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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                         Commission file number 0-22726

                              SAFESKIN CORPORATION
             (Exact name of registrant as specified in its charter)

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


            FLORIDA                                    59-2617525
   (State or other jurisdiction of                   (I.R.S. Employer
    incorporation or organization)                  Identification No.)

                             12671 HIGH BLUFF DRIVE
                           SAN DIEGO, CALIFORNIA 92130
          (Address of principal executive offices, including zip code)

        Registrant's telephone number, including area code (619) 794-8111

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

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

                                      NONE

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

                          COMMON STOCK, $.01 PAR VALUE

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

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

    As of March 26, 1999, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $342,745,262.

    As of March 26, 1999, the number of outstanding shares of Common Stock, par
value $.01 per share, of the Registrant was 55,095,209.

                       Documents Incorporated by Reference

    Information required by Part III is incorporated by reference to portions of
the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1998 fiscal year.

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                             TABLE OF CONTENTS PAGE
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<S>            <C>                                                                                                            <C>
PART I
Item 1.        Business..................................................................................................        3

Item 2.        Properties................................................................................................       10

Item 3.        Legal Proceedings.........................................................................................       10

Item 4.        Submission of Matters to a Vote of Security Holders.......................................................       11

PART II                                                                                                                        

Item 5.        Market for the Registrant's Common Equity and Related Shareholder Matters.................................       11

Item 6.        Selected Consolidated Financial Data......................................................................       12

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations.....................       14

Item 7A.       Quantitative and Qualitative Disclosure About Market Risk.................................................       23

Item 8.        Financial Statements and Supplementary Data...............................................................       24

Item 9.        Disagreements on Accounting and Financial Disclosures.....................................................       51

PART III                                                                                                                       

Item 10.       Directors and Executive Officers of the Registrant........................................................       51

Item 11.       Executive Compensation....................................................................................       51

Item 12.       Security Ownership of Certain Beneficial Owners and Management............................................       51

Item 13.       Certain Relationships and Related Transactions............................................................       51

PART IV                                                                                                                        

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................................       51

Signatures...............................................................................................................       55
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                                     PART I

ITEM 1. BUSINESS

    Safeskin is a leading developer, manufacturer and marketer of high quality
disposable gloves in the United States and believes that it is the world's
leading manufacturer of powder-free latex gloves. Safeskin sells its latex and
synthetic gloves to the acute care, alternate site, dental, high technology,
scientific, and consumer markets. For the past three years, Safeskin has been
the market share leader, in both sales dollars and units, of medical examination
gloves to acute care facilities (i.e., hospitals) in the United States.
Safeskin's gloves are used to prevent the transmission of infectious diseases
and to reduce contamination in cleanroom environments. In addition, Safeskin's
gloves are designed to maximize tactile sensitivity and comfort while minimizing
the risk of any debilitating side effects which may result from prolonged use.
Based on information provided by its distributors, Safeskin believes that in
1998 approximately 61% of Safeskin's end user unit sales were to acute care
facilities; approximately 26% were to alternate site and dental facilities; and
approximately 13% were to the high technology, scientific, and consumer markets.

    Since commencing operations in 1988, Safeskin has developed a broad
portfolio of disposable gloves. Safeskin's gloves are made of either natural
rubber latex or synthetic materials, such as Tactylon(R) (a proprietary
synthetic co-polymer), nitrile (a widely used synthetic co-polymer) and other
co-polymers. Safeskin's product portfolio is also segmented by end use. Safeskin
manufactures and markets medical examination gloves, surgical gloves and
cleanroom and laboratory gloves. The majority of Safeskin's gloves are marketed
under the "Safeskin" trade name to enhance market recognition and cultivate
brand loyalty. Safeskin also manufactures a small percentage of its gloves under
a private label. Safeskin's gloves are manufactured in various sizes and in
ambidextrous or hand specific designs. Safeskin continues to develop and market
new products, thereby expanding both its product line and markets served.

    In addition to developing new products internally, Safeskin also pursues
strategic acquisitions that either extend Safeskin's presence in selected
markets or possess attractive proprietary technologies. Safeskin generally
expects to realize synergies from such acquisitions by transferring
manufacturing to its efficient, low-cost Southeast Asian facilities and by
utilizing its dedicated sales force to market new products. In March 1997,
Safeskin acquired the synthetic glove business of Tactyl Technologies, Inc.
("Tactyl"), a developer and manufacturer of non-latex surgical gloves for the
domestic and international markets. As a result of the Tactyl acquisition,
Safeskin began offering Safeskin Tactylon(R) synthetic surgical gloves and has
begun developing additional products using the Tactylon(R) synthetic material.
In February 1998, Safeskin acquired Absolute Quality Leadership ("AQL"), a
developer and marketer of gloves for the high technology and scientific markets.
As a result of the AQL acquisition, Safeskin expanded its line of proprietary
latex and synthetic glove products for these markets. Safeskin plans to begin
manufacturing substantially all of its AQL products in Thailand by the first
quarter of 1999.

INDUSTRY

    In 1998, the total U.S. market for disposable gloves was approximately $1.5
billion. Of this amount, the medical glove market was approximately $1.2
billion, according to IMS market data, and is expected to grow 5% annually over
the next three years. The growth in the market for medical gloves has largely
resulted from increased concerns among healthcare professionals regarding the
transmission of infectious diseases, particularly AIDS and hepatitis B. Of the
total medical glove market, the market for acute care medical examination gloves
was approximately $350 million, and the powder-free segment of the acute care
medical examination glove market was approximately $186 million. Safeskin
estimates that it has a 25% share of the overall acute care medical examination
glove market and a 38% share of the powder-free segment of the acute care
medical examination glove market. The high technology and scientific glove
markets comprised approximately $273 million of the total U.S. disposable glove
market in 1998 and, according to internal management estimates, are expected to
grow 9% annually over the next three years. The growth in the market for high
technology and scientific gloves has been driven by increased use of cleanroom
manufacturing processes which require stringent contamination controls. These
manufacturing process require the use of gloves that minimize the number of
particles on their surfaces to reduce the risk of contamination. In addition,
concerns in all glove markets over the adverse effects of prolonged exposure to
high allergen gloves containing latex and powder have led to a shift away from
commodity priced powdered latex gloves towards higher quality powder-free latex
and synthetic gloves.

    As people began wearing latex gloves more often and for longer periods,
there was an increase in irritations to the powder used to make the glove, and
in allergic reactions to the water soluble proteins in latex and to the
chemicals and other additives used in processing latex and manufacturing gloves.
In 1991, the FDA issued a medical alert warning to healthcare professionals
about the increased incidences of allergic reactions to latex medical products
by both medical personnel and patients. In response to the increase in allergic
reactions to latex gloves, glove manufacturers attempted to reduce the amount of
powder, latex proteins and chemical allergens in their gloves.



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Occupational Safety Health Administration regulations in effect since 1991
require that all employers provide hypoallergenic gloves, glove liners,
powderless gloves, or other similar alternatives to those employees who are
allergic to the gloves normally provided.

PRODUCTS

    Safeskin manufactures and markets medical examination gloves, surgical
gloves, cleanroom and laboratory gloves. Safeskin's gloves are used to prevent
the transmission of infectious diseases and to reduce contamination in cleanroom
environments. In addition, Safeskin's gloves are designed to maximize tactile
sensitivity and comfort while minimizing the risk of any debilitating side
effects which may result from prolonged use.

MEDICAL EXAMINATION GLOVES

-   Powder-Free Latex Gloves. In 1990, Safeskin introduced its first
    powder-free latex examination glove. Safeskin currently manufactures and
    markets several types of powder-free examination gloves with various
    textures and lengths. Medical examination gloves are manufactured utilizing
    a proprietary process that makes them easy to don and remove without the
    need for corn starch powder. The lack of powder makes the gloves more
    desirable to wearers who may develop reactions to prolonged use of powdered
    gloves. In addition, powder free gloves eliminate airborne powder which may
    cause distress to respiratory and neonatal patients. Safeskin sells
    powder-free latex examination gloves to acute site facilities, alternate
    site facilities and scientific laboratories. According to market studies, in
    1998, end users typically paid between $.05 and $.12 per glove for
    powder-free latex examination gloves.

-   Lightly Powdered Latex Gloves. In 1988, Safeskin introduced its lightly
    powdered latex examination glove. The lightly powdered glove is Safeskin's
    lowest priced glove. "Lightly Powdered" refers to the corn starch powder
    added to the inside of the glove in order to make it easier to don and
    remove. Safeskin sells its lightly powdered latex gloves primarily to acute
    care facilities; alternate site facilities, such as nursing homes, clinics
    and physician offices; dental offices; and the consumer market. According to
    market studies, in 1998, end users typically paid between $.03 and $.07 per
    glove for lightly powdered latex examination gloves.

-   Powder-Free Nitrile Gloves. In 1997, Safeskin introduced its nitrile
    examination glove. These gloves are made out of a material called nitrile, a
    synthetic co-polymer that contains no latex. The nitrile medical examination
    glove provides an alternative for individuals allergic to latex. This glove
    is powder-free and manufactured with reduced chemical levels. In addition,
    the nitrile glove is easy to don, comfortable to wear for extended periods,
    durable and designed to be soft, odor-free, and non-sticky. Safeskin sells
    nitrile examination gloves to acute care facilities, alternate site
    facilities and scientific laboratories. According to market studies, in
    1998, end users typically paid between $.06 and $.12 per glove for
    powder-free nitrile examination gloves.

SURGICAL GLOVES

-   Powder-Free Latex Surgical Gloves. In 1996, Safeskin introduced a sterile,
    powder-free latex surgical glove, the Safeskin 2000(TM), which was designed
    to meet the more rigorous demands of the operating room environment. The
    Safeskin 2000(TM) surgical glove is non-pyrogenic, reducing the risk of
    endotoxin contamination of surgical sites. In addition, powder-free gloves
    eliminate complications which could be caused by powder entering open
    wounds. Safeskin sells powder-free latex surgical gloves to acute care
    facilities. According to market studies, in 1998, end users typically paid
    between $.85 and $1.85 per pair for powder-free surgical gloves.

-   Tactylon(R) Surgical Gloves. In 1997, Safeskin acquired the synthetic
    glove business of Tactyl and began offering Tactylon(R) synthetic surgical
    gloves. Tactylon(R) synthetic surgical gloves are constructed from a
    patented synthetic thermoplastic elastomer technology developed to address
    the needs of healthcare professionals and patients who are sensitive to
    latex. Safeskin's management believes that the Tactylon(R) synthetic
    surgical glove strategically complements Safeskin's powder-free latex
    surgical glove by permitting Safeskin to be able to offer surgeons the
    choice of either a latex or a synthetic glove. According to market studies,
    in 1998, end users typically paid between $1.55 and $2.50 per pair for
    synthetic surgical gloves.

