilities that would be
used in the development of proprietary products.

Duramed anticipates initiating clinical work in the near future to evaluate
Cenestin in additional dosage strengths and for the prevention of osteoporosis.




                                      -9-
<PAGE>   11

In December 1998, Duramed filed an Investigational New Drug ("IND") application
with the FDA to study the effects of medroxyprogesterone acetate ("MPA")
administered cyclically in combination with Cenestin (referred to as the
combination product). The proposed study will evaluate the combined drug product
for the treatment of vasomotor symptoms in postmenopausal women with an intact
uterus. Duramed anticipates initiating the Phase III clinical trials in the
second quarter of 1999 and filing an NDA upon successful completion of these
trials. This activity is part of Duramed's efforts to become a leader in the
hormone replacement market.

In addition, the Company currently has eight ANDAs on file with the FDA, three
of which are for hormonal products. The market for one of the hormonal products
is estimated by IMS America, Ltd. ("IMS") to be $150 million with no generic
equivalent available currently. IMS data estimates the market for the other
seven products on file at $638 million. The Company plans to submit ANDAs for
other projects as appropriate.

Formulations for all new products are subjected to laboratory testing and
stability studies and, when required to support an ANDA filing, are tested for
bioequivalence to the reference product by qualified laboratories. Bio-studies,
used to demonstrate that the rate and extent of absorption of a generic drug
statistically conform to the corresponding innovator product, currently cost in
the range of $250,000 to $700,000. Bio-studies for certain product classes
exceed that range. If the accumulated data demonstrates bioequivalency,
submission is then made to the FDA for its review and approval to manufacture
and market.

The cost for clinical studies of branded pharmaceutical products typically are
substantially higher than the bioequivalency studies to support an ANDA
submission. Clinical studies for the prevention of osteoporosis indication for
Cenestin and for the combination product discussed previously are multi-million
dollar studies.

The development of new generic products, including formulation, stability
testing and obtaining FDA approval, generally takes a minimum of 21-28 months.
Development of sustained release prescription products typically requires at
least two bioequivalence studies for most products and, therefore, total
development time, including FDA approval, may be two or three years. Liquid
product development frequently does not require bioequivalence studies and,
including formulation, stability testing and FDA approval, generally takes a
minimum of 12-18 months.

New drug applications are reviewed under the provisions of the Prescription Drug
User Fee Act which require the payment of a user fee and provide for a standard
review period of twelve months or less.





                                      -10-
<PAGE>   12

SYNTHETIC CONJUGATED ESTROGENS BACKGROUND -- The Company has invested
substantial resources pursuing the development, approval, and launch of a
conjugated estrogens product and the Company's financial condition and results
of operations have been substantially impacted by this pursuit. In September
1994, the Company filed with the FDA an ANDA for generic conjugated estrogens
that was subsequently amended to cover a variety of dosage strengths. These
products were designed and formulated to meet the conjugated estrogens product
composition standards and bioequivalency guidance established by the FDA in 1991
and U.S. Pharmacopeia (USP) composition standards.

On May 5, 1997, the Company was notified by the FDA that, at that time, it would
not approve a generic conjugated estrogens product although the product had been
developed based upon the guidance established by the FDA in 1991 and current
official USP compositional standards. In view of the FDA's decision, the Company
determined that it was prudent to write-off the conjugated estrogens inventory;
accordingly, a charge in the amount of $3,465,000 was recorded for the first
quarter of 1997 and was reflected in product development expenses for that
quarter. The product has been maintained and will be utilized in the sales
efforts for Cenestin.

In August 1997, the Company filed an Investigational New Drug ("IND")
application for the initiation of a clinical study to evaluate synthetic
conjugated estrogens in the treatment of postmenopausal symptoms. That clinical
research effort was satisfactorily completed in February 1998 and provided the
clinical data that constituted the basis for filing of an NDA for the Company's
product on March 30, 1998. On March 24, 1999, Duramed received FDA approval to
market Cenestin (synthetic conjugated estrogens, A) Tablets in two tablet
strengths.

Duramed filed the NDA for its synthetic conjugated estrogens drug product under
Section 505(b)(2) (and related regulations) of the Federal Food, Drug and
Cosmetic Act ("Act"). The NDA for Cenestin was approved under the Act, pertinent
provisions of which grant Duramed three years non-patent market exclusivity.
This delays effective approval of any subsequently approved application
submitted for the same drug substance by another company for three years from
the date of approval of Cenestin's application. Additionally, the three-year,
non-patent market exclusivity also precludes the FDA from approving any ANDA as
a generic equivalent to Cenestin during that time period.

The Company intends to market Cenestin through strategic alliances in selective
markets throughout the world and, accordingly, has initiated activities to
register the product for sale in several countries.

DURAMED EUROPE -- Duramed funded research and development efforts at Duramed
Europe for four years. In 1998, however, the Company restructured Duramed Europe
to reduce operations and overall product development expenses while retaining
certain rights to products developed by Duramed Europe.




                                      -11-
<PAGE>   13

IMPROVED TAMOXIFEN SYNTHETIC PROCESS PROJECT -- One women's health project that
is being overseen by Duramed Europe is an exclusive option, which Duramed
purchased in December 1998, to an improved Tamoxifen synthetic process from
Generic Biologicals Limited, ("GBL") a United Kingdom-based product development
company. Under the terms of the option, milestone payments are being made by
Duramed to GBL based on successful completion of the drug substance scale-up
process. With this process, Duramed may pursue commercialization of the drug
substance as well as a branded finished drug product. Duramed will have
exclusive rights to this technology in the United States, Canada and Mexico. GBL
will receive royalties on Duramed's North American sales.

Tamoxifen, which has been used for the past 25 years for the treatment of
patients with advanced breast cancer, was recently approved by the FDA for
prophylactic use for patients with a high genetic risk of developing breast
cancer. This was the first instance when a medicine won formal FDA approval as a
way of reducing the risk of breast cancer. GBL's novel patent-pending synthetic
process yields a purer form of the Z-Tamoxifen drug substance. The currently
available preparations of Tamoxifen contain a low level of the E-isomer impurity
of Tamoxifen, which may be associated with an increased risk of endometrial
cancer. Tamoxifen is one of only a few approved drug substances in the U.S.
Pharmacopeia ("USP") for which there is a limit on the amount of a single isomer
(E-Tamoxifen) that can be present. GBL's purer form of Z-Tamoxifen, with greatly
reduced levels of the E-isomer, may have the potential for reducing the risk
associated with endometrial cancer, particularly when the drug is prescribed for
long-term prophylactic use. In addition to producing purer Z-Tamoxifen, GBL's
patent-pending process is less complex, which should lower production costs.

JOINT PRODUCT DEVELOPMENT ACTIVITIES -- The Company's business strategy includes
enhancing its product development activities by entering into strategic
partnerships. The Company has agreements with several firms whereby the
companies will jointly develop and seek approval for generic prescription drug
products. The terms of these agreements vary, but typically provide for a
sharing of costs and potential profits between the Company and the partner.

Gedeon Richter, Ltd. -- In 1995, Duramed entered into an agreement with Gedeon
Richter, Ltd. ("Gedeon Richter") under which Gedeon Richter is supplying certain
bulk actives and technologies that Duramed is using to develop specific generic
pharmaceuticals, some of which are on an exclusive basis. In return, Duramed
received marketing rights to the products in North America and Gedeon Richter
has marketing rights for certain Duramed products in the former Soviet Union,
now called the Commonwealth of Independent States ("CIS"), and Eastern Europe
countries on an exclusive basis. Gedeon Richter, the largest Hungarian
pharmaceutical company, focuses on the CIS and is the only Hungarian
pharmaceutical company with manufacturing and distribution joint venture local
partners in Russia and the Ukraine. Gedeon Richter is one of the market leaders
in the CIS and Eastern Europe markets, with a diversified product portfolio and
a strong distribution network.




                                      -12-
<PAGE>   14

Kiel Laboratories -- In 1995, Duramed and Kiel Laboratories, Inc. ("Kiel"),
based in Gainesville, Georgia, entered into an agreement under which Kiel would
develop and manufacture a number of oncology products for Duramed's exclusive
marketing and distribution. In return, Duramed would make payments to Kiel based
on achievement of specific performance milestones and share in any profits
generated after products were approved and marketed. As a result of Duramed's
partnerships with Kiel, in August 1998, the Company announced the FDA approval
for Hydroxyurea capsule, an oncology drug used to reduce tumors.

GOVERNMENT REGULATION

All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA, the Drug Enforcement Administration
and by state governments. The Federal Food, Drug and Cosmetic Act, the
Controlled Substance Act, the Generic Drug Enforcement Act of 1992 and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, pricing, advertising and
promotion of the Company's products. Noncompliance with applicable requirements
can result in fines, seizure of products, total or partial suspension of
production, refusal of the government to enter into supply contracts or to
approve new drug applications, criminal prosecution and corporate debarment. The
FDA also has the authority to institute proceedings to revoke previous approvals
of drug products.

FDA approval is required before most prescription drug products can be marketed.
Each dosage form of a specific generic drug product, whether a different form of
administration or a different strength, is typically treated as a separate drug
product by the FDA and requires separate submission. There are two types of
applications currently used to obtain FDA approval of a new drug product.

1.   New Drug Application -- With respect to drug products with active
     ingredients not previously approved by the FDA or new uses or new dosage
     forms for previously approved active ingredients, a prospective
     manufacturer must conduct and submit to the FDA clinical studies to prove
     that product's safety and efficacy. An NDA also may be submitted for a drug
     product with previously approved active ingredients if the abbreviated
     procedure discussed below is not available.
2.   Abbreviated New Drug Application -- This is an abbreviated application
     procedure for obtaining FDA approval for generic drug products which are
     bioequivalent to brand name drugs. In contrast to most NDAs, this
     application procedure does not require completion of animal and clinical
     studies for safety and efficacy, and instead requires data demonstrating
     that the generic drug product is bioequivalent to the listed FDA reference
     product. Bioequivalence means that the rate of absorption and distribution
     of a generic drug in the body are equivalent to the previously approved
     listed reference drug product and, therefore, that the generic drug will
     produce a therapeutically equivalent effect.




                                      -13-
<PAGE>   15

Among the requirements for a new drug approval is that the prospective
manufacturer's methods conform to the FDA's Current Good Manufacturing Practices
("CGMP Regulations"). The CGMP Regulations must be followed when the approved
drug is manufactured. To ensure compliance with the standards set forth in these
regulations, the Company must continue to expend time, money and effort in the
areas of production and quality control. Failure to comply with these
regulations risks possible FDA action such as the suspension of manufacturing or
the seizure of drug products.

The Company also is subject to environmental protection laws and regulations of
federal, state and local governmental authorities, including the Clean Air Act
and Occupational Safety and Health Administration ("OSHA") requirements. Under
the Clean Air Act, the Company is required to meet certain air emissions
standards. Under OSHA, the Company is required to meet certain safety standards,
including those relating to equipment and procedures, indoor air quality and
safety data sheets on material used at the Company's facilities. Compliance with
these laws had no material effect on the Company's capital expenditures,
operating results or competitive position during fiscal 1998, and the Company
anticipates no such material effect during fiscal 1999.

ITEM 2.        PROPERTIES.
--------------------------

Duramed's manufacturing, laboratory, and product development activities in Ohio
are conducted primarily in a 190,000 square foot plant located on 17 acres in
Cincinnati, which includes a 38,000 square foot expansion designed to meet the
initial projected manufacturing requirements of Cenestin and other hormonal
products on file with the FDA or under development. The facility is collateral
for certain of the Company's borrowings.

The Company also conducts product development, and limited manufacturing
activities, from a leased 38,000 square foot facility in Somerset, New Jersey.
The lease pertaining to this facility expires on May 31, 2000. The Company has
notified the owner of the facility of its intent to purchase the facility. Under
the terms of the original agreement, this would have required the Company to
close the transaction on June 1, 1998; however the Company and the owner have
agreed to amend the original agreement to extend the purchase option to June 1,
2000.

The Company's executive offices and certain corporate support groups occupy a
28,200 square foot facility in Cincinnati, Ohio. The lease for this facility
extends to February 28, 2000, and contains options to renew for up to an
additional three years.

The Company's distribution and other support activities are conducted from a
leased 120,000 square foot facility in Mason, Ohio. The lease for this facility
extends to September 30, 2004.

The Company believes its facilities and equipment are well maintained, in good
operating condition and, in general, suitable for the Company's purposes. The
Company is currently reviewing its facility requirements and will likely need
additional space and equipment to execute its business plan.


                                      -14-
<PAGE>   16

ITEM 3.        LEGAL PROCEEDINGS.
---------------------------------

The Company is a party to an agreement dated June 26, 1992 and amended on April
7, 1994 (the "Schein Agreement") with Schein Pharmaceutical, Inc. ("Schein")
relating to the development of a generic version of the conjugated estrogens
product Premarin(R). Under the Schein Agreement, Schein was to provide project
funding while Duramed was responsible for product development and manufacturing.
Both firms were to participate in the marketing and distribution of the generic
product. In May 1997, the Company was notified by the FDA that, at that time, it
would not approve a generic conjugated estrogens product. On August 7, 1997, the
Company filed a complaint for a declaratory judgment against Schein in the Court
of Common Pleas, Hamilton County, Ohio, Case No. A9705498 ("Ohio action"). The
Company seeks a declaration that the Schein Agreement applies only to a product
approved on the basis of an ANDA and which would be fully substitutable for
Premarin(R) and that the Schein Agreement does not apply to the Company's
efforts to develop or market any conjugated estrogens product which would be
approved and marketed on the basis of an NDA.

In apparent response to the Company's action, on September 29, 1997, Schein
filed a complaint against the Company and other unnamed defendants in the
Superior Court of New Jersey, Chancery Division, Morris County, Docket No.
MRS-C-187-97 ("New Jersey action"). Schein alleges that the Company breached its
obligations to Schein under an alleged joint venture arising between the parties
and that the unnamed defendants tortuously interfered with Schein's prospective
business advantage and are liable to Schein. Schein seeks various forms of
relief against the Company, including injunctions barring the Company from the
development of a conjugated estrogens product with any person or company other
than Schein and requiring specific performance from the Company according to the
terms of the Schein Agreement and alleged joint venture and accounting and money
damages and a constructive trust.

On October 9, 1997, Schein filed a motion to dismiss the Ohio action based upon
the pending New Jersey action. The court denied this motion on November 13,
1997. On October 17, 1997, the Company filed a motion to dismiss or, in the
alternative, to stay the New Jersey action because of the previously-filed Ohio
action. On November 14, 1997, the New Jersey court granted the Company's motion
in part and stayed the New Jersey action.