HIGH TECHNOLOGY AND SCIENTIFIC GLOVES

-   Latex Cleanroom Gloves. In 1992, Safeskin introduced its first cleanroom
    latex glove. Cleanroom gloves are designed, processed and packaged to meet
    the stringent contamination control requirements of the microelectronics
    industry, including the semiconductor and disk drive segments, and the
    health technologies industry, including the pharmaceutical, medical device
    and biomedical segments. These glove products minimize the introduction of
    sub-micron particulate contamination and chemical extractable contamination
    into



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    the end user's environment. Safeskin currently manufactures and markets
    numerous types of sterile and non-sterile cleanroom gloves. According to
    Safeskin's estimates, in 1998, end users typically paid between $.17 and
    $.78 per pair for cleanroom latex gloves.

-   Latex Laboratory Gloves. In 1998, as a result of its acquisition of AQL,
    Safeskin began offering powder-free latex gloves designed specifically for
    laboratories. Certain of these latex gloves are also polymer coated to
    enhance donning and grip characteristics. According to Safeskin's estimates,
    in 1998 end users typically paid between $.08 and $.30 per pair for
    laboratory latex gloves.

-   Synthetic Cleanroom and Laboratory Gloves. In 1995, Safeskin introduced
    its first synthetic glove for the high technology and scientific markets.
    Safeskin currently manufactures and markets numerous types of synthetic
    cleanroom and laboratory gloves made of nitrile and other co-polymers. These
    gloves are manufactured from synthetic materials which improve contamination
    control performance, enhance resistance to various chemicals and solvents
    and eliminate natural rubber protein antigens. According to Safeskin's
    estimates, in 1998 end users in the high technology and scientific fields
    typically paid between $.18 and $.85 per pair for non-vinyl, powder-free
    synthetic cleanroom and laboratory gloves.

RESEARCH AND DEVELOPMENT

    Safeskin's research and development expenses were approximately $6,347,000
in 1998, $3,504,000 in 1997, and $2,209,000 in 1996. Safeskin expects these
costs to increase as Safeskin increases the number of new products it
introduces. Safeskin's research and development efforts are focused on both
developing new products and improving its manufacturing facilities and
processes. Safeskin's product research and development seeks to: (i) address the
needs of the synthetic glove market for lower cost and higher quality synthetic
gloves and (ii) expand Safeskin's product line for the high technology and
scientific markets. Safeskin's manufacturing research and development is
directed toward designing and constructing new production lines that will meet
Safeskin's increasing capacity and quality demands. In addition, Safeskin
continues to dedicate resources to the research and development of other
disposable protective products. There can be no assurance that these new
products or processes will be successfully developed, will be cleared by the
FDA, will gain market acceptance, will command pricing levels acceptable to
Safeskin or will meet the demands of the market.

SALES AND MARKETING

    Safeskin sells its latex and synthetic gloves to the acute care, alternate
site, dental, high technology, scientific and consumer markets. Based on
information provided by its distributors, Safeskin believes that in 1998,
approximately 61% of Safeskin's end user unit sales were to acute care
facilities; approximately 26% were to alternate site and dental facilities; and
approximately 13% were to the high technology, scientific, and consumer markets.

MEDICAL MARKET

    Safeskin's sales and marketing activities in the medical products area are
directed at three groups: (i) medical personnel who are the actual end users of
gloves, (ii) group purchasing organizations ("GPOs") and integrated healthcare
networks and (iii) medical distributors. As of December 31, 1998, Safeskin had
47 sales representatives and 6 nurse consultants in the United States who market
to end users at acute care and alternate site facilities. Purchasing decisions
by healthcare systems are customarily made by a clinical staff committee which
evaluates potential products based on quality criteria, such as effectiveness,
durability and likelihood to cause dermatitis, as well as price and value.
Safeskin's sales representatives work with healthcare personnel to ensure that
Safeskin's products are considered in the purchasing process and that their
comparative advantages are known by the committee. Education is an integral part
of the sales approach to end users. Consequently, sales representatives and
nurse consultants are specifically trained and certified to conduct continuing
education programs for healthcare personnel. Sales representatives must possess
at least five years of previous medical sales experience and are paid salaries
plus performance-based commissions. As of December 31, 1998, Safeskin's gloves
were used in over 4,200 hospitals and 23,000 alternate site facilities.

    Safeskin's national accounts department promotes sales to and negotiates
agreements with GPOs, integrated healthcare networks, large non-acute care
customers and multi-facility high technology and scientific customers. In
addition, Safeskin has entered into various contracts with certain national
GPOs, pursuant to which Safeskin is either the sole or one of a limited number
of approved suppliers from which the member healthcare and hospital facilities
may purchase examination and surgical gloves. GPOs with which Safeskin has
agreements include Premier Purchasing Partners, L.P., the largest hospital
alliance in the United States. Safeskin has also entered into an exclusive,
six-year contract to supply Columbia/HCA Healthcare Corporation, the largest
provider of healthcare services in the United States, with latex examination
gloves. During 1998, Safeskin also had a GPO contract with Catholic Materials
Management Alliance ("CMMA"), which was acquired by Consorta, Inc., during the
year, for the supply of examination gloves to member hospitals. On



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March 16, 1999, Safeskin was advised that this contract was being terminated.
Although Safeskin will no longer be the sole supplier of examination gloves,
Safeskin expects member hospitals to continue to purchase its examination gloves
pursuant to three-party contracts with such end-users. Safeskin does not expect
the contract termination to have a material adverse effect on Safeskin's 1999
revenues.

    All domestic sales of Safeskin's medical products are made through national,
regional and local distributors. Safeskin believes that these partnerships
allows it to utilize the distributors' extensive infrastructure to access acute
care and alternate site facilities throughout the United States. Typically,
sales to distributors are made pursuant to a contract between Safeskin and the
distributor specifying prices to be paid by the distributor for gloves sold to a
particular end user. Safeskin works with medical products distributors seeking
to reduce their order cycle time, increase fill rates and optimize ordering
patterns and inventory levels. In addition, Safeskin actively promotes the use
of electronic data interchange (EDI) technology for applications such as order
entry, invoicing and sales tracing. These initiatives strive to produce savings
throughout the supply chain. In February 1998, Safeskin established a
partnership with Perot Systems Corporation which seeks to enable Safeskin to
streamline distribution and administrative procedures for itself and its
customers. Two of the largest distributors to the acute care market, McKesson
General Medical and Owens & Minor, currently carry Safeskin's product line on a
non-exclusive basis. McKesson General Medical and Owens & Minor distributed
gloves accounting for approximately 17.3% and 16.4%, respectively, of Safeskin's
1998 consolidated net sales. Although distributors often utilize Safeskin's
education and marketing programs to sell Safeskin's products, distributors do
not necessarily promote the sale of Safeskin's products more aggressively than
the other competing lines of gloves which they carry.

    Effective October 1, 1994, Safeskin entered into a three year contact with
General Medical, which was later acquired by McKesson General Medical
(collectively "MGM"), governing sales of Safeskin's gloves. MGM is currently a
leading national medical/surgical products distributor and the nation's largest
distributor to the alternate site market. The contract designated Safeskin as
the exclusive manufacturer of MGM's private label gloves. Sales of gloves under
the contract first occurred in 1995. In July 1996, the contract was amended to
extend its term for an additional two years, expiring on October 1, 1999, and to
name Safeskin as MGM's preferred glove manufacturer. In the amendment, MGM also
agreed to promote sales of Safeskin's gloves and the private label gloves
manufactured by Safeskin.

    In March 1999, Safeskin entered into a strategic alliance with Owens &
Minor, the nation's largest distributor of national name brand medical and
surgical supplies, establishing Safeskin as Owens & Minor's preferred
examination glove supplier. Under the alliance, Safeskin and Owens & Minor will
share common sales targets, with Owens & Minor receiving quarterly volume
incentives when these sales targets are achieved.

HIGH TECHNOLOGY AND SCIENTIFIC MARKETS

    Safeskin markets its products for a variety of cleanroom and laboratory
applications in the semiconductor, biotechnology, pharmaceutical, general
industrial manufacturing and research segments of the high technology and
scientific markets. Like the medical segment, more workers in the high
technology and scientific markets are using gloves. As of December 31, 1998,
Safeskin's high technology and scientific products were sold through a network
of approximately 110 distributors, including the two largest distributors of
high technology and scientific gloves in the United States, Fisher Scientific
International Inc. and VWR Scientific Products Corporation. Safeskin has a sales
force consisting of 17 sales representatives supporting the distribution network
and end users. As a result of Safeskin's AQL acquisition, Safeskin expects that
it will be able to market a broad line of proprietary latex and synthetic glove
products, specifically designed for the microelectronics (semiconductor and disk
drive), health technologies (pharmaceutical, medical device and biotechnology)
and general laboratory and safety market segments.

INTERNATIONAL MARKETS

    Safeskin believes that the non-U.S. market for disposable gloves was
approximately $2.0 billion in 1998. Safeskin's international net sales were
$26.3 million in 1998, or 11% of Safeskin's net sales. Sales in Europe comprised
$24.1 million of Safeskin's international sales. Safeskin's European operations
are headquartered in The Netherlands, and Safeskin also has sales offices in
Germany and the United Kingdom. Safeskin currently plans to open additional
sales offices in Europe over the next two years. As of December 31, 1998,
Safeskin had 12 sales representatives in Europe who focused primarily on the
medical market. Unlike the United States, where all of Safeskin's sales are to
distributors, approximately 30% of Safeskin's sales in Europe are made directly
to end users, primarily consisting of acute care and alternate site facilities.
Safeskin also sells its products in Latin America, Africa and Southeast Asia.

MANUFACTURING AND QUALITY CONTROL



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    During 1998, Safeskin manufactured its products in Thailand, Malaysia, and
California. Factory locations are selected based on proximity to natural sources
of latex, the cost and availability of labor, favorable tax treatment and the
local political and social conditions. In 1998, Safeskin added annual production
capacity of approximately 2.0 billion gloves which brought its expected annual
production capacity as of year end 1998 to approximately 5.5 billion gloves. In
1997, Safeskin began production in its latex concentrate plant in Thailand. The
output of the plant currently supplies approximately 70% of the latex
concentrate required by Safeskin's factories in Thailand and Malaysia for the
manufacture of its disposable latex gloves. Safeskin believes that this plant
allows it to integrate its manufacturing processes to gain better control over
the quality, cost and reliability of latex supplies.

    Gloves are manufactured on production lines which have the ability to run
continuously and can be changed quickly to produce different types and sizes of
gloves. Quality control and testing are emphasized throughout Safeskin's
manufacturing process. Each latex glove is formed by dipping a porcelain mold
into the latex compound. Water soluble proteins which occur naturally in latex
and certain processing additives are reduced by means of extensive heating and
leaching processes. Proteins and chemicals are minimized as a result of
Safeskin's proprietary manufacturing processes.

    All of Safeskin's current manufacturing facilities have received ISO 9002
certification. This certification demonstrates the facilities' compliance with
the internationally recognized quality manufacturing standards established by
the International Organization for Standardization based in Geneva, Switzerland.
Safeskin believes that the ISO 9002 certification makes it more competitive in
the marketplace as customers are increasingly recognizing the standard as an
indication of product quality.

    Safeskin is expanding its Thailand manufacturing operations and transferring
manufacturing capacity from California and Malaysia to capitalize on the
increased production efficiencies and lower operating costs in Thailand that
Safeskin expects to realize. Safeskin has recently completed construction of a
fifth building and related machinery at Safeskin's existing Hat Yai, Thailand
facility. This building houses 22 high-speed and product-flexible dipping
production lines which were commissioned throughout 1998, beginning in the
second quarter, and are expected to increase production capacity by an
additional 1.5 billion gloves annually. During 1999, Safeskin's expansion plans
include the completion of a second manufacturing facility in Sadao, Thailand
that is expected to produce latex and synthetic surgical, high-technology and
scientific and medical examination gloves. Construction of the new manufacturing
facility in Sadao, Thailand began in the second half of 1997 after approval by
the Thailand Board of Investment. Four production buildings have been
constructed on this site. The first building is expected to provide additional
capacity for the production of Safeskin's surgical and cleanroom glove products
and was completed in the fourth quarter of 1998. The second building is expected
to house the expansion of Safeskin's Tactylon(R) synthetic medical examination
and surgical glove products and Safeskin's nitrile glove production. This
building is expected to increase by over 200 percent the production capacity of
the Tactylon(R) product line in comparison to the existing facility which is
located in Vista, California. Finally, the additional two buildings are expected
to provide Safeskin increased capacity for latex and synthetic medical
examination, surgical and scientific glove production. The new buildings,
machines and supporting infrastructure at the new Sadao manufacturing facility
and the fifth building at the Hat Yai facility are currently expected to cost
approximately $80 million in the aggregate, approximately $48 million of which
had been expended as of December 31, 1998.

    In the fourth quarter of 1998, Safeskin began construction of a facility in
southern Thailand designed to manufacture boxes and ceramic handformers for the
Company's use. This facility is expected to allow Safeskin to further integrate
its manufacturing operations to gain better control over the quality,
timeliness, costs and reliability of these products. This facility is expected
to commence production in May 1999 and is expected to produce approximately 80%
of Safeskin's requirements. The total expected costs for the construction of
these facilities will be approximately $7 million.

    On December 13, 1996, Safeskin announced plans to move all of its remaining
latex medical examination glove production from its Malaysian facility to its
Thailand facility. Safeskin also announced that the Malaysia facility would
continue to operate as Safeskin's manufacturing source of higher-value
synthetic, surgical and scientific products. In connection with the move,
Safeskin recognized expense of approximately $3 million in the fourth quarter of
1996 reflected in the accompanying financial statements as a component of
restructuring and other unusual charges. Subsequent to December 31, 1996,
Safeskin extended the planned use of the Malaysian facility due to existing
production requirements and the timing of bringing new production capacity
on-line in Thailand. In December 1998, Safeskin recognized expense of
approximately $5 million to reflect the write-down of fixed assets at Safeskin's
facilities in Malaysia and Vista and Santa Maria, California. The write-down is
reflected in the accompanying financial statements as a component of
restructuring and other unusual charges. This write-down was a result of (i)
Safeskin's expectation that its previously announced plans to move all remaining
examination, surgical and synthetic glove production from its Ipoh, Malaysia and
Vista, California facilities would be completed during the first quarter of 1999
and (ii) the relocation, during the fourth quarter of 1998, of AQL's sales and
corporate operations to Safeskin's corporate headquarters.



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    Although Safeskin has never experienced an interruption in the availability
of latex due to natural phenomena or transportation problems or by a factory
shutdown resulting from fire, power outage, employee strike or other cause,
there can be no assurance that Safeskin's production of gloves will not be
adversely affected by such events.

COMPETITION

    Safeskin faces substantial competition from a number of manufacturers of
disposable gloves. The leading competitors in the medical glove product line are
Allegiance Corporation ("Allegiance"), Ansell-Perry, Inc., Maxxim Medical, Inc.,
Microflex Medical Corporation, and Johnson & Johnson Medical, Inc. Safeskin's
management believes that Allegiance is also the leading competitor in the high
technology and scientific markets. There are also a number of other competitors
which are engaged in manufacturing or distributing high technology and
scientific gloves. Many of Safeskin's competitors have substantially greater
financial, manufacturing, marketing and technical resources than Safeskin.

    Safeskin's management believes the primary competitive factors within its
markets are product quality, durability, reliability, consistency, clinical
value, ease of product use, access to distribution channels, price and the
availability of prompt delivery. Failure of Safeskin to continue to distinguish
its products on the basis of any of these factors could have a material adverse
effect on Safeskin's business, results of operations or financial condition.
Furthermore, there can be no assurance that Safeskin's competitors or others
will not develop products, manufacturing processes or new technologies which
would be more cost effective or more efficient than those of Safeskin or that
Safeskin's gloves will not be rendered obsolete or uncompetitive. Such
competition could have a material adverse effect on Safeskin's business, results
of operations or financial condition.

GOVERNMENT REGULATION

    Safeskin's products are subject to regulation by numerous governmental
authorities in the United States and other countries, particularly as to safety
and efficacy and adherence to the Quality System Regulation ("QSR") for medical
devices. In the United States, examination and surgical gloves are classified as
Class I medical device products regulated by the FDA. The Federal Food, Drug,
and Cosmetic Act (the "FFD&C Act") and other federal statutes and regulations
govern or influence the testing, manufacture, safety, labeling, storage,
record-keeping, clearance, advertising and promotion of Class I devices.
Noncompliance with the FFD&C Act or regulations promulgated thereunder can
result in administrative enforcement, such as warning letters, import alerts and
administrative detention, or in civil penalties, product bans, defect
notifications, mandatory field corrections, seizures, recalls, injunctions and
criminal prosecution. Periodically the FDA inspects shipments of medical gloves
as they arrive in United States ports. The time period during which the tests
are conducted and the FDA review of the results may cause delays in delivery and
thus can result in a loss or delay in recognition of income by Safeskin.

    Medical examination and surgical gloves must be submitted to the FDA for
clearance to market by a pre-market notification filing under Section 510(k) of
the FFD&C Act. An application is made for a particular use or performance claim
for each type of glove produced by a specific manufacturer. Applications under
the 510(k) procedure must demonstrate substantial equivalence to a legally
marketed device. Additional data requirements apply to gloves such as surgical
gloves, which are sterile. Applicants must defer marketing until a written order
is issued by the FDA finding the firm's device substantially equivalent to a
legally marketed device. This notice may be issued within 90 days of submission,
but may take substantially longer. The FDA, however, may determine that the
proposed device is not substantially equivalent, or the agency may require
Safeskin to submit further information, such as additional test data, before it
is able to make a substantial equivalence determination. Such an adverse
determination or request for additional information could have the effect of
materially delaying the commencement of marketing. As part of the substantial
equivalence determination, Safeskin must demonstrate that the glove complies
with the American Society of Testing and Materials testing standards relating to
physical specifications for the product and must pass the FDA "leakage test." In
addition, the FDA may inspect the manufacturing facilities before issuing a
notice of substantial equivalence and may delay or decline to issue such notice.

    Safeskin has obtained 510(k) clearance for each type of currently marketed
glove which requires clearance. Safeskin has not experienced any substantial
difficulty in obtaining 510(k) clearances in the past. If Safeskin makes any
changes to a type of glove previously cleared by the FDA that could
significantly affect its safety or effectiveness (such as significant changes in
the manufacturing process), a new 510(k) submission will be required.

    Safeskin is subject to periodic inspection by the FDA for compliance with
QSR regulations. Under QSR regulations, Safeskin is subject to significant
procedural and documentation requirements with respect to manufacturing,
packaging, storage and control activities. Safeskin also may be subject to
inspection by foreign regulatory authorities to determine compliance with
comparable standards. Due to the FDA's recently promulgated QSR regulations for
medical devices which incorporate preproduction design and development controls
into one



                                       8
<PAGE>   9

system with quality system requirements worldwide, Safeskin must continue to
expend time, monies and efforts in the areas of production and quality control
to ensure full technical compliance with these standards.

    Safeskin must also comply with various FDA labeling and post-market
reporting requirements. Failure to comply with applicable regulatory
requirements can result in administrative enforcement, such as warning letters,
import alerts and administrative detention, or in product bans, field
corrections, seizures, recalls, injunctions and criminal prosecutions. Changes
in existing requirements or adoption of new requirements could adversely affect
the ability of Safeskin to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on
Safeskin's business, results of operations or financial condition.

    Whether or not FDA clearance is obtained for a new product, approval or
clearance of a product by regulatory authorities in foreign countries may be
required prior to the commencement of commercial sales of the product in such
countries. The requirements governing product approvals or clearances vary
widely from country to country and the time required for approval may be longer
or shorter than that required for FDA approval.

    In August 1989, Safeskin received FDA clearance to market non-sterile latex
gloves labeled "hypoallergenic." This clearance, which was also obtained for
subsequent versions of Safeskin's latex gloves, was based on the low level of
residual chemicals in the gloves following their manufacture, as demonstrated by
their passing the modified Draize test for hypoallergenicity. The clearance did
not relate to the level of latex proteins in the glove, which at that time was
not recognized as a potential issue. It was subsequently discovered that
proteins in latex gloves may provoke allergic reactions in latex allergic
individuals. As a result, in June 1996, the FDA proposed issuing regulations
prohibiting the use of the term "hypoallergenic" on latex gloves. In 1997, the
FDA issued regulations to that effect, which became effective September 30,
1998. Recognizing that certain users of its latex gloves might mistake the term
"hypoallergenic" to apply to latex proteins rather than chemical residuals only,
Safeskin has already removed the term "hypoallergenic" from its packaging in
advance of the FDA mandated regulation.