On January 30, 1998, Schein amended its answer in the Ohio action and asserted a
counterclaim against the Company and other unnamed defendants similar to the New
Jersey complaint. As a result, on March 4, 1998, the Company renewed its motion
to dismiss the New Jersey action because Schein had brought the same basic
claims as a counterclaim in the Ohio action. On April 17, 1998, the Court
dismissed without prejudice the New Jersey action.

On September 11, 1998, both the Company and Schein filed cross motions for
summary judgment. The court subsequently denied both motions. No trial date is
set, but the Company intends to seek a trial date sometime in 1999.




                                      -15-
<PAGE>   17

The Company intends vigorously to prosecute its claim for declaratory relief in
the Ohio action and vigorously to defend against Schein's counterclaim in the
Ohio action, however, the outcome of the litigation cannot be predicted.

The Company is involved in various additional lawsuits and claims, which arise
in the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.


ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------       ----------------------------------------------------
Not applicable.


                                     PART II

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

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "DRMD." The following table sets forth the range of high and low sale
prices for the Common Stock on the Nasdaq National Market for the periods
indicated.

<TABLE>
<CAPTION>
                                                          High       Low
<S>                                                       <C>     <C>   
1998:
         First Quarter       . . . . . . . . . . . . .    $ 7.31   $ 4.75
         Second Quarter      . . . . . . . . . . . . .      7.31     5.25
         Third Quarter       . . . . . . . . . . . . .      6.25     3.31
         Fourth Quarter      . . . . . . . . . . . . .      5.56     2.63
1997:
         First Quarter       . . . . . . . . . . . . .    $12.25   $ 7.00
         Second Quarter      . . . . . . . . . . . . .     11.25     3.00  
         Third Quarter       . . . . . . . . . . . . .      7.00     3.25      
         Fourth Quarter      . . . . . . . . . . . . .      6.00     3.00
</TABLE>

As of December 31, 1998 the Company had 1,752 holders of record of the Common
Stock. The Company believes that, in addition, there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name."
The Company has not paid any cash dividends on its Common Stock since its
inception and does not intend to pay cash dividends in the foreseeable future.
Under the terms of the Company's current loan agreements with its bank, no
dividend declaration is permitted.





                                      -16-
<PAGE>   18


ITEM 6.        SELECTED FINANCIAL DATA.
----------------------------------------

The following table sets forth selected financial data, derived from the audited
financial statements of the Company, for each of the five years in the period
ended December 31, 1998. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included elsewhere in this document.

<TABLE>
<CAPTION>
Year ended December 31,               1998            1997           1996           1995             1994   
                                     --------       --------       --------       --------       --------
(In thousands, except per share data)

<S>                                  <C>            <C>            <C>            <C>            <C>     
NET SALES                            $ 49,759       $ 44,296       $ 43,855       $ 49,624       $ 45,274
                                     --------       --------       --------       --------       --------
PRETAX (LOSS) INCOME                   (8,396)       (17,441)       (20,810)          (991)         5,765
                                     --------       --------       --------       --------       --------
INCOME TAXES                               --             --          3,901             --         (3,786)
                                     --------       --------       --------       --------       --------
NET (LOSS) INCOME                      (8,396)       (17,441)       (24,711)          (991)         9,551
                                     --------       --------       --------       --------       --------
PREFERRED DIVIDENDS                       517            170            929            123             --
                                     --------       --------       --------       --------       --------
NET (LOSS) INCOME APPLICABLE TO
     COMMON STOCKHOLDERS               (8,914)       (17,611)       (25,640)        (1,114)         9,551
                                     --------       --------       --------       --------       --------

NET (LOSS) INCOME PER SHARE
     OF COMMON STOCK:

     BASIC                              (0.49)         (1.14)         (2.44)         (0.14)          1.22
                                     --------       --------       --------       --------       --------
     DILUTED                            (0.49)         (1.14)         (2.44)         (0.14)           .93
                                     --------       --------       --------       --------       --------
CASH DIVIDENDS
     PER COMMON SHARE                      --             --             --             --             --
                                     --------       --------       --------       --------       --------

TOTAL ASSETS                           61,206         50,126         53,634         45,177         37,002
                                     --------       --------       --------       --------       --------
LONG-TERM LIABILITIES                  22,580         12,009         11,878         19,837         18,267
                                     --------       --------       --------       --------       --------
</TABLE>


                                      -17-
<PAGE>   19

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

OVERVIEW
--------

Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and events, particularly relating to sales of current
products as well as the introduction of new manufactured and distributed
products. Forward-looking statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed. Factors that might affect the forward-looking statements set
forth in this Form 10-K include, among others, (i) increased competition from
new and existing competitors and pricing practices from such competitors, (ii)
the amount of funds continuing to be available for internal research and
development and for research and development joint ventures, (iii) research and
development project delays or delays in obtaining regulatory approvals, (iv) the
ability of the Company to retain and attract personnel in key operational areas,
(v) the outcome of pending litigation, (vi) the status of strategic alliances,
and (vii) the success of its brand marketing efforts.

Duramed manufactures and distributes a line of prescription drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those it
markets under arrangements with other drug manufacturers. The Company's results
include expenses associated with a product development program designed to
generate a stream of new product offerings. The Company's strategy has been to
focus its product development activities primarily on prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers of entry, principally hormonal products. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.

Results for the three year period ended December 31, 1998 reflect the
substantial resources Duramed invested in the development of an ANDA, and
subsequently, an NDA for a conjugated estrogens product. In March 1999, the
Company received U.S. Food and Drug Administration ("FDA") marketing approval of
the product, its first branded prescription product. Cenestin (synthetic
conjugated estrogens, A) Tablets is a new plant-derived synthetic conjugated
estrogens product for the treatment of moderate-to-severe vasomotor symptoms
associated with menopause. The approval of Cenestin, which is expected to become
the Company's single largest source of revenue, should permit Duramed to move
ahead with its long-term product development program designed to make the
Company a leader in women's health and the hormone replacement market, in part
by developing a family of hormone products.






                                      -18-
<PAGE>   20

OUTLOOK

Business Strategy Outlook -- Based on an assessment of the market opportunities
for a synthetic conjugated estrogens product and the related, potential impact
on Duramed's revenues and profitability, management believes that the approval
of Cenestin in March 1999 significantly changes Duramed's long-term outlook and
greatly enhances the Company's ability to fund its efforts to become a leader in
the women's health market.

To achieve that goal, as well as generate sustainable profitability, Duramed
will focus efforts on two initiatives:


Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), will compete with other ERT/HRT products in a market approaching
$2 billion in the U.S. alone. According to NDC(R) Health Information Services, a
leading pharmaceutical market data provider, the combined ERT/HRT market is
growing at a projected annual rate of 15%. ERT/HRT therapies are prescribed for
women entering or in menopause. The average age for women entering menopause is
51. According to the American College of Obstetrics and Gynecology, the first
wave of "baby boomer" women (born between 1945-1960) is now entering menopause
and another 20 million will reach menopause in the next decade. Currently more
than 40 million women in the U.S. are over 50 and eligible to take either ERT
(estrogen only) or HRT (estrogen with progestin).

Duramed believes that the distinctive characteristics of its product will
contribute to its ability to capture a significant share of the ERT market. To
help communicate Cenestin's availability and favorable characteristics, on March
30, 1999 Duramed entered into a marketing and distribution agreement with
Cardinal MarketFORCE, a subsidiary of Cardinal Health, Inc., to perform the
necessary direct-to-doctor sales efforts and national distribution. See
"Cenestin Marketing and Distribution Agreement" for further information on the
Cardinal MarketFORCE agreements. Additionally, the Company is finalizing the
balance of its aggressive Cenestin marketing plan which will include health care
and consumer advertising programs. Management's goal is for Cenestin to reach at
least $100 million in annualized revenues within 15-18 months of the product's
expected launch in July 1999. Expenses associated with these programs and the
product launch, however, will occur before the anticipated revenue stream from
sales of the product. As a result, Duramed management believes that material
improvement in the Company's operating performance due to Cenestin will not
occur until the fourth quarter of 1999 and beyond.




                                      -19-
<PAGE>   21


Continue to Invest in Product Development Activities -- While product
development expenditures were curtailed in 1998 as part of an effort to conserve
resources while awaiting the FDA's decision regarding Cenestin, management is
encouraged by the results to date from its product development program. With the
approval of Cenestin, the Company intends to accelerate spending for research
and development in the women's health area and for hiring incremental personnel
and procuring necessary equipment to prepare for the production and launch of
certain products on file. The Company also intends to initiate two multi-million
dollar clinical studies, one to demonstrate the effectiveness of Cenestin in the
prevention of osteoporosis, the other to determine the effect of
medroxyprogesterone acetate ("MPA") administered cyclically in combination with
Cenestin (referred to as the combination product). The Company intends to
initiate these studies based upon the availability of funds generated from
operations through the sale of Cenestin, profits generated from other products
on file, if approved, and other resources that may be available to the Company.
Since the beginning of 1998, the FDA has approved the Cenestin NDA and four
ANDAs submitted by the Company, and the Company has eight ANDAs on file. Three
of the ANDAs on file are for hormonal products. The market for one of the
hormonal products is estimated by IMS to be $150 million with no generic
equivalent available currently. IMS data estimates the market for the other
seven products on file at $638 million. The Company plans to submit NDAs and
ANDAs for other projects in 1999 and beyond, as appropriate to its business
strategy.

Management recognizes that continued investment in product development slows the
rate at which the Company moves toward profitability. However, the contribution
of products approved during 1997 and 1998 helped the Company begin to generate
performance improvements during the course of 1998 and management believes this
trend will continue in 1999 and beyond.

The Company's ability to attain profitability, the time frame required to do so,
and the potential level of such profitability, are dependent upon a number of
factors including: (1) the rate at which Cenestin penetrates the ERT market; (2)
the level of spending required to launch and promote Cenestin to health care
professionals and consumers; (3) the profit level generated from the Company's
current business base (including the level of revenue received under the
Company's agreement with Warner-Lambert); (4) the approval of pending, or not
yet filed, applications with the FDA; and (5) the level of spending on clinical
and bioequivalencies studies.

During the period in which Duramed is investing in the launch of Cenestin, the
Company will require additional external capital to achieve its performance
objectives. The extent of the Company's need for additional capital is dependent
on the factors noted above. Management believes that approval of Cenestin
expands its potential sources of capital and anticipates it should be able to
access sufficient funds to meet its overall business plan. Delays in obtaining
the necessary financing, however, would negatively impact the Company's ability
to meet its overall business plans.




                                      -20-
<PAGE>   22

RESULTS OF OPERATIONS
---------------------

The table below sets forth the components of the Company's results of operations
as a percentage of net sales.

<TABLE>
<CAPTION>
                                         Percentage of Sales
                                        Year Ended December 31,
                                    -----------------------------
                                    1998        1997         1996
                                   -----       -----        -----
<S>                               <C>         <C>          <C> 
Net sales                          100.0%      100.0%       100.0%
-----------------------------------------      -------------------
Cost of goods sold                  75.0        75.6         72.2
Gross margin                        25.0        24.4         27.8
                                               
Product development                 10.6        36.0         23.3
Purchase of in process                         
   research and development         ---          ---         19.5
Selling                              6.9         7.2         10.3
General and administrative          19.6        17.4         17.8
Operating margin                   (12.1)      (36.2)       (43.1)
                                               
Interest expense                     4.7         3.2          4.2
Preferred dividends                  1.0         0.4          2.1
INCOME TAXES                         ---         ---          8.9
                                   -----       -----        -----  
                                               
Net Loss                           (17.8)%     (39.8)%      (58.3)%
                                   =====       =====        =====  
</TABLE>
                                          
NET SALES

Net sales increased by $5.5 million (12.3%) in 1998, compared with an increase
of $0.4 million (1.0%) in 1997 over 1996. The 1998 increase in net sales was
primarily attributable to shipment of products sourced from other manufacturers
that were in a backorder status at December 31, 1997 and the contribution from
recently approved products offset by a decline in revenues from the Company's
methylprednisolone product and lower revenue from several products for which the
Company instituted price increases late in the second quarter of 1998. While the
adjustment to the selling price of those selected low margin products reduced
unit sales volume, the action resulted in improving margins. The 1997 net sales
were essentially unchanged from 1996 levels with unit sales increases, primarily
on products sourced through other manufacturers, offsetting price erosion due to
increased competition on the Company's methylprednisolone product.




                                      -21-
<PAGE>   23

Methylprednisolone accounted for 26% of sales in 1998, 37% of sales in 1997, and
41% in 1996. Acetaminophen with Codeine, a product distributed on behalf of
Ortho-McNeil, accounted for 14% of sales in 1998. Duramed received approval to
manufacture Acetaminophen with Codeine in 1997 and can continue to meet demand
for this product following termination of the supply agreement with
Ortho-McNeil. No other single product has accounted for more than 10% of net
sales in either 1998 or 1997. In total, products manufactured by Duramed,
compared to those distributed for others, accounted for 54% of sales in 1998,
63% of sales in 1997 and 65% in 1996.

Management believes that Cenestin, approved by the FDA for marketing in March
1999, has the potential to become a market leader in the ERT market and will
become a significant component of the Company's total sales. Based on the
Company's assessment of the market, the planned timing of the product launch and
other factors, management's goal is for sales of Cenestin to reach at least an
annualized level of $100 million within 15-18 months of the product's launch,
with additional growth after that time.

GROSS MARGIN

Gross margins, and the corresponding percentages of net sales, for 1998, 1997
and 1996, were $12.4 million (25.0%), $10.8 million (24.4%), and $12.2 million
(27.8%), respectively. The increased gross margin in 1998 reflects the favorable
impacts of pricing actions taken toward the end of the second quarter, contract
revenues from Warner-Lambert, and contributions from recently approved products
offset by increased competition on the Company's methylprednisolone product.

The reduced gross margin in 1997 primarily reflected the continued decline in
methylprednisolone profitability, principally due to price erosion. The margin
erosion for methylprednisolone was partially offset by sales of products sourced
from other manufacturers and, in the fourth quarter, the positive contribution
from the manufacturing agreement signed with Warner-Lambert in September 1997.

Various factors are expected to impact the Company's gross margin in 1999 and
beyond, the most significant of which will be the rate at which Cenestin
penetrates the ERT market. Additionally, the Company's gross margin could be
favorably impacted by successful introduction and marketing of other recently
approved products, additional approvals of pending applications and
contributions from the Company's agreement with Warner-Lambert. FDA approval of
the Company's pending applications is outside the Company's control, and
management cannot predict whether or when these approvals will be obtained.

The Company's generic products are subject to price deterioration if market
conditions change, particularly if additional competitive products are
introduced as a result of FDA approvals. These impacts can be material depending
on the products affected.