    Safeskin must meet various regulatory requirements for the sale and
distribution of its products throughout the European Union ("EU"). Safeskin
currently meets such regulatory requirements for the majority of its products
sold in Europe, as evidenced by the inclusion of the CE mark in product
labeling. The approval to "CE" mark its products was gained, in part, by having
each manufacturing facility's quality system registered with a European Notified
Body which is authorized to grant such approvals.

    Safeskin's customers typically do not bill third-party reimbursement sources
separately for purchases of Safeskin's gloves. However, Safeskin's ability to
sell its medical gloves profitably may depend in part on the reimbursement
policies and regulations of government health administration authorities,
private health insurers and other organizations. Such third-party payors are
increasingly seeking to reduce the price of medical products and services.
Additionally, certain legislative measures, if adopted, could adversely affect
the pricing of, or the amount or availability of reimbursement for, Safeskin's
medical gloves.

    In addition to the statutes and regulations described above, Safeskin is
also subject to U.S., Malaysian and Thai occupational, health and environmental
laws and regulations.

PRODUCT LIABILITY AND INSURANCE

    Participants in the medical supply industry are subject to lawsuits alleging
product liability, many of which involve significant damage claims and defense
costs. Safeskin currently has in force product liability insurance policies.
Safeskin's insurance policies are on a "claims made" basis. Successful claims
against Safeskin in excess of Safeskin's insurance coverage could have a
material adverse effect on Safeskin's business, results of operations or
financial condition. Claims made against Safeskin, regardless of their merit,
also could have a material adverse effect on Safeskin's reputation. There can be
no assurance that the coverage limits of Safeskin's insurance policies will be
adequate. While Safeskin has been able to obtain product liability insurance in
the past, such insurance varies in cost, is difficult to obtain and may not be
available in the future on acceptable terms or at all. See "Legal Proceedings."

EMPLOYEES

    As of December 31, 1998, Safeskin had approximately 7,200 employees, of whom
approximately 6,900 were employed in Thailand and Malaysia. The Malaysian
factory workers are represented by a company union which has entered into a
collective bargaining agreement with Safeskin's Malaysian subsidiary. The
agreement was reinstated beginning October 1, 1997 and expiring on September 30,
2000. As of March 30, 1999, Safeskin had approximately 7,200 employees in
Thailand and 222 in Malaysia, as the Company has terminated substantially all of
the Malaysian employees in connection with the transfer of manufacturing
operations from Malaysia to



                                        9
<PAGE>   10

Thailand. The Company anticipates that an additional 191 employees in Malaysia
will be terminated during the second quarter of 1999. Safeskin considers its
relations with its employees to be good.

ITEM 2. PROPERTIES

    Safeskin owns two manufacturing facilities located in Ipoh, Malaysia,
totaling approximately 300,000 square feet, and a latex concentrate
manufacturing and processing plant located in Seremban, Malaysia, comprised of
approximately 30,000 square feet. Safeskin leases the land where its facilities
are located under long-term leaseholds from the state government which have
expiration dates ranging from the year 2063 to the year 2072. Any transfer of a
land leasehold by Safeskin requires the prior approval of the state. Safeskin
has announced plans to close the Malaysian facility during 1999. See "Management
Discussion and Analysis of Financial Condition and Results of Operation -
Restructuring."

    Safeskin also owns a manufacturing facility in Hat Yai, Thailand totaling
approximately 500,000 square feet. Safeskin owns the approximately 42 acres of
land on which the facility is located. In addition, Safeskin also owns a latex
concentrate manufacturing and processing plant located in Nathavee District, 50
kilometers from Hat Yai, Thailand totaling approximately 94,000 square feet.
Safeskin owns the 40 acres of land on which this facility is located. Safeskin
owns approximately 54 acres of land in Sadao, Thailand on which the new
manufacturing facility is being constructed. This new facility will have
approximately 940,000 square feet upon completion.

    In the United States, Safeskin leases approximately 21,000 square feet of
warehouse space, approximately 90,000 square feet of office space and
approximately 17,000 square feet of manufacturing space.

    In Mexico, Safeskin leases 11,000 square feet located in La Mesa, Tijuana
for the packing and distribution operations of Tactyl.

ITEM 3. LEGAL PROCEEDINGS

    As of December 31, 1998, approximately 213 product liability lawsuits
seeking monetary damages, in most cases of an unspecified amount, were pending
in federal and state courts against Safeskin and other manufacturers of latex
gloves. These lawsuits allege injuries ranging from dermatitis to severe
allergic reactions caused by the residual chemicals or latex proteins in gloves
worn by medical workers while performing their duties. On February 26, 1997, the
Judicial Panel on Multi-District Litigation entered an order transferring all
latex allergy lawsuits brought on behalf of healthcare workers against Safeskin
and other latex glove manufacturers in the Federal courts to the United States
District Court for the Eastern District of Pennsylvania, consolidating those
cases for discovery management and other pre-trial proceedings. Safeskin has
referred the defense of these lawsuits to its insurance carriers.

    Since March 11, 1999, approximately fifteen lawsuits (collectively the
"Securities Actions") have been filed in the U.S. District Court for the
Southern District of California against Safeskin and certain officers and
directors alleging violations of Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The Securities
Actions were brought by plaintiffs in their individual capacity and on behalf of
purported class of persons who purchased or otherwise acquired Safeskin publicly
traded securities during various periods occurring between October 23, 1997 and
March 11, 1999. They allege that plaintiffs purchased Safeskin securities at
prices artificially inflated by defendants' misrepresentations and omissions
concerning Safeskin's financial condition and prospects and seek an unspecified
amount of damages. In addition, a shareholder derivative action has been filed
against certain of Safeskin's directors, and Safeskin as a nominal defendant, in
the Supreme Court of the State of California, San Diego County (the "Derivative
Action"). The Derivative Action alleges breach of fiduciary duty, waste of
corporate assets and gross negligence in connection with Safeskin's stock buy
back program and seeks an unspecified amount of damages. Defendants' time to
respond to the allegations made in the Securities Actions and the Derivative
Action has not yet expired, however, Safeskin believes that these claims are
without merit and intends to contest the claims vigorously.

    From time to time, Safeskin is involved in other litigation relating to
claims arising out of its operations in the normal course of business. As of the
date hereof, Safeskin is not a party to any other legal proceedings, the adverse
outcome of which, in management's opinion, individually or in the aggregate,
would have a material adverse effect on Safeskin's business, results of
operation or financial condition.

    Safeskin's tax returns for the years ended December 31, 1995, 1996 and 1997
are currently being audited by the Internal Revenue Service.



                                       10
<PAGE>   11

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

    None.

                                     PART II

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

    (a)  MARKET INFORMATION

    Safeskin's Common Stock trades on The Nasdaq Stock Market(sm) under the
symbol "SFSK." The following table sets forth the high and low sales prices of a
share of Safeskin's Common Stock for each quarter in 1997 and 1998, and the
interim period indicated, as reported by The Nasdaq Stock Market(sm) and
restated to give effect to the 100% stock dividends distributed on April 1, 1998
and January 2, 1997.

<TABLE>
<CAPTION>
                             High          Low
                             ----          ---
<S>                         <C>           <C>
1997
First Quarter               13 5/8        8 13/16
Second Quarter              14 3/4        8 13/16
Third Quarter               23 13/16      14
Fourth Quarter              29            20

1998
First Quarter               37 3/16       25 3/4
Second Quarter              45            31 3/4
Third Quarter               47 1/8        29 7/8
Fourth Quarter              35 1/4        17 3/8

1999                                     
First Quarter               26 1/4        7 3/8
(through March 26,                       
1999)
</TABLE>

    The closing price of Safeskin's Common Stock on March 26, 1999, as reported
by The Nasdaq Stock Market(sm) was $ 7 15/32.

    (b)  HOLDERS

    The number of record holders of Safeskin's common stock as of March 26, 1999
was 780. Safeskin believes that a larger number of beneficial owners hold such
shares of Common Stock in depository or nominee form.

    (c)  DIVIDENDS

    Safeskin has not paid cash dividends on its common stock and does not intend
to pay any cash dividends in the foreseeable future.



                                       11
<PAGE>   12

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except share and per
share data)

    The following selected consolidated financial data of Safeskin for the five
years ended December 31, 1998 are derived from the audited consolidated
financial statements of Safeskin, except for per share information, which has
been restated to give effect to the 100% stock dividends of the common stock
effected on April 1, 1998 and January 2, 1997. The consolidated financial
statements as of December 31, 1998 and 1997 and for each of the three years
ended December 31, 1998, 1997, 1996 are included elsewhere in this Report. The
financial information for Safeskin at December 31, 1995 and 1994 was derived
from financial statements of Safeskin not included in this Report. The following
information should be read in conjunction with the Consolidated Financial
Statements of Safeskin and the related notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information included elsewhere in this Report.


<TABLE>
<CAPTION>
                                            1998            1997             1996            1995           1994
                                          ---------       ---------       ---------       ---------       ---------
<S>                                       <C>             <C>             <C>             <C>             <C>      
STATEMENT OF OPERATIONS
DATA:
Net sales                                 $ 231,784       $ 182,998       $ 146,089       $ 117,014       $  84,142
Costs of goods sold                         110,746         102,229          87,004          78,256          52,079
                                          ---------       ---------       ---------       ---------       ---------
Gross profit                                121,038          80,769          59,085          38,758          32,063
Selling expenses                             24,834          18,615          15,014          13,620           9,982
Research and development                      6,347           3,504           2,209           1,493             977
General and administrative expenses          30,243          15,923          12,287           6,397           3,625
Restructuring and other unusual
charges                                      14,331              --           2,979              --              --
                                          ---------       ---------       ---------       ---------       ---------
Income from operations                       45,283          42,727          26,596          17,248          17,479
Interest expense (income), net                3,026            (823)            (58)            194              17
Other expense (income), net                  (3,085)         (2,699)            133            (163)           (825)
                                          ---------       ---------       ---------       ---------       ---------
Income before income tax                     45,342          46,249          26,521          17,217          18,287
Income tax provision                          3,473           4,999           2,939           2,326           3,920
                                          ---------       ---------       ---------       ---------       ---------
Net income                                $  41,869       $  41,250       $  23,582       $  14,891       $  14,367
                                          =========       =========       =========       =========       =========
Net income per share-basic(1)(2)          $     .78       $     .79       $     .46       $     .30       $     .29
Net income per share-diluted(1)(2)        $     .70       $     .70       $     .42       $     .29       $     .28
Weighted average common shares
outstanding-basic                            53,344          52,261          50,944          49,500          49,013
Weighted average common shares
outstanding-diluted                          60,120          58,538          55,551          51,210          50,783


BALANCE SHEET DATA:
Working capital                           $  51,137       $  43,201       $  48,310       $  28,055       $  22,987
Total assets                                248,961         138,520         116,749          84,675          61,230
Long-term debt                               87,731              --              --           2,750              --
Shareholders' equity                        121,412         106,578         103,015          69,861          54,260
</TABLE>


(1)  The number of shares outstanding has been adjusted to reflect the 100%
     stock dividends of the Common Stock distributed on April 1, 1998 and
     January 2, 1997.



                                       12
<PAGE>   13

(2)  Net income per share-diluted is computed by dividing net income by the
     weighted average of common shares outstanding and dilutive common stock
     equivalents. Common stock options are common stock equivalents and are
     included in the weighted average of common shares outstanding using the
     treasury stock method.



                                       13
<PAGE>   14

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

    The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto incorporated by
reference herein.

General

    Safeskin's net sales have grown substantially over the past several years.
Safeskin attributes the growth in net sales during this period principally to
increased market penetration due to the implementation of sales and marketing
programs, the introduction of new products and growth in markets for its
products. Safeskin introduced lightly powdered medical gloves in 1989,
powder-free medical gloves in 1990, HypoClean(R) powder-free gloves in 1992,
powder-free latex surgical gloves in 1994, various high technology and
scientific nitrile gloves in 1995, and Safeskin 2000(TM) powder-free latex
surgical gloves in 1996. In 1997, Safeskin began selling a medical examination
glove made of nitrile, a non-latex material. Additionally, in 1997, as a result
of its acquisition of the synthetic glove business of Tactyl Technologies, Inc.
("Tactyl"), Safeskin began selling Tactylon(R) synthetic examination and
surgical gloves. In February 1998, as a result of its acquisition of Absolute
Quality Leadership, Inc. ("AQL"), Safeskin expanded its current product line
associated with the high-technology and scientific markets to include a broad
line of proprietary latex and synthetic glove products, specifically designed
for the microelectronics, health technologies and general laboratory and safety
market segments. Although Safeskin has continued to develop new products and
expects to do so in the future, no assurance can be given that the new products
will be accepted in the marketplace or will have similar growth rates.

    Safeskin's net sales are derived from the sale of finished products, net of
contractual allowable rebates, incentives, fees and allowance for estimated
returns. These rebates are provided to distributors for the resale of Safeskin's
products in specific volumes to specified end user customers and fees are
provided to group purchasing organization based on sales made to their member
organizations. Safeskin estimates allowable rebates, on a monthly basis, through
the analysis of actual sales information from distributors, Safeskin's
projections of distributor inventories, contractual arrangements and historical
and projected trends related to actual rebates issued. The Company establishes
an allowance for estimated returns based on historical return patterns and
estimated future returns. Cost of goods sold includes all costs to manufacture
the finished product plus related costs associated with ocean freight, customs
duty, warehousing and product delivery expenses. Selling expenses include
salaries for sales and marketing staffs and other related expenses such as sales
commissions, and costs associated with travel, trade show participation and
advertising. Research and development expenses include salaries for research and
development staffs and related expenses for consulting, product testing and
travel. General and administrative expenses include salaries for administrative
and information technology staffs and related expenses for travel, insurance,
facilities, consulting and professional fees. The income tax provision is
substantially less than statutory rates as a result of the tax-free status of
Safeskin's foreign manufacturing operations. Safeskin's existing Thailand
manufacturing facilities have been granted tax-free status through 2003 and have
been granted a reduced tax rate through 2007. In 1998, Safeskin built new
production facilities in Thailand, and applied for and received similar tax-free
status for these operations. These new facilities in Thailand have been granted
tax-free status through 2006 and were granted a reduced tax rate through 2010.
Safeskin's Malaysian manufacturing operations were granted five years of
tax-free status which expired on September 30, 1998. The expiration of this
tax-free status is not expected to have a material adverse effect upon
Safeskin's operations as the Malaysian manufacturing operations are expected to
be transferred to Thailand during the first quarter of 1999. During the third
quarter of 1998, two of Safeskin's subsidiaries entered into a transaction that
qualified as a Section 351 Exchange, as defined in Section 351 of the Internal
Revenue Code.

Restructuring

    During 1996, Safeskin announced plans to move all of its remaining latex
examination glove production from its Malaysian facility to its Thailand
facility. Safeskin also announced that the Malaysian facility would continue to
operate as Safeskin's manufacturing source of higher-value synthetic, surgical,
and scientific products. In connection with the move, Safeskin recognized
expense of approximately $3 million in the fourth quarter of 1996, reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. At December 31, 1996, the Malaysian facility was considered
held for sale. During 1997, Safeskin extended the planned use of the Malaysian
facility due to existing production requirements and the timing of bringing new
production capacity on-line in Thailand. During 1998, Safeskin successfully
increased its examination glove production capacity at its existing Thailand
facility and in 1998, Safeskin commenced operations at its new 54-acre
manufacturing facility in Thailand. This facility was constructed to provide
additional capacity for the production of Safeskin's synthetic, surgical, and
scientific products. As a result of this increased production capacity in
Thailand for specialized gloves, during 1998 Safeskin decided to move all of its
remaining examination, surgical, and synthetic glove production from its Ipoh,
Malaysia and Vista, California production facilities to Safeskin's manufacturing
facilities in Thailand by the end of the first quarter of 1999. In addition,
Safeskin completed the integration of AQL in the fourth quarter of 1998 by
relocating



                                       14
<PAGE>   15

AQL's offices from Santa Maria, California to Safeskin's corporate headquarters
in San Diego, California. In connection with the closure of Safeskin's
facilities in Ipoh, Malaysia and Vista and Santa Maria, California, Safeskin
recognized expense of $14,331,000 in the fourth quarter of 1998, reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. This expense consists of approximately $5,134,000 related to
fixed assets written down to estimated fair value, $3,883,000 related to
employee termination costs, $3,335,000 related to impairment of goodwill
associated with the Tactyl acquisition, $1,535,000 related to the write-off of
leased equipment and the costs to renovate a leased facility, and approximately
$444,000 associated with various other unusual charges. All remaining assets
were assumed to be scrapped at the disposition date. The net book value of
assets expected to be disposed of totaled approximately $14 million as of
December 31, 1998.

1998 COMPARED TO 1997

    Net sales for 1998 were $231,784,000 which represents a 26.7% increase over
net sales of $182,998,000 in 1997. The predominant causes for the sales growth
were an increase in unit volumes sold and the shift in product mix to higher
priced powder-free gloves in the 1998 period as compared to the 1997 period.
Safeskin's sales into international markets continued to demonstrate strong
growth in 1998; international net sales increased by 20.7% over the prior year.
However, in 1999 Safeskin anticipates that net sales will be negatively affected
by higher than estimated distributor inventory levels, slower than anticipated
increase in orders from the new end-user contracts and increased pricing
pressures in the industry.

    Cost of goods sold increased 8.3% from $102,229,000 for 1997 to $110,746,000
for 1998. As a percentage of net sales, cost of goods sold decreased from 55.9%
in 1997 to 47.7% in 1998. This decrease in cost of goods sold as a percentage of
net sales was attributable to the continued shift of production to Thailand's
lower comparable product cost manufacturing facility and to the shift of product
mix to higher margin powder-free gloves in 1998. In addition, Safeskin's gross
profit margin was favorably impacted in 1998 due to the positive effects on the
cost of goods sold of the devaluation of the currencies in Thailand and
Malaysia. In 1997, the positive effects of the devaluation of the currencies in
Thailand and Malaysia did not begin to have a favorable impact on Safeskin's
gross profit margin until the fourth quarter of 1997. As a result of the above
factors, gross profits increased 50.0% from $80,769,000 in 1997 to $121,038,000
in 1998. However, in 1999 Safeskin anticipates that gross profit margins will be
negatively affected by startup costs associated with transferring operations to
the new Thailand facility, wind-down costs associated with the closing of the
Malaysian manufacturing facility and increased pricing pressures in the
industry. In addition, if the baht remains at its present level it would
negatively impact cost of goods sold.

    Selling expenses increased 33.4% from $18,615,000 in 1997 to $24,834,000 in
1998. As a percentage of net sales, selling expenses increased slightly from
10.2% in 1997 to 10.7% in 1998. The increase in selling expenses as a percentage
of net sales pertains primarily to increased costs and expenses related to
Safeskin's efforts to introduce new products and expand its business in high
technology and scientific markets.

    Research and development expenses increased 81.1% from $3,504,000 in 1997 to
$6,347,000 in 1998. As a percentage of net sales, research and development
expenses increased from 1.9% in 1997 to 2.7% in 1998. The increase in research
and development expenses as a percentage of net sales is primarily due to costs
associated with developing and testing 21 new products scheduled for
introduction in 1998 and 1999.

    General and administrative expenses increased 89.9% from $15,923,000 in 1997
to $30,243,000 in 1998. As a percentage of net sales, general and administrative
expenses increased from 8.7% for the 1997 period to 13.0% for the 1998 period.
The increase in general and administration expenses as a percentage of net sales
was due to increased costs associated with Safeskin's efforts to improve and
streamline its information technology systems and services, increased
compensation costs, increased legal and other related costs associated with
product liability lawsuits, and expenses associated with the operation of AQL.
In addition, as part of the terms of separation, non-competition and
non-solicitation agreements between Safeskin and three former officers, Safeskin
extended the time within which each officer could vest in and exercise
previously granted stock options and recorded aggregate non-cash compensation
expense of approximately $3.0 million during 1998.

    Income from operations increased 6.0% from $42,727,000 in 1997 to
$45,283,000 in 1998. Operating margins decreased from 23.3% in 1997 to 19.5% in
1998. Excluding the effects of the restructuring and other unusual charges in
1998, income from operations increased 39.5% from $42,727,000 in 1997 to
$59,613,000 in 1998. Operating margins, excluding the effects of the
restructuring and other unusual charges, would have been 25.7% in 1998.