                                      -22-
<PAGE>   24

PRODUCT DEVELOPMENT

Product development expenditures for the years ended December 31, 1998, 1997 and
1996 were approximately $5.3 million, $12.5 million and $10.2 million,
respectively, net of $3.5 million for the write-off of conjugated estrogens
inventory in the first quarter of 1997, and an additional $8.6 million for
purchase of in-process research and development related to the acquisition of
Hallmark, now known as Duramed Somerset, in 1996. The decrease in product
development expense in 1998 was due principally to a reduction of spending for
bioequivalency studies in an effort to conserve resources. Additionally, product
development expenses during the 1998 periods were impacted by reduced spending
on Duramed Europe operations and efficiencies obtained through the consolidation
of the Company's product development activities to its Somerset, New Jersey
facility. The product development emphasis is on hormonal therapies and
controlled release technology, focusing on products with high margin potential
and limited competition.

Write-off of Conjugated Estrogens Inventory -- In 1997, in view of the FDA's
decision regarding the Company's generic conjugated estrogens ANDA, the Company
determined that it was prudent to write-off existing conjugated estrogens
inventory. Accordingly, a charge in the amount of $3,465,000 was recorded in the
first quarter of 1997 and reflected in product development expenses for the
year. While General Accepted Accounting Principals do not allow for reversal of
the inventory write-off, that product inventory has been maintained and will be
utilized in the sales efforts for Cenestin.

Purchased Research and Development -- In connection with the acquisition of
Hallmark in September 1996, the Company recorded a one-time, non-cash charge of
approximately $8.6 million for the portion of the consideration allocated to the
purchase of in-process research and development. (See Notes to Consolidated
Financial Statements - Note B).

For four years, Duramed funded research and development efforts at Duramed
Europe. In 1998, the Company restructured the operation to conserve resources
while still providing Duramed with access to certain rights to products
developed by Duramed Europe.

Product development expenses for 1999 and beyond are dependent on the timing of
biostudies and clinical studies and the Company's continuing efforts to balance
product development spending and available resources.

The Company expects product development expenditures in 1999 to be greater than
the 1998 level as the Company accelerates its efforts to become a leader in the
women's health market. In particular, the Company will be pursuing Phase III
clinical trials under the IND filed with the FDA to study the effects of
medroxyprogesterone acetate administrated cyclically in combination with
Cenestin and will be initiating clinical work to evaluate Cenestin in additional
dosage strengths and for the prevention of osteoporosis.






                                      -23-
<PAGE>   25

SALES AND MARKETING

The Company's sales and marketing expenses increased by $545,810 in 1998
compared with 1997, excluding a charge in the first quarter of 1997 of $300,000
in connection with contractual commitments associated with its generic
conjugated estrogens product. The increase in selling expenses in 1998 was a
result of increased costs associated with preparing for the launch of its
synthetic conjugated estrogens product as a branded product. The Company expects
to substantially increase spending on the Cenestin marketing program beginning
in the second quarter of 1999 to maximize the market penetration of the product.

Excluding the $300,000 charge in 1997, an incremental $750,000 charge recorded
in the third quarter of 1996 to supplement the allowance for doubtful accounts
(primarily as a result of the bankruptcy petition filed by a large wholesaler
customer) and a $300,000 charge recorded in the fourth quarter of 1996 to
establish a reserve for potential shelf stock adjustments, selling expenses
declined $586,000 between 1997 and 1996 due to steps implemented to control
costs.

GENERAL AND ADMINISTRATIVE

General and administrative expenses in 1998 increased $2.0 million compared with
1997 due principally to increased legal fees associated with pending litigation
with Schein Pharmaceuticals, Inc. and other legal matters. Additionally, the
Company has expanded its information technology infrastructure to address the
implementation of its Year 2000 Compliance program as well as other information
technology needs.

In 1997, general and administrative expenses decreased by $94,000, as the
Company continued to monitor and control expense levels. Additionally, during
1997 and 1996 the Company incurred incremental expenses of approximately
$593,000 and $503,000, respectively, in connection with responding to various
regulatory and legal issues associated with the Company's ANDA application for
conjugated estrogens.

Year 2000 Compliance

Many computer systems ("IT systems") and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to recognize only the last two
digits of a calendar year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their inability to
distinguish years after 1999 from years preceding 1999. As a result, the Company
has initiated a program to identify and remedy or replace its date-sensitive IT
systems and non-IT systems.

The Company's IT systems consist of the primary business and science information
systems, electronic data interchange ("EDI") with customers, personal
computer/terminal hardware and related network software. Non-IT systems include
primarily manufacturing, facility and telecommunication equipment that is
computer controlled.



                                      -24-
<PAGE>   26

To date, the Company has identified date-sensitive areas and is in the process
of remedying or replacing the internally identified systems. Regarding IT
systems within the Company, compliant software upgrades to its primary business
systems have been completed, testing has been in process for the past few months
and the systems are expected to be confirmed as compliant by mid-1999. A Year
2000 compliant science information system has been installed and is operational
at the Company's Somerset, New Jersey facility and a similar system upgrade is
scheduled at the Company's Cincinnati facility in the second quarter of 1999.
Upgrade of the Company's network of PCs and terminals was commenced in mid-1998,
is continuing with the evaluation of all installed personal computer hardware
and the full upgrade of all units for Year 2000 compliance is expected by
mid-1999. EDI compliance evaluation and testing has been continuing since
September 1998 and compliance is expected to be completed by the end of April
1999. The analysis of the Company's non-IT systems has been substantially
completed and for the most part the items identified as possibly being affected
by the Year 2000 issue have been concluded to be compliant. All others are being
addressed in order to be compliant before the end of the second quarter of 1999.

The Company estimates the cost of hardware and system upgrades in order to
address the IT aspects of the Year 2000 issue, to be approximately $500,000. For
non-IT aspects of the Year 2000 issue, the cost of compliance is estimated to be
approximately $250,000. Of these cost estimates, approximately $450,000
represents capital expenditures which will be amortized over the estimated
useful life of the asset. The remaining $300,000 is expensed as incurred and has
been or will be included in the Company's operating results on a ratable basis
between June 1998 and October 1999. The amounts do not include the cost incurred
by the Company as a result of the use of its own employees but does include
approximately $40,000 for the use of outside consultants who are assisting the
Company in evaluating, implementing and testing aspects of the Year 2000 issue
and the Company's compliance program. To the extent that the implementation of
the Company's program identifies additional areas of noncompliance it is
possible that the estimated cost of compliance could increase.

The Company is dependent upon its customers and suppliers in meeting its ongoing
business needs. The Company's Year 2000 program includes identifying these third
parties and determining, based on both written and verbal communication, that
they are either in compliance or expect to be in compliance. Lack of compliance
by a third party on whom the Company depends for critical goods or services
could have a material adverse effect on the Company's operations in the absence
of the third party's ability to meet the Company's needs through a contingency
plan or the Company's ability to obtain the goods or services elsewhere.

Currently, the Company believes the largest area of exposure concerning the Year
2000 lies with third party suppliers of raw materials especially those located
in foreign countries. The contingency plan to mitigate the disruption among
these suppliers includes the buildup of critical raw material inventories.
However, the extent to which this may be required has not yet been determined
and therefore the cost and ability to accumulate such inventories cannot be
estimated at this time.



                                      -25-
<PAGE>   27

The estimates and conclusions in this description of the Year 2000 issue contain
forward-looking statements and are based on management's estimates of future
events.

NET INTEREST EXPENSE AND INTEREST RATE RISK

The Company's borrowings are primarily variable rate facilities. Net interest
expense increased by $960,000 in 1998 compared with 1997 due to an increase in
average borrowings under the Company's revolving credit facility, the increase
in the mortgage on the Company's manufacturing facility and the amortization of
expenses incurred in connection with the Series F Preferred Stock.

In 1997, the Company's net interest expense declined by $451,000 compared with
1996 due to reduction of the Company's borrowings under its revolving credit
facility. Also, in 1998, 1997 and 1996 the Company earned interest income from
the short-term investment of the proceeds from the issuance of Convertible
Preferred Stock.

The Company has floating rate debt totaling $24.0 million with interest
fluctuating based on changes in the prime rate and in commercial paper rates. As
a result, annual interest expense in 1999 will fluctuate based upon fluctuation
in the prime rate and commercial paper rates.

INCOME TAXES

At December 31, 1998, the Company had cumulative net operating loss
carryforwards of approximately $56.7 million for federal income tax purposes
that expire in the years 2004 to 2013. Additionally, the Company had cumulative
losses from Duramed Europe that amounted to approximately $5.7 million that are
not deductible for U.S. tax purposes. In the fourth quarter of 1996 the Company
recognized a non-cash charge of $3.9 million to restore fully a valuation
allowance (which had been reduced in 1994) pertaining to the Company's deferred
tax assets, principally net operating loss carryforwards. Excluding the
adjustments to the valuation allowance, the Company did not record a provision
for income taxes in either 1998, 1997 or 1996.

PREFERRED DIVIDENDS

Both the Company's Series C Convertible Preferred Stock (issued in November 1995
and February 1996) and Series D Convertible Preferred Stock (issued in August
1996) provided for an 8% dividend on unconverted preferred shares, while the
Company's Series E Mandatory Redeemable Preferred Stock (issued in June 1997)
and Series F Mandatory Redeemable Preferred Stock (issued in February 1998)
provided for a 5% dividend on unconverted shares. Preferred Stock dividends of
$517,000 in 1998 and $170,000 in 1997 represent dividends associated with the
unconverted portion of Convertible Preferred Stock. Preferred dividends were
$929,000 in 1996.




                                      -26-
<PAGE>   28

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

During 1998 the Company financed its operations and a $9.4 million increase in
inventory with a private placement of $12.0 million Series F Mandatory
Redeemable Convertible Preferred Stock ("Series F Preferred Stock") and
borrowings under both its revolving credit facility and a note payable to a
strategic business partner.

The increase in inventory resulted from stocking of new products, both Duramed
produced products as well as products sourced through other manufacturers.
Additionally, inventory levels for certain of the Company's products were
adjusted to improve customer service. The decrease in payables relates to
payments issued for products sourced from other manufacturers. As a result of
the Company's continued investment in working capital, as of December 31, 1998
the Company had $30.1 million in receivables and inventory.

During the fourth quarter of 1998 the Company obtained a financing package,
described below, that addressed a number of financing needs including: (1)
expanding its borrowing capacity under its revolving line of credit, in view of
its working capital base, (2) refinancing certain equipment loans over a longer
term, (3) obtaining financing to be in a position to exercise an option to
purchase its leased Somerset, New Jersey facility, and (4) financing anticipated
capital equipment needs that would result from executing its business plan.

The Company executed the new debt financing agreement with NationsCredit
Commercial Corporation, through its NationsCredit Commercial Funding Division
("NationsCredit"). The term of the financing agreement is four years with
provisions for renewals. The financing agreement provides for a revolving credit
facility collateralized by the Company's receivables and inventory and a $5.6
million term note secured by the Company's equipment. The Company's borrowing
capacity under the revolving credit facility adjusts based on the change in
receivables and inventory. As of March 24, 1999 the Company's borrowing capacity
under this revolving credit facility was $17.8 million of which the Company has
utilized $14.3 million, leaving a net availability of $3.5 million.

The Company used the proceeds from the NationsCredit financing to pay off the
Company's previous revolving credit facility, an equipment note held by
Ortho-McNeil Pharmaceutical Corporation and various equipment notes held by its
previous bank.

Additionally, the Company refinanced its existing mortgage loan on its
Cincinnati, Ohio manufacturing facility with a $8.1 million note payable to
Merrill Lynch, which is guaranteed by Warner-Lambert.







                                      -27-
<PAGE>   29

The terms of the NationsCredit financing also provide for a financing commitment
of up to $3.0 million, subject to the results of an appraisal, to allow the
Company to purchase its Somerset, New Jersey facility, and a $5.0 million credit
line for the purchase of new eligible equipment based upon an appraisal value
(see Notes to Consolidated Financial Statements - Note D for further information
on the NationsCredit transaction).

In February 1998, the Company issued $12.0 million in Series F Preferred Stock
to raise funds necessary to continue to execute the Company's business plan. The
Series F Preferred Stock is convertible into shares of common stock and pays a
dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series F Preferred Stock that remain outstanding will be
redeemed automatically on February 4, 2000. The terms of the Series F Preferred
Stock limit the number of shares of Common Stock that can be issued upon
conversion to 3,580,252, with an option for the Company to satisfy any remaining
unconverted Series F Preferred Stock in cash or stock. In November 1998, the
Company received a waiver of the Nasdaq requirement for shareholders approval
which permits the Company to issue, as required, 1,401,584 shares beyond the
original 3,580,252. The terms of the Series F Preferred Stock provide for a
conversion price based upon a trailing 20 day period and were structured such
that the Series F Preferred Shares were convertible into common shares at
varying discounts to the market price (as defined) depending on the date the
conversion occurred.

At March 24, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that the
stock price remains above $4.88 and the Series F holder converts, the balance of
the Series F preferred shares will convert into common shares at $3.80 per
share. Based upon a $3.80 conversion price the Company will be required to issue
approximately another 1.3 million common shares upon the conversion of the
remaining Series F Preferred Stock. This would result in the Company issuing 4.1
million common shares at an average price of $2.94 upon the complete conversion
of the Series F Stock.

The terms of the Series F Preferred Stock provide for the issuance of warrants
under defined circumstances which have been met. Accordingly, on October 2, 1998
the Series F preferred stockholders were granted 500,000 warrants at an exercise
price of $5.74. The warrants are vested immediately and expire in October 2002.






                                      -28-
<PAGE>   30


ANALYSIS OF CASH FLOWS (amounts in millions)
<TABLE>
<CAPTION>
                                                                    1998             1997            1996
                                                                    ----             ----            ----

<S>                                                                  <C>            <C>             <C>   
Net Cash Used In Operating Activities                                (16.1)         (14.3)          (11.8)
Net Cash Used For Investing Activities                                (1.5)          (1.6)           (6.8)
Net Cash Provided by Financing Activities                             17.6           14.1            20.4
                                                                  --------       --------        --------
Net Change in Cash and Cash Equivalents                                ---           (1.8)            1.8
Cash and Cash Equivalents at Beginning of Period                       ---            1.8             ---
                                                                  --------       --------        --------
Cash and Cash Equivalents at End of Period                             ---            ---             1.8
                                                                  ========       ========        ========

Supplemental Cash Flow Disclosures:
Interest Paid                                                          2.0            1.4             1.9
                                                                  --------       --------        --------
Income Taxes Paid
</TABLE>

Operating Activities

The net cash and cash equivalents used in operating activities in 1998 financed
the Company's operations and a $9.4 million increase in inventory resulting from
the stocking of new products, both Duramed produced products as well as products
sourced through other manufacturers. In 1997, the net cash used in operating
activities primarily related to funding of operating losses resulting from the
Company's continued commitment to product development. Inventory decreased in
1997 principally due to the write-off of $3,465,000 in conjugated estrogens
inventory. Prepaid expense increased and accounts payable decreased due to a
change in terms under the new Ortho-McNeil distribution agreement, whereby the
Company was required to prepay for product purchases in excess of an established
credit limit. Additionally, prepaid expenses increased in 1997 due to amounts
paid on Warner-Lambert's behalf for which the Company was subsequently
reimbursed.