                                       15
<PAGE>   16

    Interest expense (income), net, changed from $823,000 of interest income in
1997 to $3,026,000 of interest expense in 1998, primarily due to the fact that
in 1998 Safeskin had incurred interest expense on debt outstanding during the
period. By comparison, in 1997, Safeskin had no debt outstanding and generated
investment returns on its cash balances. In addition, the 1998 interest expense
includes nonrecurring interest costs totaling approximately $850,000 relating to
a write-off in 1998 of capitalized interest costs associated with a 1998
financing activity.

    Other expense (income), net, increased from $2,699,000 of other income in
1997 to $3,085,000 of other income in 1998. Safeskin experienced significant
foreign currency transaction gains, net of hedging contracts, in Safeskin's
Malaysian and Thailand subsidiaries in 1997 and experienced significant foreign
currency transaction gains, net of hedging contracts, primarily in its European
and Thailand subsidiaries in 1998.

    Provision for income taxes decreased 30.5% from $4,999,000 in 1997 to
$3,473,000 in 1998. The income tax provisions recorded in both 1997 and 1998
remain less than statutory rates due primarily to the tax-free status of a
significant portion of Safeskin's foreign manufacturing operations.

    Net income increased 1.5% from $41,250,000 in 1997 to $41,869,000 in 1998
and the net income margin decreased from 22.5% in 1997 to 18.1% in 1998 due to
the foregoing factors. Excluding the effects of the restructuring and other
unusual charges (including nonrecurring interest costs) in 1998, net income
increased 38.3% from $41,250,000 in 1997 to $57,050,000 in 1998. Net income
margin, excluding the effects of the restructuring and other unusual charges
(including nonrecurring interest costs), was 24.6% in 1998.

1997 COMPARED TO 1996

    Net sales for 1997 were $182,998,000 which represents a 25.3% increase over
net sales of $146,089,000 in 1996. The predominant cause for the sales growth
was an increase in unit volumes sold during the 1997 period, which includes
sales of lightly-powdered gloves associated with Safeskin's new contracts with
group purchasing organizations as well as increased sales of powder-free exam
gloves, powder-free surgical gloves and scientific glove products. Safeskin's
sales into international markets continued to demonstrate strong growth in 1997;
international net sales increased by 24.8% over the prior year.

    Cost of goods sold increased 17.5% from $87,004,000 for 1996 to $102,229,000
for 1997. As a percentage of net sales, cost of goods sold decreased from 59.6%
in 1996 to 55.9% in 1997. This decrease in cost of goods sold as a percentage of
net sales was principally attributable to the favorable impact of greater
manufacturing efficiencies, the continued shift of production to Safeskin's
lower-cost manufacturing facility in Thailand, and lower latex prices. Although
sales of Safeskin's lower margin lightly powdered gloves increased slightly as a
percentage of net sales in the 1997 period as compared to the 1996 period, the
impact on the gross profit margin was partially offset by increased sales of
higher margin powder-free surgical and scientific glove products. In addition,
Safeskin's gross profit margin was favorably impacted in 1997 due to the
positive effects of the significant devaluation of the currencies in both
Malaysia and Thailand. As a result of the above factors, gross profits increased
36.7% from $59,085,000 in 1996 to $80,769,000 in 1997.

    Selling expenses increased 24.0% from $15,014,000 in 1996 to $18,615,000 in
1997. As a percentage of net sales, selling expenses decreased slightly from
10.3% in 1996 to 10.2% in 1997.

    Research and development expenses increased 58.7% from $2,209,000 in 1996 to
$3,504,000 in 1997. As a percentage of net sales, research and development
expenses increased from 1.5% in 1996 to 1.9% in 1997. The increase in research
and development expenses as a percentage of net sales reflects an increase in
Safeskin's product testing, research and development personnel and research and
development costs related to the Tactylon(R) product line.

    General and administrative expenses increased 29.6% from $12,287,000 in 1996
to $15,923,000 in 1997. As a percentage of net sales, general and administrative
expenses increased slightly from 8.4% for the 1996 period to 8.7% for the 1997
period. The increase in general and administrative expenses as a percentage of
net sales was caused primarily by increased costs associated with Safeskin's
acquisition of Tactyl Technologies, Inc.

    On December 13, 1996, Safeskin announced plans to move all of its remaining
latex examination glove production from its Malaysian facility to its Thailand
facility in 1997. In connection with the move, Safeskin took a $3 million charge
against earnings in the fourth quarter of 1996, reflected in the accompanying
financial statements as a component of restructuring and other unusual charges.
During 1997, Safeskin extended the planned use of the Malaysian facility due to
existing production requirements and the timing of bringing new



                                       16
<PAGE>   17

production capacity on-line in Thailand. The Malaysian facility is still
considered held for sale and the delay in moving examination glove production
from Malaysia to Thailand has had no impact on Safeskin's restructuring plan and
the restructuring charge recorded in 1996.

    Income from operations increased 60.6% from $26,596,000 in 1996 to
$42,727,000 in 1997. Operating margins increased from 18.2% in 1996 to 23.3% in
1997. Excluding the effects of the restructuring charge in 1996, income from
operations increased 44.5% from $29,575,000 in 1996 to $42,727,000 in 1997.
Operating margins, excluding the effects of the restructuring charge, would have
been 20.2% in 1996.

    Interest expense (income), net, increased from $58,000 of interest income in
1996 to $823,000 of interest income in 1997, and is primarily due to the fact
that in 1997 Safeskin did not have any debt outstanding and generated investment
returns on its increased cash balances. Since 1996, Safeskin has been able to
successfully fund its operations, including its acquisition of Tactyl
Technologies, Inc. and the expansion of Safeskin's foreign manufacturing
operations, with internally generated cash while, at the same time, generating
excess cash balances.

    Other expense (income), net, changed from $133,000 of other expense in 1996
to $2,699,000 of other income in 1997. This change in other expense was
substantially due to net foreign currency transaction gains experienced in
Safeskin's Malaysian and Thailand subsidiaries in 1997. Due to their
immateriality and because substantially all of the sales of these subsidiaries
were intercompany sales, the gains and losses from foreign currency transactions
for Safeskin's Malaysian and Thailand subsidiaries were recorded as a component
of cost of sales in 1996. With the significant devaluation of the Malaysian
ringgit and the Thai baht since June 30, 1997, Safeskin has experienced an
increased amount of net foreign currency transaction gains and, therefore, has
recorded these net foreign currency transaction gains as a component of other
expense (income), net in 1997. In future periods, Safeskin will record net
foreign currency transaction gains and losses, regardless of materiality, as a
component of other expense (income), net.

    Provision for income taxes increased 70.1% from $2,939,000 in 1996 to
$4,999,000 in 1997. The income tax provisions recorded in both 1996 and 1997
remain less than statutory rates due to the tax-free status of Safeskin's
foreign manufacturing operations.

    Net income increased 74.9% from $23,582,000 in 1996 to $41,250,000 in 1997
and the net income margin increased from 16.1% in 1996 to 22.5% in 1997 due to
the foregoing factors. Excluding the effects of the restructuring charge in
1996, net income increased 55.3% from $26,561,000 in 1996 to $41,250,000 in
1997. Net income margin, excluding the effects of the restructuring charge, was
18.2% in 1996.

LIQUIDITY AND CAPITAL RESOURCES

    Safeskin began operating certain of its new manufacturing facilities in the
second half of 1998, which enabled Safeskin to increase its production capacity
during 1998. From July 1997 to June 1998, Safeskin operated with its customers
on an allocation of product basis i.e. Safeskin was only able to fulfill a
portion of each distributor's orders. As Safeskin increased production capacity,
Safeskin's sales personnel began a new and increased sales program directed at
new and current end-user customers. As part of this sales program, Safeskin, its
distributors and certain end-users entered into new three-way contracts
providing for the pricing and supply of Safeskin products to such end-users.
During the third quarter and the fourth quarter of 1998, Safeskin's distributors
increased their orders from Safeskin to enable them to fulfill new sales they
anticipated would be placed pursuant to these contracts. As a result of these
factors, Safeskin's accounts receivable increased from $22,196,000 at December
31, 1997 to $32,511,000 at December 31, 1998 and inventory increased from
$21,243,000 at December 31, 1997 to $37,057,000 at December 31, 1998. Safeskin
expected these trends to continue into the first quarter. However, end-users
have not purchased products under the new contracts as quickly as anticipated.
In addition, during the first quarter of 1999 the Company has experienced a
longer than anticipated sales cycle for signing new contracts. As a result,
Safeskin expects sales and earnings for the first quarter and full year 1999 to
be lower than anticipated.

    In order to reduce debt and increase cash flow in conjunction with
Safeskin's plan to refinance its debt, Safeskin entered into a Non-Recourse
Receivables Purchase Agreement in December 1998. Under the agreement, Safeskin
sold accounts receivable valued at approximately $8,000,000 on a non-recourse
basis. Proceeds from the sale were used to repay monies owed under the Revolving
Credit Facility.

    Safeskin acquired capital assets of approximately $65,360,000 during 1998,
$35,183,000 during 1997, and $20,230,000 during 1996 primarily for the expansion
of Safeskin's foreign manufacturing operations. Included in the 1998 and 1997
amounts were approximately $57,476,000 and $31,015,000, respectively, for the
expansion of Safeskin's foreign manufacturing operations and latex concentrate
plant



                                       17
<PAGE>   18

located in Thailand. Included in the 1996 amount was approximately $16,441,000
for the expansion of Safeskin's foreign manufacturing operations and the
acquisition of land at Safeskin's manufacturing facility in Hat Yai, Thailand.

    During 1997, Safeskin completed construction and began operating the first
of its three production lines located in its Thailand facility, referred to by
Safeskin as the "Grand Master(TM)." The two additional production lines began
operating in the first quarter of 1998. Safeskin's management believes that a
single "Grand Master"(TM) production line has the highest capacity of any glove
production line in the world, equivalent in capacity to approximately eight of
the previously existing production lines in this facility. The construction of
these production lines has been funded with internally generated cash.

    In addition, Safeskin is currently building a latex concentrate plant in
Thailand. Safeskin began initial production of latex concentrate at this plant
in the third quarter of 1997 and expects the final phase of construction to be
completed in 1999. The output of the plant currently supplies approximately 70%
of the latex concentrate required by Safeskin's factories in Thailand and
Malaysia for the manufacture of its disposable latex gloves. Safeskin believes
that this plant allows it to integrate its manufacturing processes to gain
better control over the quality, cost and reliability of latex supplies.
Safeskin anticipates that the completion of this construction will be funded
with internally generated funds and borrowings under the credit facility.

    Safeskin is expanding its Thailand manufacturing operations and transferring
manufacturing capacity from California and Malaysia to capitalize on the
increased production efficiencies and lower operating costs in Thailand that
Safeskin expects to realize. Safeskin has recently completed construction of a
fifth building and related machinery at Safeskin's existing Hat Yai, Thailand
facility. This building houses 22 high-speed and product-flexible dipping
production lines which were commissioned throughout 1998, beginning in the
second quarter, and are expected to increase production capacity by an
additional 1.5 billion gloves annually. During 1999, Safeskin's expansion plans
include the completion of a second manufacturing facility in Sadao, Thailand
that is expected to produce latex and synthetic surgical, high-technology and
scientific and medical examination gloves. Construction of the new manufacturing
facility in Sadao, Thailand began in the second half of 1997 after approval by
the Thailand Board of Investment. Four production buildings have been
constructed on this site. The first building is expected to provide additional
capacity for the production of Safeskin's surgical and cleanroom glove products
and was completed in the fourth quarter of 1998. The second building is expected
to house the expansion of Safeskin's Tactylon(R) synthetic medical examination
and surgical glove products and Safeskin's nitrile glove production. This
building is expected to increase by over 200 percent the production capacity of
the Tactylon(R) product line in comparison to the existing facility which is
located in Vista, California. Finally, the additional two buildings are expected
to provide Safeskin increased capacity for latex and synthetic medical
examination, surgical and scientific glove production. The new buildings,
machines and supporting infrastructure at the new Sadao manufacturing facility
and the fifth building at the Hat Yai facility are currently expected to cost
approximately $80 million in the aggregate, approximately $48 million of which
has been expended as of December 31, 1998. Safeskin believes that its
significant investment in its manufacturing operations has increased Safeskin's
annualized production capacity from approximately 3.5 billion gloves to
approximately 5.5 billion gloves as of December 31, 1998. Financing for the
total capital expenditures for the two-year period is projected to come from
internally generated funds, with any shortfalls to be financed through
borrowings from the credit facilities.

    In the fourth quarter of 1998, Safeskin began construction of a facility in
southern Thailand designed to manufacture boxes and ceramic handformers for the
Company's use. This facility is expected to allow Safeskin to further integrate
its manufacturing operations to gain better control over the quality,
timeliness, cost and reliability of these products. This facility is expected to
commence production in May 1999 and is expected to produce approximately 80% of
Safeskin's requirements. The total expected costs for the construction of these
facilities is approximately $7 million. This construction is expected to be
funded through internally generated cash and borrowings under Safeskin's credit
facilities.

    On December 13, 1996, Safeskin announced plans to move all of its remaining
latex medical examination glove production from its Malaysian facility to its
Thailand facility. Safeskin also announced that the Malaysian facility would
continue to operate as Safeskin's manufacturing source of higher-value
synthetic, surgical and scientific products. In connection with the move of the
remaining latex medical examination glove production, Safeskin recognized
expense of approximately $3 million in the fourth quarter of 1996 reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. During 1997, Safeskin extended the planned use of the Malaysian
facility due to existing production requirements and the timing of bringing new
production capacity on-line in Thailand. During 1998, Safeskin successfully
increased its examination glove production capacity at its existing Thailand
facility and commenced operations at its new 54-acre manufacturing facility in
Thailand. This facility was constructed to provide additional capacity for the
production of Safeskin's synthetic, surgical, and scientific products. As a
result of this increased production capacity in Thailand for specialized gloves
during 1998, Safeskin decided to move all of its latex and synthetic examination
glove production from its Ipoh, Malaysia and Vista, California production
facilities to Safeskin's manufacturing facilities in Thailand by the end of the
first quarter of 1999. In addition, Safeskin announced that it had completed the
integration of AQL in the fourth quarter of 1998 by relocating AQL's offices



                                       18
<PAGE>   19

from Santa Maria, California to Safeskin's corporate headquarters in San Diego,
California. In connection with the closure of Safeskin's facilities in Ipoh,
Malaysia and Vista and Santa Maria, California, Safeskin recognized expense of
approximately $5 million that is reflected in the accompanying financial
statements as a component of restructuring and other unusual charges, to reflect
the fixed assets at Safeskin's Malaysia and Vista and Santa Maria, California
facilities at estimated fair value.

    Safeskin has outstanding contractual commitments at December 31, 1998 for
the construction of plant and equipment in Thailand in the approximate amount of
$12,481,000.

    In March 1997, Safeskin acquired the synthetic glove business of Tactyl
Technologies, Inc., a San Diego based developer and manufacturer of non-latex
surgical gloves for the domestic and international markets. The acquisition,
which has been accounted for under the purchase method, included an acquisition
price of approximately $14.5 million payable at the closing, plus up to an
additional $5 million payment which was contingent upon the Tactyl business
achieving certain future sales and performance targets, including the
development of the next generation of synthetic latex technology. Safeskin made
a final additional payment related to this agreement totaling approximately $3.3
million in 1998. The payment has been recorded as goodwill and is being
amortized over its remaining useful life.

    In February 1998, Safeskin completed the acquisition of AQL, a California
based marketer of glove products for the high-technology and scientific markets.
The acquisition, which has been accounted for under the purchase method,
included an acquisition price of approximately $8.8 million and $1,564,000 in
stock options issued plus certain contingent payments totaling approximately $2
million based upon the performance of the Company's scientific business unit.
Safeskin paid for this acquisition with internally generated cash.
Safeskin has changed the name of AQL to Safeskin Scientific Corporation.

    In May 1998, the Company acquired Sensicon Corporation, a San Diego based
developer and manufacturer of non-latex products. The acquisition, which has
been accounted for under the purchase method, included an acquisition price of
approximately $6 million in cash paid at the closing.

    During 1998, Safeskin had an unsecured two-year credit facility for
financing general working capital needs, up to a maximum of $40,000,000 in
borrowings (the "Revolving Credit Facility"). As of December 31, 1998, there was
approximately $12,000,000 outstanding under the Revolving Credit Facility. On
July 30, 1998, Safeskin, through its subsidiary Safeskin (B.V.I.) Limited
("Safeskin BVI"), entered into and closed a credit agreement for a $100 million
loan facility (the "BVI Facility") with Union Bank of California, N.A., as
Agent. The BVI Facility was secured by a first priority lien on the Common Stock
of Safeskin purchased by Safeskin BVI, a first priority lien on all the assets
of Safeskin BVI and a first priority pledge of the capital stock and beneficial
interest in Safeskin Corporation (Thailand) Limited. Safeskin BVI had the option
to accrue interest on the BVI Facility at an annual rate equal to either (i) the
base rate plus 0.25% or (ii) LIBOR plus 1.75%. As of December 31, 1998, there
was approximately $80,000,000 outstanding under the BVI Facility. During the
second half of 1998, Safeskin used a majority of the funds from the BVI Facility
to repurchase approximately two million shares of its Common Stock. The total
cost of the treasury stock acquired related to this share buyback totaled
approximately $73,600,000 for the year-to-date period ending December 31, 1998.
Borrowings above the cost of Safeskin's share buyback are being used to finance
(i) Safeskin's ongoing investment in its Thailand facilities where its
production capacity is expanding by nearly 60 percent above 1997 levels, (ii)
Safeskin's working capital requirements and (iii) other general corporate
purposes.

    On March 5, 1999, Safeskin entered into a $100 million loan agreement,
including a $60 million term loan (the "Term Loan") and a $40 million revolving
credit facility (the "Revolver") both maturing in 2004. The Term Loan and the
Revolver bear interest at approximately LIBOR plus 1.25%, however, the rate may
vary according to certain financial ratios. Concurrently, Safeskin also closed a
private placement of $40 million of senior secured notes due 2009 (the "Notes")
with a final maturity of ten years and an average life of seven-years. The Notes
bear interest at an annual fixed rate of 6.89%. The Notes constitute senior debt
of Safeskin, ranking pari passu with Safeskin's other senior bank indebtedness.
The proceeds of the Term Loan, the Revolver and the Notes were used to repay
amounts outstanding under the Revolving Credit Facility and BVI Facility, which
were subsequently canceled. The Term Loan, Revolver, and the Notes will all be
secured by certain assets of Safeskin as well as a guarantee of all current and
future significant domestic subsidiaries. Safeskin also entered into a seven
year lease (the "Lease") for a new corporate headquarters campus facility to be
constructed for Safeskin. The lessor of the campus has committed to fund up to a
maximum of $60 million for the construction of the campus, with the portion of
the committed amount actually used to be determined by Safeskin. Safeskin has
the option to purchase the leased premises at any time during the lease. If
Safeskin elects not to purchase the premises, Safeskin has guaranteed that the
lessor, upon subsequent sale of the building, will receive a percentage of the
total amount of funding, up to $53.9 million. The Company's lease obligations,
including the payment of rents and the payment of the guaranteed residual value
is secured by the Company's interest in the real estate subject to the Lease
and, pari passu with the lenders on the Term Loan, Revolver, and Notes, certain
other assets of Safeskin.



                                       19
<PAGE>   20

    Safeskin's foreign manufacturing subsidiaries have revolving lines of credit
for financing general working capital needs up to approximately $9,100,000. As
of December 31, 1998, there were no borrowings outstanding under these credit
facilities. These borrowings are collateralized by all assets of the
subsidiaries and are further supported by a guarantee of Safeskin.

    In July 1997, the Thai baht and Malaysian ringgit were permitted to float
against the U.S. dollar and other currencies, and as a result, the baht and
ringgit devalued from approximately 24.7 bahts/dollar and 2.52 ringgits/dollar,
as of June 30, 1997 to approximately 48.15 bahts/dollar and 3.89 ringgits/dollar
as of December 31, 1997, respectively. In 1997, the significant devaluation in
both the Thai and Malaysian currencies resulted in an increased amount of
foreign currency translation adjustments, which were recorded as accumulated
other comprehensive loss totaling approximately $46,400,000. As of December 31,
1998, the Thai baht and Malaysian ringgit strengthened to approximately 36.55
bahts/dollar and 3.8 ringgits/dollar, respectively. Safeskin has, experienced
approximately $18,700,000 of foreign currency translation adjustments that are
reflected as other comprehensive income in 1998.

YEAR 2000 READINESS DISCLOSURE

OVERVIEW

    The Year 2000 Issue is the issue of whether information and non-information
technology systems will be able to accurately recognize and process
date-sensitive information involving dates in and beyond the Year 2000. Safeskin
relies, directly and indirectly, on information technology systems, such as
desktop computers, network hardware equipment and applications software, to
manage its business data and to perform a variety of administrative services
including, accounting, financial reporting, payroll and invoicing. Safeskin also
relies on non-information technology systems including office equipment,
security systems, telephone systems and process controllers, to control its
manufacturing systems and carry out its day-to-day operations. In addition,
third parties material to Safeskin's operations, such as suppliers, vendors and
customers, rely on information and non-information technology systems to manage
their businesses. All of these technology systems could potentially be affected
by the Year 2000 Issue.