Investing Activities

The $1.5 million in capital expenditures in 1998 include renovating the
manufacturing portion of the Duramed Somerset facility to incorporate updates
necessary for manufacturing of controlled substances. In 1997, capital
expenditures were $1.6 million including an expansion of lab facilities at the
Somerset, New Jersey facility.







                                      -29-
<PAGE>   31

Financing Activities

Financing activities have funded the Company's operations for the three-year
period. Issuances of Convertible Preferred Stock raised $11.4 million, $9.6
million and $29.8 million in the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, long-term borrowings added $6.8 million, $9.1 million
and $6.8 million, in each year, respectively. These funds were offset by payment
of long-term debt in each of the three years and by a $8.7 million reduction in
the revolving credit facility in 1996. In 1998 and 1997, the Company increased
borrowings under its revolving credit facility by $6.2 million and $4.5 million,
respectively.

In February 1998, the Company raised $12.0 million ($11.4 million net of
issuance cost) through an offering of 120,000 shares of Series F Mandatory
Redeemable 5% Cumulative Convertible Preferred Stock ("Series F Preferred
Stock"). As of December 31, 1998, $4.3 million of Series F Preferred Stock had
been converted into Common Stock. Subsequent to December 31, 1998 an additional
$2.8 million of Series F Preferred Stock has been converted. The Company has
issued 2,794,702 shares of Common Stock in connection with conversions of the
Series F Preferred Stock at an average conversion price of $2.54 per share.

In June 1997, the Company raised $10.0 million ($9.5 million net of issuance
costs) through an offering of 100,000 shares of Series E Mandatory Redeemable 5%
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"). As of
December 31, 1997, $9.85 million of Series E Preferred Stock had been converted
into common stock. Subsequent to December 31, 1997 the remaining $150,000 of
Series E Preferred Stock was converted into 2,881 shares of Common Stock and
$176,099 was redeemed in cash. The Company issued 2,956,246 shares of Common
Stock in connection with conversions of Series E Preferred Stock at an average
conversion price of $3.47 per share.

In August 1996 the Company raised $20.0 million ($19.0 million net of issuance
costs) through an offering of 200,000 shares of Series D 8% Cumulative
Convertible Preferred Stock ("Series D Preferred Stock"). The bulk of the
proceeds from the issuance of the Series D Preferred Stock were utilized to pay
off the Company's revolving credit facility, with the balance initially invested
in short-term securities. The Series D Preferred Stock was convertible on
October 16, 1996, at the option of the holders, at 15% below the average of the
closing bid prices of the Common Stock of the Company over the ten day trading
period ending the day prior to the date of conversion. At December 31, 1996, all
$20.0 million of the Series D Preferred Stock had been converted to 2,832,966
shares of the Company's Common Stock, at an average conversion price of $7.06
per share.





                                      -30-
<PAGE>   32

Previously, the Company had raised $24.0 million through an offering of Series C
8% Cumulative Convertible Preferred Stock, ("Series C Preferred Stock"), of
which the first $12.0 million ($10.8 million net of issuance costs) was received
in November 1995, and the remaining $12.0 million ($10.9 million net of issuance
costs) was received in February 1996. The proceeds from the issuance of the
Series C Preferred Stock were utilized to fund operating activities including
the expanded product development program, as well as costs associated with
preparing to launch the conjugated estrogens product and repayment of certain
indebtedness. Through August 1996, the full $24.0 million of the Series C
Preferred Stock had been converted to 1,672,417 shares of Common Stock, at an
average price of $14.35 per share.

In September 1997, the Company entered into a long-term manufacturing agreement
with Warner-Lambert. Under the terms of the agreement, Duramed will manufacture
a name brand pharmaceutical product for Warner-Lambert, if the product is
successfully developed and approved by the FDA. In addition, Warner-Lambert has
guaranteed a promissory note mortgage loan in the amount of $8.5 million, which
is secured by the Company's manufacturing facility. This loan guaranty replaced
the $5.5 million loan guaranty from Ortho-McNeil.

In September, a new agreement was reached with Ortho-McNeil that resulted in an
extension of product distribution rights for Ortho-McNeil products distributed
by the Company and a new equipment note for equipment provided in connection
with the Company's facility expansion that was completed in 1995. In the fourth
quarter of 1996, the Company recorded a $4.0 million asset and liability for the
equipment provided by Ortho-McNeil (see Notes to Consolidated Financial
Statements - Note D).

The Company's bank holds warrants, exercisable until August 2005, to purchase
200,000 shares of the Company's Common Stock at a price of $18.125 per share.
These warrants were granted to the bank in consideration of certain
modifications to the Company's borrowing arrangements and additional extensions
of credit that were made during the second half of 1995. Based on an
anti-dilutive clause in the Provident Warrant contract, the exercise price was
adjusted to $11.638 and the number of warrants to purchase shares of the
Company's common stock was adjusted to 311,471 as of March 24, 1999.

The Company paid off a $4.5 million term note during 1996 with the proceeds from
its Series C Preferred Stock offering. Under a separate agreement, in March 1996
the Company's bank made available to the Company an additional $1.5 million of
term financing collateralized by existing equipment.






                                      -31-
<PAGE>   33

AVAILABLE FUNDS

The Company's need for additional financing is dependent upon several factors
including: (1) the level of spending necessary to commercialize Cenestin; (2)
the level and timing of the profit contribution from products approved by the
FDA in recent months; (3) the timing of approval of currently pending
applications with the FDA; (4) the ability of the Company to maintain the
current business base as well as the success of other aspects of its business
plan; and, (5) the proceeds received from the exercise of stock options and
warrants. Additionally, capital will be required for facility and equipment to
execute the Company's business plan.

Exercise prices for outstanding stock options and warrants vary. Should all
vested stock options and warrants priced less than $6.00 a share be exercised,
approximately $11.0 million in proceeds would be available to the Company. The
exercise of all vested stock options and warrants would provide approximately
$20.0 million in proceeds to the Company. The decision to exercise options and
warrants is at the discretion of the holder and, therefore, is beyond the
control of the Company.

Management believes that approval of Cenestin expands the Company's potential
sources of capital and anticipates that it should be able to access sufficient
funds to meet its overall business plans. Such sources have not been defined
specifically, but may include expanded borrowings under the NationsCredit
agreement or from other lenders and agreements with product development
partners. At present, the Company does not intend to issue additional equity
securities.

If the Company's intentions change and it decides to raise equity capital, the
extent of dilution to current shareholders will be dependent on the amount of
capital required and the terms under which it is raised. The terms of the Series
F Preferred Stock require the Company to obtain the investor's concurrence to
raise additional capital under certain defined terms. If capital is needed and
is not available, or approval to raise such capital cannot be obtained from the
investor, implementation of the Company's overall business plans will be
restricted or delayed.

SEASONALITY

Certain of the Company's generic products have a degree of seasonality, the
effect of which the Company attempts to mitigate by adding complementary
products to its line.


ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
----------------------------------------------------------------------------

The information required by Item 7A is included in Item 7 on page 27 of this
Form 10-K.





                                      -32-
<PAGE>   34


ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
---------------------------------------------------------

The following financial statements are included in this report on Form 10-K:

                                                                   Page
                                                                   ----
Report of Independent Auditors ...................................  F-1
Consolidated Balance Sheets as of
      December 31, 1998 and 1997..................................  F-2
Consolidated Statements of Operations for
      the Years Ended December 31, 1998,
      1997 and 1996...............................................  F-4
Consolidated Statements of Stockholders' Equity
      for the Years Ended December 31, 1998,
      1997 and 1996...............................................  F-5
Consolidated Statements of Cash Flows for
      the Years Ended December 31, 1998,
      1997 and 1996...............................................  F-6
Notes to Consolidated Financial Statements........................  F-7


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

None.













                                      -33-
<PAGE>   35

                                    PART III


ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
----------------------------------------------------------------

DIRECTORS
The Company's corporate powers are exercised, and its business, property and
affairs are managed, by or under the direction of the Board of Directors.
Directors of the Company are elected at the Annual Meeting of Stockholders.
Currently there are five directors. Set forth below is certain information with
respect to each director.

E. THOMAS ARINGTON, age 62. Mr. Arington has been President, Chief Executive
Officer and a director of the Company since 1987 and Chairman of the Board since
1988. Prior to joining the Company, he was President of MarketMaster, Inc., a
health care consulting firm which was acquired by the Company in 1987. Mr.
Arington's career has also included 17 years with Lederle Laboratories, a
division of American Cyanamid, where he held a variety of executive management
positions.

JEFFREY T. ARINGTON, age 38. Mr. Arington has been Senior Vice President,
Marketing, Sales and Science of the Company since 1995 and a director since
1998. He served as the Company's Senior Vice President, Marketing, Science and
Operations from 1994 until 1995, as Vice President, Sales and Marketing from
1989 until 1994 and as Executive Director of Sales and Marketing from 1987 until
1989. From 1984 until 1987, he was employed by MarketMaster. Jeffrey T. Arington
is E. Thomas Arington's son.

GEORGE W. BAUGHMAN, age 61. Mr. Baughman has been a director of the Company
since 1989. Mr. Baughman has been President and Chairman of Advanced Research
Associates, a consulting firm specializing in information systems and technology
and in financial analysis and planning, for more than the past five years. He
was employed by The Ohio State University for twenty-five years, retiring as
Director of Special Projects, Office of President.

PETER R. SEAVER, age 55. Mr. Seaver has been a director of the Company since
1998. Mr. Seaver has been President of the Health Care Group of Kaleidoscope
Television, Inc., a health care cable company, since 1997. He joined
Kaleidoscope Television following a thirty-year career with The Upjohn Company,
a pharmaceutical manufacturer, where he held a variety of management and
executive positions, including serving as Vice President of Marketing from 1987
until 1989, as Corporate Vice President of Worldwide Pharmaceutical Marketing
from 1989 until 1995 and as Corporate Vice President of Health Care Policy
during 1996.

S. SUNDARARAMAN, age 62. Mr. Sundararaman is the Company's Secretary and has
been a director of the Company since 1982. Mr. Sundararaman is Manager, Sales
Automation and Distribution, USA for Lufthansa German Airlines and has been with
that company since 1961.




                                      -34-
<PAGE>   36

EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:

Name                      Age       Title
----                      ---       -----
E. Thomas Arington         62      Chairman of the Board, President and
                                   Chief Executive Officer

S. Sundararaman            62      Secretary and Director

Jeffrey T. Arington        38      Senior Vice President, Marketing,
                                   Sales and Science and Director

Timothy J. Holt            46      Senior Vice President, Finance and 
                                   Administration, Treasurer and Chief Financial
                                   Officer


Information about Messrs. E. Thomas Arington, Jeffrey T. Arington and
Sundararaman is given above. Information about the Company's other executive
officer is as follows:

TIMOTHY J. HOLT. Mr. Holt has been Senior Vice President, Finance and
Administration of the Company since 1994. He served as Vice President, Finance
of the Company from 1985 to 1994. Prior to joining the Company in 1985, Mr. Holt
was Vice President-Finance and Chief Financial Officer of Vortec Corporation, a
then publicly held company operating in the fields of specialty manufacturing
and home health care equipment, and also held financial management positions
with privately held companies including Eagle Software Publishing.

Officers of the Company are elected by, and serve at the discretion of, the
Board of Directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten-percent
beneficial owners also are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. Based upon a review of copies
of such forms, the Company believes that all Section 16(a) filing requirements
were complied with on a timely basis during and for 1998 except that gifts made
by E. Thomas Arington during 1998 to various family members, totaling 13,000
shares of Common Stock, were reported in April 1999 instead of on his February
1999 Form 5 and options granted to Mr. Seaver as a consultant prior to his
becoming a director were reported on his February 1999 Form 5 instead of on his
Form 3.




                                      -35-
<PAGE>   37

ITEM 11.  EXECUTIVE COMPENSATION.
---------------------------------

SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by the Company to
(i) Mr. E. Thomas Arington and (ii) each of the Company's other executive
officers at the end of 1998 whose salary and bonus exceeded $100,000. Mr.
Arington and these other persons are sometimes referred to as the "named
executive officers."


<TABLE>
<CAPTION>
                                           SUMMARY COMPENSATION TABLE

                                                                                Long Term
                                                                            Compensation
                                      Annual Compensation                         Awards
                                  ---------------------------------------------------------------

                                                                  Other         Securities
                                                                 Annual         Underlying
                                                                 Compen-       Stock Option         All Other
       Name and                                     Bonus        sation           Grants           Compensation
  Principal Position       Year      Salary ($)      ($)         ($)(1)            (#)                ($)(2)
------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>               <C>         <C>              <C>               <C>
E. Thomas Arington         1998         $ 500,006         ---         ---              175,000           $ 62,669
Chief Executive Officer    1997           519,234         ---         ---                  ---             43,423
                           1996           369,213         ---         ---              518,500             32,522

Jeffrey T. Arington        1998         $ 177,250         ---         ---               23,000           $  3,200
Senior Vice President,     1997           163,365         ---         ---               22,000              3,207
Sales and Marketing        1996           148,489         ---         ---               17,000              3,107

Timothy J. Holt            1998         $ 172,250         ---         ---               20,000           $  3,920
Senior Vice President,     1997           163,365         ---         ---               20,000              3,802
Finance and Treasurer      1996           145,883         ---         ---               15,000              3,188

------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  None, other than perquisites which did not exceed the lesser of $50,000 or
     10% of salary and bonus for any named executive officer.

(2)  Amounts disclosed for 1998 are comprised of the following: (i) term and/or
     whole life insurance premium payments for the benefit of Mr. E. Thomas
     Arington ($53,017) and Mr. Timothy J. Holt ($720); (ii) disability
     insurance premium payments for Mr. E. Thomas Arington ($6,452); (iii)
     matching contributions to the Company's 401(k) Plan on behalf of Mr. E.
     Thomas Arington ($3,200), Mr. Jeffrey T. Arington ($3,200) and Mr. Timothy
     J. Holt ($3,200) in respect of their contributions to the Plan.






                                      -36-
<PAGE>   38

STOCK OPTIONS. The following table presents information on option grants during
1998 to the named executive officers. The Company's plans do not provide for the
grant of stock appreciation rights.


                                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                            Individual Grants(1)

                          ----------------------------------------------------------------------------------------
                                                                                        Potential Realizable        
                                                                                          Value at Assumed          
                             Number of                                                  Annual Rates of Stock       
                            Securities     % of Total                                  Price Appreciation for       
                            Underlying       Options       Exercise                          Option Term            
                             Options       Granted to      or Base                  ------------------------------  
                             Granted      Employees in      Price     Expiration    
          Name                 (#)         Fiscal Year      ($/Sh)       Date          5%($)        10%($)
------------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>            <C>       <C>         <C>            <C>       
E. Thomas Arington              175,000       25.7%          $5.625    4/13/08     $ 619,068      $1,568,840
                                                                                   
Jeffrey T. Arington               8,000        1.2%          $5.625    4/13/08      $ 28,300        $ 71,718
                                 15,000        2.2%          $3.687   12/17/08      $ 34,781        $ 88,142
                                                                                   
Timothy J. Holt                   8,000        1.2%          $5.625    4/13/08      $ 28,300        $ 71,718
                                 12,000        1.8%          $3.687   12/17/08      $ 27,825        $ 70,514
                                                                               
------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  The options granted to Messrs. Jeffrey T. Arington and Timothy J. Holt
     having an expiration date of April 13, 2008 became exercisable immediately
     on April 13, 1998. All other options become exercisable at a maximum rate
     of 20% of the shares per year beginning on the first anniversary of the
     date of grant. Each option becomes exercisable in full (i) if any person
     becomes, or commences a tender offer which could result in the person
     becoming, the beneficial owner of more than 50% of the outstanding shares
     of the Company's Common Stock or (ii) in the event of the execution of an
     agreement of merger, consolidation or reorganization pursuant to which the
     Company is not to be the surviving corporation or the execution of an
     agreement of sale or transfer of all or substantially all of the assets of
     the Company. Under certain change-of-control circumstances, an optionee
     will be entitled to receive a cash payment equal to the difference between
     the "fair value" of all unexercised option shares and the aggregate option
     price of those shares.

With respect to each named executive officer, the following table sets forth
information concerning option exercises during 1998 and unexercised options held
at December 31, 1998.




                                      -37-
<PAGE>   39
                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                             Value of Unexercised
                                              Value Realized      Number of Securities           In-the-Money
                                                    ($)          Underlying Unexercised        Options at FY-End
                                                                  Options at FY-End (#)               ($)
                                             (Market Price on
                         Shares Acquired      Exercise Less           Exercisable/               Exercisable/
         Name            on Exercise (#)     Exercise Price)          Unexercisable              Unexercisable
-----------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>               <C>                         <C> 
E. Thomas Arington              ---                    ---           1,168,343/375,000           $  1,867,123/$0

Jeffrey T. Arington             ---                    ---              120,201/36,800           $  234,952/$945

Timothy J. Holt               3,000                 $9,561               91,334/39,000           $  178,993/$756

-----------------------------------------------------------------------------------------------------------------
</TABLE>

COMPENSATION OF DIRECTORS. During 1998, nonemployee directors of the Company
received an annual fee of $10,000, fees of $1,200 for each Board meeting
attended, plus reimbursement of expenses, and fees of $500 for each Board
meeting held by conference telephone. Committee meeting fees are paid at the
same rates as fees for Board meetings; however, no fees are paid for committee
meetings held on the same dates as Board meetings. No fees are paid to directors
who are also employees of the Company. Each nonemployee director also is
annually awarded nondiscretionary options to purchase 5,000 shares of the
Company's Common Stock and is reimbursed by the Company for up to $7,500 per
year in legal and financial consulting expenses.

In December 1998 the Compensation Committee set the annual fee for nonemployee
directors of the Company for 1999 at $30,000. Pursuant to the Company's new 1999
Nonemployee Director Stock Plan, $12,000 of the annual fee will be paid in
Duramed Common Stock and the remainder will be paid in cash. Also for 1999, fees
of $1,500 will be paid for each Board meeting attended, $1,000 for each
committee meeting attended and held on a date other than a Board meeting date,
and $600 for each Board meeting held by conference telephone.

The Company has an unfunded pension plan covering nonemployee directors who have
served on the Board for at least five years. No director who is, or at any time
during the five years prior to the end of service as a director was, an employee
of the Company may participate in the plan. The plan provides an annual benefit,
payable monthly from the time a participating director ceases to be a member of
the Board until death, equal to the director's most recent annual Board fee, as
adjusted annually to reflect changes in the Consumer Price Index. The right of a
director to receive benefits under the plan is forfeited if the director engages
in any activity determined by the Board to be contrary to the best interests of
the Company.





                                      -38-
<PAGE>   40

EMPLOYMENT AGREEMENT. On March 30, 1994, the Company entered into an Amended and
Restated Employment Agreement (the "Agreement") with Mr. E. Thomas Arington. The
initial term of the Agreement expired on December 31, 1998; however, the
Agreement provides for automatic annual extension if notice of termination is
not given by either party prior to specified dates. No notice was given.
Therefore, the effect of the Agreement is to continue with subsequent "rolling
three year" minimum terms. The Agreement may be amended by agreement between the
Compensation Committee of the Board of Directors and Mr. Arington.

Under the Agreement, Mr. Arington is to receive a salary in an amount to be set
by the Compensation Committee, but not less than $33,333 per month. Mr.
Arington's salary was set at $500,000 for 1998 and remains at that level in
1999. The Agreement also entitled Mr. Arington to receive a 1998 bonus equal to
5% of the Company's income before taxes. After 1998, bonuses will be paid in
such a manner and amount as the Compensation Committee determines from time to
time. This incentive compensation arrangement was approved by the Company's
stockholders at the 1994 Annual Meeting of Stockholders.

The Agreement provides for life and disability insurance for certain other
customary benefits. Options to purchase 254,685 shares of Common Stock
previously granted to Mr. Arington are continued by the Agreement. If Mr.
Arington's employment is voluntarily terminated by him, or if he is terminated
by the Company with cause, the Agreement provides that he will not compete with
the Company for a period of one year after termination.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. E. Thomas
Arington, the Company's Chief Executive Officer, determined the 1998 salaries of
the Company's other named executive officers, taking into consideration the
target range for total cash compensation established by the Compensation
Committee.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------------

The following table sets forth, as of April 15, 1999, certain information with
regard to the beneficial ownership of the Company's Common Stock by (i) each of
the Company's stockholders known to hold more than 5% of the outstanding shares
of Common Stock, (ii) each director and each executive officer named on the
Summary Compensation Table, individually, and (iii) all directors and executive
officers of the Company as a group.




                                      -39-
<PAGE>   41

<TABLE>
<CAPTION>
           Name                  Beneficial Ownership
           ----                  --------------------
                            Number Of Shares(1)   Percent
                            -------------------   -------

<S>                             <C>                  <C> 
E. Thomas Arington              1,730,202            8.7%
7155 East Kemper Road
Cincinnati, OH 45249

Jeffrey T. Arington               171,844              *

George W. Baughman                 83,000              *

Timothy J. Holt                   134,377              *

Peter R. Seaver                    20,000              *

S. Sundararaman                   219,716            1.1%

All directors and               2,368,466           11.9%
executive officers
as a group (6 persons)
</TABLE>

*Less than one percent.

------------
(1)  Excludes shares of Common Stock subject to options which cannot be
     exercised within 60 days after April 15, 1999. Includes options to purchase
     the following numbers of shares: Mr. E. Thomas Arington, 803,343 shares;
     Mr. George W. Baughman, 35,000 shares; Mr. Peter R. Seaver, 15,000 shares;
     Mr. S. Sundararaman, 25,000 shares; Mr. Jeffrey T. Arington, 130,151
     shares; Mr. Timothy J. Holt, 109,034 shares; and all directors and
     executive officers as a group, 1,118,278 shares.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------------------------------------------------------------

Mr. Philip B. Arington is employed by the Company as its Executive Director of
Sales. His total compensation for 1998 was approximately $117,000. Mr.
Christopher H. Arington is employed by the Company as its Business Director -
Southwest Region. For 1998, his total compensation was approximately $94,000.
Mr. Philip B. Arington and Mr. Christopher H. Arington are sons of Mr. E. Thomas
Arington, the Company's Chairman of the Board and Chief Executive Officer.






                                      -40-
<PAGE>   42

                                     PART IV


ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
--------------------------------------------------------------------------------
(a) 1. All financial statements filed as a part of this report on Form 10-K are
       listed under Item 8, above.

    2. The following financial statement schedule is filed herewith:

                                                                   Page
                                                                   ----

                     Valuation and Qualifying Accounts             S-1

All other schedules are omitted because of the absence of conditions under which
they are required or because the information is shown in the financial
statements or notes thereto.

(b)    Reports on Form 8-K:  None

(c)    Exhibits

Exhibit Number       Description
--------------       -----------

         3.1        Certificate of Incorporation  (a)
         3.2        By-Laws*
         4.1        Certificate of Designation, Preferences and Rights of
                         Series A Preferred Stock (b)
         4.2         Rights Agreement between Duramed Pharmaceuticals, Inc. and
                         The Provident Bank as Rights Agent dated as of August
                         17, 1988 (c)
         4.3         Amendment dated as of August 12, 1998 to Rights Agreement
                         (d)
         4.4         Certificate of Designation, Preferences and Rights of
                         Series F Preferred Stock (e)
         10.1        Loan and Security Agreement dated November 6, 1998, between
                         NationsCredit Commercial Corporation through its
                         NationsCredit Commercial Funding Division and the
                         Company. (f)
         10.2        Term WCMA Loan Agreement No. 9808880201 dated as of October
                         1, 1998 between the Company and Merrill Lynch Business
                         Financial Services, Inc. (f)
         10.3        Term WMA Note dated October 1, 1998, granted by the Company
                         to Merrill Lynch Business Financial Services, Inc. in
                         the principal sum of $8,500,000.00 (f)
         10.4        Reimbursement Agreement dated November 5, 1998, between the
                         Company and Warner-Lambert Company (f)





                                      -41-
<PAGE>   43

         10.5        Open-End Mortgage granted by the Company to Warner-Lambert
                         Company (f) 
         10.6        Unconditional Guaranty dated October 1, 1998, granted by
                         Warner-Lambert Company to Merrill Lynch Business
                         Financial Services, Inc. (f)
         10.7        Form of warrant issued to shareholders of Hallmark
                         Pharmaceuticals, Inc. (g)
         10.8        Lease by and between the Company and Warner-Lambert Company
                         dated as of September 24, 1997 (h)
         10.9        Executive Compensation Plans and Arrangements
                         (i)    Amended and Restated Employment Agreement dated
                                as of March 30, 1994 between the Company and E.
                                Thomas Arington (i)
                         (ii)   Life and disability insurance policies for the
                                benefit of E. Thomas Arington (j)
                         (iii)  Life insurance policy for the benefit of Timothy
                                J. Holt (j)
                         (iv)   1988 Stock Option Plan (k)
                         (v)    1991 Stock Option Plan for Nonemployee Directors
                                (l)
                         (vi)   1997 Stock Option Plan (m)
                         (vii)  1999 Nonemployee Director Stock Plan
         23           Consent of Independent Auditors
         24           Powers of Attorney*
         27           Financial Data Schedule*


*Previously filed.


                                      -42-
<PAGE>   44

   (a) Filed as an Exhibit to Registration Statement No. 33-8215-C and
       incorporated herein by reference.
   (b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1988 and incorporated herein by reference.
   (c) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of
       Report August 28, 1988, and incorporated herein by reference.
   (d) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q/A for
       the quarter ended June 30, 1998 and incorporated herein by reference.
   (e) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1997 and incorporated herein by reference.
   (f) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 1998 and incorporated herein by
       reference.
   (g) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
       No. 333-06901, and incorporated herein by reference.
   (h) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
       the quarter ended September 30, 1997 and incorporated herein by
       reference.
   (i) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1993 and incorporated herein by reference.
   (j) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
       year ended December 31, 1992 and incorporated herein by reference.
   (k) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993
       Annual Meeting of Stockholders and incorporated herein by reference.
   (l) Filed as an Exhibit to the Company's Proxy Statement relating to the 1998
       Annual Meeting of Stockholders and incorporated herein by reference
   (m) Filed as an Exhibit to the Company's Proxy Statement relating to the 1997
       Annual Meeting of Stockholders and incorporated herein by reference.

The Company will furnish to the Commission, upon request, its long-term debt
instruments not listed in this Item.




                                      -43-
<PAGE>   45

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 29th day of
April 1999.

                                       DURAMED PHARMACEUTICALS, INC.

                                       BY:  /s/ Timothy J. Holt
                                           ----------------------------------
                                            Timothy J. Holt
                                            Senior Vice President
                                            Finance and Administration  







                                      -44-
<PAGE>   46
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                 DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
              Col. A                      Col. B                      Col. C                     Col. D            Col. E
------------------------------------------------------------------------------------------------------------------------------------
                                                                     Additions
                                                       -------------------------------------
                                                                                                Deductions-    Balance at End
            DESCRIPTION                                                                          Describe        of Period
                                                       Charged to Costs     Charged to Other
                                                         and Expenses      Accounts-Describe
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>               <C>                 <C>              <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful trade
   accounts receivable                  $ 1,481,868      $   191,694                           $  770,662(2)     $   902,900
Allowance for inventory obsolescence    $ 1,629,547      $   840,726                           $   24,745(3)     $ 2,445,528

YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful trade
   accounts receivable                  $ 1,339,492      $   176,588                          $    34,212(2)     $ 1,481,868
Allowance for inventory obsolescence    $ 1,551,630      $   292,673                          $   214,756(3)     $ 1,629,547

YEAR ENDED DECEMBER 31, 1996
Allowance for funds advanced to
   Hallmark Pharmaceuticals, Inc.       $ 1,458,952      $ 1,675,000                          $ 3,133,952(1)              --
Allowance for doubtful trade
   accounts receivable                  $   576,297      $ 1,213,808                          $   450,613(2)     $ 1,339,492
Allowance for inventory obsolescence    $   551,455      $ 1,505,902                          $   505,727(3)     $ 1,551,630
</TABLE>

(1) Incorporated with closing of acquisition in 9/96.
(2) Uncollectible accounts written off, net of recoveries.
(3) Products reserved as short dated inventory then subsequently sold.



                                      S-1
<PAGE>   47
                         Report of Independent Auditors

The Board of Directors
Duramed Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Duramed
Pharmaceuticals, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Duramed
Pharmaceuticals, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in a
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.

                                         ERNST & YOUNG LLP

Cincinnati, Ohio
March 29, 1999

                                      F-1
<PAGE>   48

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
December 31,                                   1998                    1997
                                           ------------            ------------
<S>                                        <C>                     <C>
Current assets:
  Cash and cash equivalents                $      3,500            $      3,500
  Trade accounts receivable,
    less allowance for doubtful
    accounts: 1998 - $903,000
    1997 - $1,482,000                        10,330,816               8,108,462
  Inventories                                19,786,705              10,435,942
  Prepaid expenses and other assets           2,803,460               2,650,274
                                           ------------            ------------
    Total current assets                     32,924,481              21,198,178
                                           ------------            ------------

Property, plant and equipment - net          27,229,828              28,419,056
                                           ------------            ------------
Deposits and other assets                     1,051,575                 508,707
                                           ------------            ------------
                                           $ 61,205,884            $ 50,125,941
                                           ============            ============
</TABLE>

See accompanying notes.



                                      F-2
<PAGE>   49

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
December 31,                                         1998              1997
--------------------------------------------------------------------------------
<S>                                              <C>              <C>
Current liabilities:
Accounts payable                                 $  4,370,181     $  4,129,712
Accrued liabilities                                 5,886,201        4,973,354
Current portion of long-term debt
  and other liabilities                             3,384,860        6,913,909
Current portion of capital lease obligations          708,891        1,064,210
                                                 ------------     ------------
      Total current liabilities                    14,350,133       17,081,185
                                                 ------------     ------------
Long-term debt, less current portion               22,138,315       10,903,498
Long-term capital leases, less current portion        441,632        1,105,571
                                                 ------------     ------------
      Total liabilities                            36,930,080       29,090,254
                                                 ------------     ------------

Mandatory redeemable convertible preferred stock    7,700,000          150,000
                                                 ------------     ------------
Stockholders' equity:
  Common stock - authorized 50,000,000
    shares, par value $.01; issued and
    outstanding 19,811,178 and 17,881,287 shares
    in 1998 and 1997, respectively                    198,111          178,812
  Additional paid-in capital                       94,795,906       90,728,595
  Accumulated deficit                             (78,418,213)     (70,021,720)
                                                 ------------     ------------
      Total stockholders' equity                   16,575,804       20,885,687
                                                 ------------     ------------
                                                 $ 61,205,884     $ 50,125,941
                                                 ============     ============
</TABLE>

See accompanying notes.



                                       F-3
<PAGE>   50

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,              1998            1997            1996
----------------------------------------------------------------------------

Net sales                        $ 49,759,285    $ 44,296,444   $ 43,855,014
Cost of goods sold                 37,333,632      33,468,376     31,679,577
                                 ------------    ------------   ------------
    Gross profit                   12,425,653      10,828,068     12,175,437
                                 ------------    ------------   ------------

Operating expenses:
  Product development               5,282,167      15,961,150     10,238,395
  Purchase of in-process
    research and development               --              --      8,557,275
  Selling                           3,428,100       3,182,290      4,518,600
  General and administrative        9,752,471       7,726,830      7,820,757
                                 ------------    ------------   ------------
                                   18,462,738      26,870,270     31,135,027
                                 ------------    ------------   ------------
    Operating loss                 (6,037,085)    (16,042,202)   (18,959,590)

Net interest expense                2,359,408       1,399,114      1,850,446
                                 ------------    ------------   ------------
    Loss before income
      taxes and preferred
      stock dividends              (8,396,493)    (17,441,316)   (20,810,036)

Income taxes                               --              --      3,901,000
                                 ------------    ------------   ------------

    Net loss                       (8,396,493)    (17,441,316)   (24,711,036)

Preferred stock dividends             517,343         170,023        929,471
                                 ------------    ------------   ------------
Net loss applicable to
common stockholders              $ (8,913,836)   $(17,611,339)  $(25,640,507)
                                 ============    ============   ============



Basic and diluted loss per share $      (0.49)   $      (1.14)  $      (2.44)
                                 ============    ============   ============


See accompanying notes.



                                       F-4

<PAGE>   51

                          DURAMED PHARMACEUTICALS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                      Preferred Stock           Common Stock          Additional            
                                  -----------------------------------------------      Paid-In        Accumulated             
                                     Series B, C and D       Shares       Amount       Capital          Deficit         Total
                                  -----------------------------------------------    ------------   -------------    -----------
<S>                               <C>                      <C>           <C>         <C>            <C>              <C>
BALANCE - DECEMBER 31, 1995            $ 12,000,075        8,074,449     $ 80,744    $ 24,686,871   $ (27,869,368)   $ 8,898,322
Issuance of stock in connection
  with compensation plans                       ---           12,486          125         187,099             ---        187,224
Issuance of stock in connection
  with stock options                            ---          349,838        3,499         929,640             ---        933,139
Issuance of stock in settlement
  of certain liabilities                        ---              723            7          12,379             ---         12,386
Issuance of stock in connection
  with Hallmark acquisition                     ---          640,000        6,400      11,093,600             ---     11,100,000
Issuance of Series C
  Preferred Stock                        12,000,000              ---          ---      (1,142,633)            ---     10,857,367
Issuance of Series D
  Preferred Stock                        20,000,000              ---          ---      (1,051,165)            ---     18,948,835
Conversion of Series B
  Preferred Stock                               (69)         686,000        6,860          (6,791)            ---            ---
Conversion of Series C
  Preferred Stock                       (24,000,000)       1,672,417       16,724      23,983,276             ---            ---
Conversion of Series D
  Preferred Stock                       (20,000,000)       2,832,966       28,330      19,971,670             ---            ---
Conversion of Convertible Note                  ---          334,637        3,346       2,339,111             ---      2,342,457
Net loss for 1996                               ---              ---          ---                     (24,711,036)   (24,711,036)
Preferred Stock dividends                       ---              ---          ---        (929,471)            ---       (929,471)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996                       6       14,603,516      146,035      80,073,586     (52,580,404)    27,639,223
Issuance of stock in connection
  with compensation plans                       ---           37,196          372         198,891             ---        199,263
Issuance of stock in connection
  with stock options                            ---          137,251        1,372         313,259             ---        314,631
Issuance of stock in settlement
  of certain liabilities                        ---           89,369          894         892,800             ---        893,694
Conversion of Series B
  Preferred Stock                                (6)          60,590          606            (600)            ---            ---
Conversion of Series E
  Preferred Stock Net                           ---        2,953,365       29,533       9,420,682             ---      9,450,215
Net loss for 1997                               ---              ---          ---             ---     (17,441,316)   (17,441,316)
Preferred Stock dividends                       ---              ---          ---        (170,023)            ---       (170,023)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997                     ---       17,881,287      178,812      90,728,595     (70,021,720)    20,885,687
Issuance of stock in connection
  with compensation plans                       ---           51,121          511         236,577             ---        237,088
Issuance of stock in connection
  with stock options                            ---           73,967          740         173,249             ---        173,989
Conversion of Series E
  Preferred Stock Net                           ---            2,881           29             ---             ---             29
Conversion of Series F
  Preferred Stock Net                           ---        1,801,922       18,019       4,174,828             ---      4,192,847
Net loss for 1998                               ---              ---          ---             ---      (8,396,493)    (8,396,493)
Preferred Stock dividends                       ---              ---          ---        (517,343)            ---       (517,343)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998                   $ ---       19,811,178    $ 198,111    $ 94,795,906   $ (78,418,213)   $16,575,804
                                  =================       ==========    =========    ============   =============    ===========
</TABLE>

See accompanying notes.



                                       F-5
<PAGE>   52

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,                   1998             1997           1996
----------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>
Cash flows from operating activities:
  Net loss                              $ (8,396,493)  $(17,441,316)  $(24,711,036)
Adjustments to reconcile net loss to
  net cash used in operating activities:
  Depreciation and amortization            2,789,639      2,446,050      2,065,240
  Provision for doubtful accounts            191,694        176,588      1,213,808
  Common stock issued in connection
    with employee compensation plans         237,088        199,263        187,224
  Write off of conjugated estrogens
    inventory                                     --      3,465,044             --
  Deferred taxes                                  --             --      3,901,000
  Recognition of deferred revenues                --             --       (500,000)
  Purchase of in-process research and
    development                                   --             --      8,557,275

Changes in assets and liabilities:
  Trade accounts receivable               (2,414,048)      (824,598)      (130,849)
  Inventories                             (9,350,763)      (712,359)    (3,703,937)
  Prepaid expenses and other assets           45,128     (1,589,809)       106,720
  Accounts payable                           240,469       (113,710)       818,003
  Accrued liabilities                        927,515        126,079        502,589
  Other                                     (418,150)       (81,524)      (118,248)
                                        ------------   ------------   ------------
Net cash used in operating
 activities                              (16,147,921)   (14,350,292)   (11,812,211)
                                        ------------   ------------   ------------
Investing activities:
  Capital expenditures                    (1,460,611)    (1,572,323)    (5,244,306)
  Payments in connection with
    acquisition                                   --             --     (1,577,649)
                                        ------------   ------------   ------------
Net cash used for investing
  activities                              (1,460,611)    (1,572,323)    (6,821,955)
                                        ------------   ------------   ------------

Cash flows from financing
  activities:
  Payments of long-term debt,
    including current maturities          (6,347,723)    (9,036,004)    (7,688,898)
  Net increase (decrease) in
    revolving credit facility              6,238,833      4,462,656     (8,664,861)
  Long-term borrowings                     6,795,400      9,099,099      6,839,789
  Issuance of preferred stock - net       11,399,376      9,560,848     29,806,202
  Cash redemption of preferred stock        (149,971)            --             --
  Issuance of common stock                   173,989        314,631        945,525
  Dividends paid                            (501,372)      (286,297)      (795,009)
                                        ------------   ------------   ------------
Net cash provided by financing
 activities                               17,608,532     14,114,933     20,442,748
                                        ------------   ------------   ------------

Net change in cash and cash
  equivalents                                     --     (1,807,682)     1,808,582
Cash and cash equivalents at
  beginning of period                          3,500      1,811,182          2,600
                                        ------------   ------------   ------------
Cash and cash equivalents at
  end of period                         $      3,500   $      3,500   $  1,811,182
                                        ============   ============   ============

Supplemental cash flow disclosures:
  Interest paid                         $  1,990,794   $  1,412,182   $  1,901,092
  Income taxes paid                               --             --             --
</TABLE>


See accompanying notes.



                                       F-6
<PAGE>   53

DURAMED PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. ACCOUNTING POLICIES

The Company's Business
----------------------
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") conducts business in
one segment which develops, manufactures and markets prescription pharmaceutical
products in tablet, capsule and liquid forms to customers throughout the United
States. The Company's product development program is focused on hormonal
therapies and controlled release technology. On March 24, 1999, the FDA granted
Duramed approval to market Cenestin(TM) (synthetic conjugated estrogens, A)
Tablets for the treatment of moderate to severe vasomotor symptoms associated
with menopause. Cenestin is Duramed's first pharmaceutical product which will be
marketed as a brand product.

A summary of the principal accounting policies followed in preparation of the
consolidated financial statements and related information is set forth below.

Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents
-------------------------
Duramed considers all investments with a maturity of three months or less as of
the date of purchase to be cash equivalents. As of December 31, 1998, the
Company had no short term investments classified as cash equivalents. The
Company's 1998 and 1997 cash balance represents only the balance maintained in
internal cash funds.

Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Components of inventories include:

<TABLE>
<CAPTION>
 December 31,
                                   1998                   1997
<S>                           <C>                    <C>         
Raw materials                 $  6,841,241           $  3,855,477
Work-in-process                    476,404                882,835
Finished goods                  14,914,588              7,327,177
Obsolescence reserve            (2,445,528)            (1,629,547)
                              ------------           ------------
      Net inventory           $ 19,786,705           $ 10,435,942
                              ============           ============
</TABLE>



                                      F-7



<PAGE>   54

The Company has $3.5 million in inventory of its synthetic conjugated estrogens
product, in raw material and finished dosage form, which has previously been
expensed. The product has been maintained and will be utilized in the sales
efforts for Cenestin.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation and amortization
is provided using principally the straight-line method over the estimated useful
lives of the assets. Major renewals and improvements are capitalized, while
ordinary maintenance and repairs are expensed. Property, plant and equipment
consist of the following:
<TABLE>
<CAPTION>
                                           December 31,          Estimated
                                        1998         1997        Useful Life
                                    ------------------------------------------
<S>                                 <C>           <C>           <C>
Land                                $ 1,000,000   $ 1,000,000
Buildings and improvements           19,285,854    18,785,948   20 to 30 Years
Equipment, furniture and fixtures    25,253,509    24,441,717    3 to 10 Years
                                    -----------   -----------
                                     45,539,363    44,227,665
Less accumulated
   depreciation and amortization     18,309,535    15,808,609
                                    -----------   -----------
                                    $27,229,828   $28,419,056
                                    ===========   ===========
</TABLE>

PRODUCT DEVELOPMENT COSTS

Product development costs are charged to expense when incurred. The reported
costs include specifically identifiable expenses and an allocation of certain
expenses shared with the other departments within the Company.


REVENUE RECOGNITION

The Company recognizes revenue at the time it ships product and provides for
returns and allowances based upon historical trends.


CONCENTRATION OF RISK

The financial instrument that potentially subjects the Company to credit risk is
accounts receivable. The Company sells its products to drug store chains, drug
wholesalers, private label distributors, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and governmental agencies. Two customers
accounted for 11% and 10% of net sales in 1998 and 18% and 11%, respectively, of
receivables as of December 31, 1998. In 1997, one customer accounted for 12% of
net sales. No single customer accounted for more than 10% of net sales in 1996.
The credit risk associated with this financial instrument is believed by the
Company to be limited due to the relatively large number of customers, their
geographic dispersion and the performance of certain credit evaluation
procedures. The Company maintains credit insurance for its accounts receivable
portfolio subject to certain limits and deductibles.



                                       F-8
<PAGE>   55

The drugs and other raw materials used in the Company's products are purchased
through United States distributors from foreign and domestic manufacturers of
bulk pharmaceutical chemicals and are generally available from numerous sources.
The federal drug application process requires specification and approval of raw
material suppliers. If raw materials from all specified suppliers become
unavailable, FDA approval of a new supplier is required, which can cause a delay
of six months or more in the manufacture of the drug involved. To date, the
Company has not experienced any significant delays and generally specifies two
or more suppliers in all drug applications.


USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.


NOTE B. ACQUISITIONS

On September 13, 1996, Duramed completed the acquisition of the assets and
business of Hallmark Pharmaceuticals, Inc. ("Hallmark"), a privately held
pharmaceutical development company headquartered in Somerset, N.J. with
technical expertise and capabilities with respect to advanced drug delivery
systems technologies. As consideration, Duramed issued 640,000 shares of the
Company's common stock, and warrants to purchase 400,000 shares of common stock
at a purchase price of $25, and assumed certain obligations of Hallmark, a
portion of which Duramed paid off at closing. During 1997, the Company agreed to
reprice the warrants to $10. These warrants are vested and have anti-dilutive
provisions (see Note I).

This acquisition was accounted for by the purchase method of accounting, and is
summarized below:
<TABLE>
<CAPTION>
<S>                                                               <C>
Fair value of assets acquired                                     $ 5,806,441
Liabilities assumed                                                (1,921,795)
                                                                  -----------
                                                                    3,884,646
Impairment of value - product marketing rights                       (847,200)
                                                                  -----------
                                                                    3,037,446
                                                                  -----------
Purchase price:
     Fair market value of common stock and warrants                11,100,000
     Cash (including related acquisition costs)                       494,721
                                                                  -----------
                                                                   11,594,721
                                                                  -----------
Purchase of in-process research and development                   $ 8,557,275
                                                                  ===========
</TABLE>



                                      F-9
<PAGE>   56

For the year ended December 31, 1996 the Company's results of operations, on a
pro forma basis as if Hallmark had been acquired at the beginning of the year,
would not have been materially different from the results reported.


NOTE C. ACCRUED LIABILITIES

The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
                                                    December 31,
                                           -------------------------------
                                               1998                1997
                                           -----------         -----------
<S>                                        <C>                 <C>    
Wages and other compensation               $ 2,449,556         $ 2,210,956
Taxes, other than income taxes                 606,782             632,255
Distribution agreements profit sharing         545,785             149,549
Royalty payable                                462,422             151,349
Accrued Medicaid rebates                       235,449             375,775
Accrued bio-studies                            136,470             334,495
Other                                        1,449,737           1,118,975
                                           -----------         -----------
                                           $ 5,886,201         $ 4,973,354
                                           ===========         ===========
</TABLE>


NOTE D. DEBT AND MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company's debt and mandatory redeemable convertible preferred stock consists
of the following:
<TABLE>
<CAPTION>
                                                      December 31,
                                           ---------------------------------

                                               1998                 1997
                                           ------------         ------------
<S>                                        <C>                  <C>   
Debt
Revolving credit facility                  $ 10,701,489         $  4,462,656
Merrill Lynch note payable                    8,144,404                  ---
Equipment term note                           5,564,866                  ---
Note payable to strategic alliance partner    1,081,146                  ---
Installment notes payable                        31,270               36,164
Promissory note mortgage loan                       ---            8,393,750
Equipment liability                                 ---            3,601,214
Equipment loan                                      ---            1,323,623
                                           ------------         ------------
                                             25,523,175           17,817,407
Less amount classified as current             3,384,860            6,913,909
                                           ------------         ------------
                                           $ 22,138,315         $ 10,903,498
                                           ============         ============
Mandatory redeemable
  convertible preferred stock              $  7,700,000         $    150,000
                                           ============         ============
</TABLE>




                                      F-10

<PAGE>   57

During 1998, the Company financed its operations and a $9.3 million increase in
inventory with proceeds received from a private placement of $12.0 million
Series F Preferred Stock (see Note G) and borrowings under its revolving credit
facility and a note payable to a strategic business partner.


DEBT

On November 9, 1998 the Company executed a new debt financing agreement with
NationsCredit Commercial Corporation, through its NationsCredit Commercial
Funding Division ("NationsCredit"). The term of the financing agreement is four
years with provisions for renewals. The financing agreement provides for a
revolving credit facility collateralized by the Company's receivables and
inventories and a $5,631,913 term note secured by the Company's equipment. The
Company's borrowing capacity under the revolving credit facility adjusts based
on the change in receivables and inventory and bears an interest rate of prime
plus 0.50% (8.25% at December 31, 1998). As of December 31, 1998 the Company's
available borrowing capacity under this revolving credit facility was $6.1
million based upon eligible collateral ($16.3 million as of December 31, 1998).
The $5,631,913 term note bears an interest rate of prime plus 0.75% (8.50% at
December 31, 1998) and requires monthly principal payments of $67,047 plus
interest for a seven year period, subject to renewal of the financing agreement.

The Company used the proceeds from the NationsCredit financing to pay off the
Company's existing revolving credit facility, as well as, an equipment note held
by Ortho-McNeil Pharmaceutical Corporation and various equipment notes held by
its previous bank.

Additionally, the Company refinanced its existing mortgage loan on its
Cincinnati, Ohio manufacturing facility with a $8.1 million note payable to
Merrill Lynch, which is guaranteed by the Warner-Lambert Company
("Warner-Lambert"). Warner-Lambert holds a first mortgage on the Company's
Cincinnati, Ohio manufacturing facility. The note payable to Merrill Lynch bears
a variable interest rate based upon the average commercial paper dealer rate
plus 2.65% (7.75% on December 31, 1998). The monthly principal payment required
is $35,417 plus interest. Principal payments are based upon a twenty year
amortization with a balloon payment due on October 1, 2007 of $4,250,000.

The note payable to a strategic alliance partner is an unsecured note. The note
requires payments of $600,000 and $550,000 on April 30, 1999 and April 30, 2000,
respectively.

Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.

The carrying value of the Company's debt approximates fair market value.



                                      F-11

<PAGE>   58

At December 31, 1998, maturities of long-term indebtedness for the ensuing five
years were as follows:

Year ending December 31:
<TABLE>
<CAPTION>
                                      Debt
<S>                              <C>
1999                             $  3,384,860
2000                                1,737,545
2001                                1,238,201
2002                               11,936,416
2003                                1,206,749
Thereafter                          6,019,404
                                 ------------
                                   25,523,175
Less current installments           3,384,860
                                 ------------
                                 $ 22,138,315
                                 =============
</TABLE>


MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK

During June 1997, the Company raised $10.0 million ($9.5 million net of issuance
costs) through an offering of 100,000 shares of Series E Mandatory Redeemable 5%
Cumulative Convertible Preferred Stock, ("Series E Preferred Stock"). As of
December 31, 1997, $9.85 million of Series E Preferred Stock had been converted
to common stock. In January, 1998 the remaining $150,000 obligation was settled
through a combination of cash redemption and issuance of common stock. The
Company issued a total of 2,956,246 shares of common stock in connection with
conversions of Series E Preferred Stock at an average conversion price of $3.47
per share.

In February 1998, the Company issued $12.0 million in Series F Preferred Stock
to raise funds necessary to continue to execute the Company's business plan. The
Series F Preferred Stock is convertible into shares of common stock and pays a
dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series F Preferred Stock that remain outstanding will be
redeemed automatically on February 4, 2000. The terms of the Series F Preferred
Stock limit the number of shares of Common Stock that can be issued upon
conversion to 3,580,252, with an option for the Company to satisfy any remaining
unconverted Series F Preferred Stock in cash or stock. In November 1998, the
Company received a waiver of the Nasdaq requirement for shareholders approval
which permits the Company to issue, as required, 1,401,584 shares beyond the
original 3,580,252. The terms of the Series F Preferred Stock provide for a
conversion price based upon a trailing 20 day period and were structured such
that the Series F Preferred Shares were convertible into common shares at
varying discounts to the market price (as defined) depending on the date the
conversion occurred.



                                      F-12
<PAGE>   59

At March 24, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that the
stock price remains above $4.88 and the Series F holder converts, the balance of
the Series F preferred shares will convert into common shares at $3.80 per
share. Based upon a $3.80 conversion price the Company will be required to issue
approximately another 1.3 million common shares upon the conversion of the
remaining Series F Preferred Stock. This would result in the Company issuing 4.1
million common shares at an average price of $2.94 upon the complete conversion
of the Series F Stock.


NOTE E. LEASES

Aggregate rental expense for the years ended December 31, 1998, 1997, 1996 was
approximately $1,118,000, $892,000, and $642,000, respectively. The following
summarizes minimum future lease payments as of December 31, 1998:

Year Ending December 31:
<TABLE>
<CAPTION>
                                           Operating           Capital
                                            Leases             Leases
                                           ---------           -------
<S>                                       <C>               <C>
 1999                                     $  952,469        $  843,660
 2000                                        582,749           409,710
 2001                                        435,535           114,538
 2002                                        428,060            20,445
 2003                                        428,060             5,246
 Thereafter                                  321,045               ---
                                          ----------        ----------
 Total minimum lease payments             $3,147,918         1,393,599
                                          ==========
 Less amount representing interest                             243,076
                                                            ----------
 Present value of net minimum lease payments                 1,150,523
 Less current installments                                     708,891
                                                            ----------
 Obligations under capital leases
    less current installments                               $  441,632
                                                            ==========
</TABLE>


Assets under capital leases amounted to approximately $7.3 million and $7.9
million in 1998 and 1997, respectively, with related amortization of $3.6
million and $3.4 million.



                                      F-13

<PAGE>   60

NOTE F. EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc.
401(k)/Profit Sharing Plan," available to eligible employees. In 1998 an
amendment to the Plan increased the Company match to 50% of employee
contributions to a maximum of 3% of each employee's compensation. The Company
match of $217,000, $185,000 and $182,000 in 1998, 1997 and 1996, respectively,
was made with the Company's common stock, as permitted by the Plan. The Plan
also has a profit sharing provision at the discretion of the Company's Board of
Directors. The Company has not made a profit sharing contribution to the Plan.
All full-time employees are eligible to participate in the deferred compensation
and Company matching provisions of the Plan. Employees are immediately vested
with respect to the Company matching provisions of the Plan.


NOTE G. COMMON AND PREFERRED STOCK

The Company has authorized the issuance of 100,000 shares of Series A Preferred
Stock, none of which has been issued.

On July, 8, 1993, as part of an agreement with its bank, the Company issued
74,659 shares of Series B Convertible Preferred Stock ("Series B Preferred
Stock"). The Series B Preferred Stock was non-voting and convertible at any time
into 746,590 shares of the Company's common stock. At December 31, 1997, all
shares of Series B Preferred Stock were converted into shares of the Company's
common stock.

In 1995 and 1996, the Company raised $44.0 million ($40.6 million net of
issuance costs) through the issuances of the Series C and Series D Convertible
Preferred Stock. During 1996 all of the Series C and Series D Convertible
Preferred Stock was converted into 1,672,417 and 2,832,966 shares of common
stock at average conversion prices of $14.35 and $7.06 per share, respectively.

NOTE H. LOSS PER COMMON SHARE

The following table presents the calculation of losses applicable to common
stockholders.

Loss Applicable to Common Stockholders
<TABLE>
<CAPTION>
                                   1998            1997              1996
                                   ----            ----              ----
<S>                            <C>            <C>               <C>
Net loss                       ($8,396,493)   ($17,441,316)     ($24,711,036)
Less dividends on preferred
  shares                           517,343         170,023           929,471
                               -----------    ------------      ------------
Net loss applicable to
  common stockholders          ($8,913,836)   ($17,611,339)     ($25,640,507)
                               ===========    ============      ============

</TABLE>

                                      F-14
<PAGE>   61

Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 18,150,494, 15,510,890 and 10,522,213 in 1998, 1997
and 1996, respectively.

For 1998, 1997 and 1996 the recognition of outstanding options and warrants in
the amount of 5,029,222, 4,028,319 and 3,785,366, respectively, were not
recognized in computing net loss per share as their effect would have been
anti-dilutive.


NOTE I. STOCK OPTIONS AND WARRANTS

STOCK OPTION PLANS

During 1998, the Company had options outstanding under the 1986 Stock Option
Plan (the "1986 Plan"), the 1988 Stock Option Plan (the "1988 Plan"), the 1997
Stock Option Plan (the "1997 Plan"), and the 1991 Stock Option Plan for
Nonemployee Directors (the "Directors Plan"). The 1986 Plan, which expired in
1996 (insofar as the grant of new options was concerned) permitted the granting
of options for up to 160,000 shares of the Company's common stock.

The 1988 Plan was replaced by the 1997 Plan on February 11, 1997. Prior to the
approval of the 1997 Plan, 4,360,000 shares of the Company's common stock were
authorized for issuance under the 1988 Plan. Upon approval of the 1997 Plan,
770,275 shares available for option grant under the 1988 Plan were transferred
to the 1997 Plan. Options that are cancelled and returned to the 1988 plan may
be regranted as nonqualified options to either employees on the regular payroll
of the Company or to advisors and consultants to the Company.

The 1997 Plan permits the granting for up to 1,500,000 shares of the Company's
common stock, which includes the 770,275 shares that transferred from the 1988
Plan. Under the 1997 Plan, both incentive stock options and nonqualified stock
options may be granted to either employees on the regular payroll of the Company
or to advisors and consultants to the Company.

Options granted under the 1986, 1988, and 1997 Plans become exercisable based
upon the terms and conditions established at the time of the grant and generally
expire 10 years after the date of grant.

The Director's Plan provides for the issuance of non-qualified options for up to
300,000 shares of the Company's common stock. The Directors Plan is a "formula
plan" under which each new nonemployee director is granted, at the close of
business on the date he or she first becomes a director, options to purchase
10,000 shares of the Company's common stock. Annually, each then serving
nonemployee director, other than a new director, is also automatically granted
options to purchase 5,000 shares of the Company's common stock at a price equal
to the closing market price on the date of grant. Options granted under the
Directors Plan vest in full six months after the date of grant and expire 10
years after the date of grant.



                                      F-15
<PAGE>   62
<TABLE>
<CAPTION>

                                                1986 Plan                                            1988 Plan
                                   ------------------------------------------------------------------------------------------------
                                    Shares     Option Price       Weighted Avg         Shares        Option Price      Weighted Avg
                                   ------------------------------------------------------------------------------------------------
<S>                                <C>         <C>                <C>               <C>            <C>                 <C>
Outstanding at
   December 31, 1995    ......      85,878    $ 0.50 to $ 6.00       $1.96           1,572,205     $0.50 to $19.25         $4.60
Granted                 ......      11,231     17.50 to  17.50       17.50           1,002,408      6.88 to  19.75         15.72
Forfeited               ......                                                         (40,158)     1.13 to  19.75          9.66
Exercised               ......     (21,210)     0.50 to   6.00        2.15            (148,673)     0.50 to  16.50          2.20

Outstanding at
   December 31, 1996    ......      75,899      0.50 to   8.63        2.87           2,385,782      0.50 to   8.63          5.51
Granted                 ......                                                         500,369      3.31 to  10.75          5.54
Forfeited               ......                                                        (103,960)     1.13 to   8.63          8.40
Exercised               ......      (1,417)     0.50 to   5.75        1.55             (22,499)     1.13 to   8.63          5.26

Outstanding at
   December 31, 1997    ......      74,482      0.50 to   5.00        2.31           2,759,692      0.50 to   7.25          3.66
Granted                 ......           -      N/A  to    N/A         N/A                   -      N/A  to    N/A           N/A
Expired                             (5,000)     3.13 to   3.13        3.13                   -      N/A  to    N/A           N/A
Forfeited               ......           -      N/A  to    N/A         N/A             (69,871)     3.38 to   5.75          4.91
Exercised               ......      (4,250)     0.50      5.00        0.76             (62,977)     0.50 to   5.00          2.14

Outstanding at
   December 31, 1998    ......      65,232     $0.50 to $ 5.00      $ 2.35           2,626,844     $0.50 to  $7.25         $3.68

====================================================================================================================================
Exercisable at
   December 31, 1996    ......      57,168     $0.50 to $ 5.75       $1.74           1,369,726     $0.50 to  $8.63         $3.60
   December 31, 1997    ......      66,059     $0.50 to $ 5.00       $1.97           1,670,141     $0.50 to  $7.25         $2.91
   December 31, 1998    ......      65,232     $0.50 to $ 5.00       $2.35           2,230,851     $0.50 to  $7.25         $3.49
====================================================================================================================================
Available for future
   grants at
   December 31, 1998    ......           -                                              41,591
====================================================================================================================================


<CAPTION>
                                                  1997 Plan                                       Directors Plan
                                   -------------------------------------------------------------------------------------------------
                                    Shares     Option Price       Weighted Avg         Shares     Option Price       Weighted Avg   
                                   -------------------------------------------------------------------------------------------------
<S>                                <C>         <C>                <C>                  <C>       <C>                 <C>
Outstanding at
   December 31, 1995    ......                                                          65,000   $ 0.50 to $16.50        $6.84
Granted                 ......                                                          15,000    15.00 to  15.00        15.00
Forfeited               ......                                                               -      N/A to    N/A          N/A
Exercised               ......                                                         (26,000)   0.50  to   4.00         1.86

Outstanding at
   December 31, 1996    ......          -       N/A  to    N/A          N/A              54,000    4.00  to   8.63         7.54
Granted                 ......      5,900       3.88 to   5.75         4.81              15,000    5.50  to   5.50         5.50
Forfeited               ......          -       N/A  to    N/A          N/A                   -    N/A   to    N/A          N/A
Exercised               ......          -       N/A  to    N/A          N/A                   -    N/A   to    N/A          N/A

Outstanding at
   December 31, 1997    ......      5,900       3.88 to   5.75         4.81              69,000    4.00  to  16.50         9.98
Granted                 ......    657,200       3.44 to   6.63         4.95              25,000    3.63  to   3.63         3.63
Expired                                 -       N/A  to    N/A          N/A                   -    N/A   to    N/A          N/A
Forfeited               ......       (500)      3.88 to   6.06         5.56                   -    N/A   to    N/A          N/A
Exercised               ......          -       N/A  to    N/A          N/A                   -    N/A   to    N/A          N/A

Outstanding at
   December 31, 1998    ......    662,600      $3.44 to  $6.63        $4.95              94,000    $3.63 to $16.50        $8.53
                                                                                                                                    
====================================================================================================================================
Exercisable at                                                                                                                      
   December 31, 1996    ......          -        N/A  to   N/A          N/A              39,000    $4.00 to  $8.63        $7.13
   December 31, 1997    ......          -        N/A  to   N/A          N/A              54,000    $4.00 to $16.50       $11.64
   December 31, 1998    ......     24,140      $3.88  to $6.00        $5.94              62,750    $4.00 to $16.50       $10.92
====================================================================================================================================
Available for future
   grants at
   December 31, 1998    ......    837,400                                               155,000
====================================================================================================================================
</TABLE>



                                      F-16
<PAGE>   63

OTHER OPTIONS AND WARRANTS

On August 22, 1995, in consideration of modifications to the Company's borrowing
arrangements and additional extensions of credit, the Company granted to its
bank warrants to purchase 200,000 shares of the Company's common stock at an
exercise price of $18.125 per share. These warrants vested immediately upon
grant and expire ten years from the date of grant. Based on an antidilutive
clause in the Provident Warrant contract, the exercise price was adjusted to
$11.638 and the number of warrants to purchase shares of the Company's common
stock was adjusted to 311,471 as of March 24, 1999.

On September 13, 1996, in connection with the Company's acquisition of Hallmark,
the Company issued 400,000 warrants for purchase of the Company's common stock
at $25 per share. These warrants were repriced on September 12, 1997 to $10 per
share. The warrants have a term of five years and become exercisable at the rate
of 33.3% per year beginning September 13, 1997. Based on an antidilutive clause
in the purchase contract, the exercise price was adjusted to $8.988 and the
number of warrants to purchase shares of the Company's common stock was adjusted
to 445,025 as of March 24, 1999.

On June 5, 1997, in connection with the Company's issuance of Series E Preferred
Stock, the Company granted to certain employees of Shoreline Pacific,
Institutional Finance Division of Financial West Group, warrants to purchase
20,000 shares of the Company's common stock at an exercise price of $4.3125 per
share. The warrants vested immediately and expire three years from the date of
grant.

On February 4, 1998, in connection with the Company's issuance of Series F
Preferred Stock, the Company granted 550,000 warrants to purchase shares of the
Company's common stock. Of the 550,000 warrants, 500,000 warrants were issued to
investors of the Series F Preferred Stock at an exercise price of $5.74 per
share. The warrants vested on October 2, 1998 and expire four years from the
date of grant. The remaining 50,000 warrants were granted to certain employees
of Shoreline Pacific, Institutional Finance Division of Financial West Group at
an exercise price of $5.22 per share. The warrants vested immediately and expire
three years from the date of grant.

At December 31, 1998, an aggregate of 5,029,222 shares of common stock were
reserved for issuance.



                                      F-17

<PAGE>   64

The following table summarizes information regarding stock options and warrants
outstanding:
<TABLE>
<CAPTION>
                      Options & Warrants Outstanding                             Options & Warrants Exercisable
---------------------------------------------------------------------------     ---------------------------------
                                          Weighted
                        Number             Average           Weighted              Number            Weighted
   Range of          Outstanding          Remaining           Average           Exercisable           Average
Exercise Prices     As of 12/31/98     Contractual Life    Exercise Price       As of 12/31/98     Exercise Price
---------------------------------------------------------------------------     ---------------------------------
<S>                 <C>                <C>                 <C>                  <C>                <C>
$0.50  -  $5.00        3,211,261             5.81               $3.48             2,374,668            $3.12
$5.13  - $11.64        1,787,961             6.14               $7.55             1,182,153            $8.05
$15.50 - $16.50           30,000             6.95              $16.00                30,000           $16.00
                       ---------                                                  ---------
$0.50  - $16.50        5,029,222             5.94               $5.00             3,586,821            $4.85
                       =========                                                  ========
</TABLE>

Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". As permitted by the Statement the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock based compensation plans.
Accordingly, because the exercise price of the Company's stock options is equal
to or greater than the closing market price on the date of grant, no
compensation expense is recognized. At the time the options are exercised, the
proceeds increase stockholders' equity.

Pro forma information regarding net loss and net loss per share is required by
Statement 123, which also requires that information be determined as if the
Company has accounted for its stock options granted and/or modified subsequent
to December 31, 1994 using the fair value method of that Statement. For purposes
of pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting periods. Beginning in 1996 certain options were
repriced. The impact of repriced options for 1996 and 1997 is reflected as
additional compensation expense under the pro forma disclosure requirements of
FASB 123. This incremental difference is measured as the excess of (1) the fair
value of the modified option and (2) the value of the old option immediately
before its terms are modified. According to the pro forma disclosure
requirements of FASB 123, both the incremental value of the repriced option and
the value established at the original grant date are amortized to expense over
the remaining vesting term of the option. The expense in connection with FASB
123 that would have been recorded in 1998, 1997 and 1996 was $2.7 million, $4.5
million, and $1.9 million, respectively, and would have generated the following
pro forma results:



                                      F-18
<PAGE>   65
<TABLE>
<CAPTION>
                                   1998            1997            1996
                               -------------   -------------   --------------
<S>                            <C>             <C>             <C>
Net loss applicable to
    common stockholders        $(11,659,926)   $(22,101,653)    $(27,547,664)

Net loss per common                  $(0.64)         $(1.42)          $(2.62)
share (diluted)
</TABLE>

The effects of providing pro forma disclosure are not indicative of future
amounts until the new rules are applied to all outstanding non-vested awards.

The fair value for these options was estimated at the date of grant and at the
date of the repricing using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>

Fair Value Assumptions      1998      1997      1996
-----------------------    ------    ------    ------
<S>                        <C>       <C>       <C>
Dividend Yield                0%        0%         0%

Expected Volatility        50.6%     37.7%      52.5%

Risk Free Interest Rate    4.55%     5.50%      6.75%

Expected life in years        5         4          4
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and directors stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, existing models do not necessarily provide a reliable
single measure of the fair value of its options.

                                      F-19
<PAGE>   66

The weighted average fair value of stock options granted during 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
                                    1998                              1997                                1996
                         --------------------------------   ---------------------------------  -----------------------------------
                         
                                  Weighted     Weighted             Weighted      Weighted               Weighted      Weighted
      Options                     Average      Average               Average      Average                Average       Average
      Granted            Shares  Valuation  Exercise Price  Shares  Valuation  Exercise Price  Shares  Valuation    Exercise Price
-----------------------  ------  ---------  --------------  ------  ---------  --------------  ------  ----------   --------------
<S>                     <C>        <C>          <C>         <C>       <C>          <C>        <C>         <C>           <C>
Price = Market Value(1) 682,200    $2.19        $4.91       521,269   $2.97        $7.21      1,028,639   $6.80         $15.76
</TABLE>



Note(1): Options granted during 1997 and 1996 include repricings.



                                      F-20



<PAGE>   67

NOTE J. INCOME TAXES

Deferred income taxes provided under Statement of Financials Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109") are determined based
upon the temporary differences between the financial statements and the tax
basis of assets and liabilities. The tax effects of temporary differences that
give rise to deferred income tax assets and liabilities at December 31, 1998 and
December 31, 1997 are presented below:
<TABLE>
<CAPTION>
                                             December 31,       December 31,
                                                 1998               1997
                                             ------------       ------------
                                                     (000's omitted)
<S>                                          <C>                <C>
Deferred tax assets (liabilities):
  Net operating loss carryforwards            $  23,737           $  20,456
  Accrued employee benefits                         757                 774
  Inventory obsolescence allowance                3,468               2,942
  Accounts receivable allowance                     343                 563
  Hallmark acquisition                            3,755               4,052
  Property, plant and equipment                    (412)               (630)
  Other                                            (777)              1,103
                                              ---------           ---------
    Total deferred tax assets                    30,871              29,260
Less valuation allowance                         30,871              29,260
                                              ---------           ---------
Net deferred tax assets                       $     ---           $     ---
                                              =========           =========
</TABLE>

At December 31, 1995 the Company maintained a net deferred tax asset of $3.9
million. The carrying value of the deferred tax asset and related valuation
allowance was based on a forecast of future operating results. In the fourth
quarter of 1996, in anticipation of incurring a loss for 1997, the Company
recognized a charge of $3.9 million to restore fully the valuation allowance on
the Company's deferred tax assets (principally net operating loss
carryforwards).

At December 31, 1998 and 1997, the Company had cumulative net operating loss
carryforwards of approximately $56.7 million and $49.1 million, respectively,
for federal income tax purposes which expire in the years 2004 to 2012.
Additionally, the Company had cumulative losses from Duramed Europe that
amounted to approximately $5.7 million and $4.7 million, respectively, in 1998
and 1997, which are not deductible for U.S. tax purposes.

                                      F-21
<PAGE>   68

The reconciliation of income tax at the U.S. federal statutory rate to income
tax (benefit) expense is:
<TABLE>
<CAPTION>
                                        Year Ended December 31
                                            (000's omitted)

                                           1998          1997          1996
                                           ----          ----          ----
<S>                                      <C>           <C>            <C>
Tax at U.S. statutory rate               $(2,855)      $(6,104)      $(7,284)
Deferred tax expense (benefit)               ---           ---         3,901
Losses for which benefit not provided      2,855         6,104         7,284
                                         -------       -------       -------
Actual tax (benefit) provision           $   ---       $   ---       $ 3,901
                                         =======       =======       =======
</TABLE>


NOTE K. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

The Company is a party to an agreement dated June 26, 1992 and amended on April
7, 1994 (the "Schein Agreement") with Schein Pharmaceutical, Inc. ("Schein")
relating to the development of a generic version of the conjugated estrogens
product Premarin(R). Under the Schein Agreement, Schein was to provide project
funding while Duramed was responsible for product development and manufacturing.
Both firms were to participate in the marketing and distribution of the generic
product. In May 1997, the Company was notified by the FDA that at that time, it
would not approve a generic conjugated estrogens product. On August 7, 1997, the
Company filed a complaint for a declaratory judgment against Schein in the Court
of Common Pleas, Hamilton County, Ohio, Case No. A9705498 ("Ohio action"). The
Company seeks a declaration that the Schein Agreement applies only to a product
approved on the basis of an ANDA and which would be fully substitutable for
Premarin(R) and that the Schein Agreement does not apply to the Company's
efforts to develop or market any conjugated estrogens product which would be
approved and marketed on the basis of an NDA.

In apparent response to the Company's action, on September 29, 1997, Schein
filed a complaint against the Company and other unnamed defendants in the
Superior Court of New Jersey, Chancery Division, Morris County, Docket No.
MRS-C-187-97 ("New Jersey action"). Schein alleges that the Company breached its
obligations to Schein under an alleged joint venture arising between the parties
and that the unnamed defendants tortuously interfered with Schein's prospective
business advantage and are liable to Schein. Schein seeks various forms of
relief against the Company, including injunctions barring the Company from the
development of a conjugated estrogens product with any person or company other
than Schein and requiring specific performance from the Company according to the
terms of the Schein Agreement and alleged joint venture and accounting and money
damages and a constructive trust.



                                      F-22

<PAGE>   69

On October 9, 1997, Schein filed a motion to dismiss the Ohio action based upon
the pending New Jersey action. The court denied this motion on November 13,
1997. On October 17, 1997, the Company filed a motion to dismiss or, in the
alternative, to stay the New Jersey action because of the previously-filed Ohio
action. On November 14, 1997, the New Jersey court granted the Company's motion
in part and stayed the New Jersey action.

On January 30, 1998, Schein amended its answer in the Ohio action and asserted a
counterclaim against the Company and other unnamed defendants similar to the New
Jersey complaint. As a result, on March 4, 1998, the Company renewed its motion
to dismiss the New Jersey action because Schein had brought the same basic
claims as a counterclaim in the Ohio action. On April 17, 1998, the Court
dismissed without prejudice the New Jersey action.

On September 11, 1998, both the Company and Schein filed cross motions for
summary judgment. The court subsequently denied both motions. No trial date is
set, but the Company intends to seek a trial date sometime in 1999.

The Company intends vigorously to prosecute its claim for declaratory relief in
the Ohio action and vigorously to defend against Schein's counterclaim in the
Ohio action, however, the outcome of the litigation cannot be predicted.

The Company is involved in various additional lawsuits and claims, which arise
in the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.



                                      F-23