    In order to minimize the risk of Year 2000 related losses, Safeskin has
completed a comprehensive assessment of its Year 2000 Issue. Perot Systems
Corporation has been retained to help Safeskin (i) identify and update or
replace non-Year 2000 compliant information and non-information technology
systems that are material to Safeskin's operations and (ii) develop contingency
and business continuation plans in the event that Safeskin is unable to timely
address its Year 2000 Issue.

    Safeskin's Year 2000 assessment involves the testing and analyzing of all
information technology equipment, applications software and non-information
technology systems used by Safeskin, and the evaluation of the Year 2000
preparedness of third parties critical to Safeskin's operations. As of December
31, 1998, Safeskin's Year 2000 assessment in each of these areas was over 90%
complete. To date, the assessment has revealed that two of the material
applications software on which Safeskin relies are not Year 2000 compliant.
Safeskin plans to replace both of these applications in 1999. In early 1998,
Safeskin began to implement a Year 2000 compliant enterprise-wide business
systems application. Although Safeskin installed the application in order to
improve the management of its business data, the application is also expected to
have the effect of ensuring that a significant percentage of Safeskin's
information technology systems are Year 2000 compliant. This application was
online at Safeskin's U.S. facilities in January 1999 and Safeskin expects it to
be online at the Southeast Asian manufacturing facilities by the end of the
third quarter of 1999.

    Safeskin has developed preliminary remediation plans for each of the areas
targeted by the Year 2000 assessment. Specifically, non-Year 2000 compliant
information technology equipment, including obsolete hardware components and
outdated operating systems, BIOS or chip codes, will be updated or replaced,
applications software that is not Year 2000 compliant are expected to be
converted or replaced by the end of the third quarter of 1999 and any
non-information technology systems or processors that are either non-Year 2000
compliant or suspect due to lack of information from the vendor are expected to
be replaced or upgraded to a compliant version. In addition, Safeskin is
currently requesting confirmation that all suppliers and customers material to
its operations are, or in within a short period of time are planning to become,
Year 2000 compliant.

    Safeskin has approved and began implementing a final remediation plan for
addressing all known Year 2000 Issues in the fourth quarter of 1998. Safeskin's
remediation plan will give priority to those non-Year 2000 compliant technology
systems which are material to Safeskin's operations. Perot Systems Corporation
is expected to handle all remediation efforts, including, if necessary, the
replacement of any information technology hardware or software, the upgrading of
manufacturing systems and the changing of BIOS or chip codes. Perot Systems will
coordinate its remediation efforts with Safeskin in order to avoid, to the
extent possible, disruption of Safeskin's manufacturing capacity. Safeskin's
expects that contingency plans for all known Year 2000 Issues will be finalized
by mid-1999.



                                       20
<PAGE>   21

    Safeskin also plans to examine the Year 2000 readiness of any information or
non-information technology systems acquired in the future and develop
remediation and contingency plans as necessary.

    Safeskin is also preparing contingency plans in the event that there is a
disruption to the business caused by Year 2000 data processing problems.
Although Safeskin anticipates complete remediation by mid-1999, it is possible
that delays in the remediation process or Year 2000 issues caused by third party
trading partners could arise. Safeskin is assessing these issues and is
developing contingency plans that would provide for uninterrupted business
operations. Safeskin's expects these contingency plans will be fully developed
by the end of the second quarter in 1999.

COSTS

    Although the total costs associated with becoming Year 2000 compliant have
not been fully identified, Safeskin does not currently expect the costs of
remediating its Year 2000 Issues to be material to its operations, results of
operations or financial condition. As of December 31, 1998, Safeskin has spent
approximately $165,000 on Year 2000 Issues, primarily attributable to the cost
of conducting the Year 2000 assessment and developing a remediation plan.

    The future cost of identifying and remediating Year 2000 Issues is expected
to be at least $175,000. Costs for replacements or modifications that would have
been necessary independent of Year 2000 Issues, including the $1.0 million that
will be spent to install the new enterprise-wide business applications software
at Safeskin's Asian operation sites, have not been included in Safeskin's Year
2000 cost estimates.

RISKS

    The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of Safeskin. Such failures could materially and adversely affect
Safeskin's results of operations and financial condition. In addition, the costs
associated with the remediation of the Year 2000 Issues may be significantly
higher than Safeskin estimates, depending upon the availability and cost of
personnel trained in the remediation of Year 2000 Issues, the ability to locate
and correct all relevant computer codes, the ability to obtain timely responses
to and corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced and
similar uncertainties. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers and customers and of the infrastructure in those countries
in which Safeskin operates, there can be no assurance that Year 2000 Issues will
not have a material impact on Safeskin's results of operations or financial
condition. However, Safeskin's Year 2000 remediation efforts are expected to
significantly reduce Safeskin's level of uncertainty about the Year 2000 Issue
and, in particular, about the Year 2000 compliance and readiness of its material
third party suppliers, customers and vendors. Furthermore, Safeskin believes
that, with the implementation of new business systems and the completion of its
Year 2000 remediation plan as scheduled, the possibility of significant
interruptions of normal operations will be minimal.

RECENT DEVELOPMENTS

    On March 11, 1999, Safeskin announced that it expects sales and earnings to
be below analysts' expectations for the first quarter and full year 1999.
Safeskin believes that net sales and earnings will be lower due to higher than
estimated distributor inventory levels, slower than anticipated ramp up of
orders from new end-user contracts and increased pricing pressures in the
industry. Subsequent to the press release on March 11, 1999, numerous purported
class action lawsuits alleging violations of federal securities laws and a
shareholder derivative action have been filed against Safeskin and certain of
its officers and directors. See "Legal Proceedings."

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

    This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements include, among others, statements
in the Management's Discussion & Analysis of Financial Condition and Results of
Operations, including statements regarding Safeskin's estimates with respect to
sales, revenues, cost of goods sold, operating margins, Safeskin's ability to
increase sales under end-user contracts, the effect of currency fluctuations in
Thailand on the cost of goods sold, and its ability to achieve anticipated
production capacity in the new manufacturing facilities and recognize certain
operating efficiencies and savings in Thailand, and statements elsewhere
concerning Safeskin's outlook for 1999 and beyond including the ability



                                       21
<PAGE>   22

of Safeskin to retain and increase sales under GPO and end-user contracts, the
ability of Safeskin to sign new contracts, the effect of currency fluctuations
in Thailand and Malaysia on the operating results of Safeskin, Safeskin's
liquidity and working capital, Safeskin's ability to complete construction of
new facilities as scheduled, the production capacity and Safeskin's ability to
achieve additional efficiencies in its manufacturing facilities and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this report are subject to
risks and uncertainties that could cause the assumptions underlying such
forward-looking statements and the actual results to differ materially from
those expressed in or implied by the statements.

    The most important factors that could prevent Safeskin from achieving its
goals--and cause the assumptions underlying forward-looking statements and the
actual results of Safeskin to differ materially from those expressed in or
implied by those forward-looking statements--include, but are not limited to,
the following:

-   the competitive nature of the industry and the ability of Safeskin to
    continue to distinguish its products on the basis of quality, reliability
    and value; possible obsolescence of Safeskin's primary products due to the
    development by competitors of new products, manufacturing processes or
    technologies including latex alternatives; the ability of Safeskin to
    maintain and build strong distributor relationships and attract new customer
    orders; and the ability of Safeskin to maintain selling prices and
    anticipated volumes;

-   the ability of Safeskin to meet existing or future FDA regulations regarding
    the manufacture and sale of Safeskin's gloves;

-   Safeskin's ability to successfully develop and introduce new products to the
    market;

-   risks associated with investments and operations in foreign countries,
    particularly Thailand and Malaysia, including exchange rate fluctuations,
    local economic conditions, governmental policies regarding foreign ownership
    of manufacturing facilities, local regulatory requirements, tax holidays and
    political factors;

-   Safeskin's ability to successfully integrate the operations of acquired
    businesses in a timely and efficient manner and to realize the anticipated
    benefits of such acquisitions;

-   the consistent availability, at budgeted prices, of raw rubber from
    independent growers and latex concentrate from plant operators in Malaysia
    and Thailand and the availability of nitrile;

-   adverse outcomes or excessive legal expenses in connection with lawsuits or
    the ability to obtain and maintain sufficient insurance coverage at
    reasonable rates;

-   delays in the completion of the construction of Safeskin's new production
    facilities in Thailand or the failure of these production facilities to
    generate anticipated productivity and efficiencies;

-   delays in the completion of the final phase of Safeskin's construction of
    its latex concentrate plant in Thailand or the failure of this plant to
    generate anticipated productivity and efficiencies;

-   the non-linearity of Safeskin's sales throughout the quarter which limits
    Safeskin's ability to accurately monitor and predict net sales and
    profitability;

-   Safeskin's ability to monitor inventories of products held by third-party
    distributors and to predict sales trends given Safeskin's limited visibility
    of sales to end user customers;

-   economic conditions in the healthcare industry, including the potential
    impact of industry consolidation and cost constraints on the end-user;

-   changes in significant government regulations affecting the healthcare
    industry;

-   the ability of Safeskin to protect its proprietary products, know-how and
    manufacturing processes;

-   Safeskin's ability to develop, maintain and improve information systems that
    provide the Company with accurate and timely information;



                                       22
<PAGE>   23

-   changes in Safeskin's rates or basis of income taxation, including
    applicable U.S. tax laws and policies governing foreign operations and
    Section 351 transactions;

-   the ability of Safeskin to complete its Year 2000 project and remediate its
    Year 2000 Issues within the specified time frames or within currently
    estimated costs; and

-   rapid levels of inflation which could have a significant effect on
    Safeskin's net sales and profitability.

These and other risks and uncertainties affecting Safeskin are discussed in
greater detail in this report and in other filings by Safeskin with the
Securities and Exchange Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of Safeskin. Safeskin,
in the normal course of doing business, is exposed to the risks associated with
foreign currency exchange rates, changes in interest rates, and certain
commodity prices. Safeskin employs established policies and procedures governing
the use of financial instruments to manage its exposure to such risks. These
financial exposures are monitored and managed by Safeskin as an integral part of
Safeskin's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on Safeskin's results.

Foreign Currency Exchange Rate Risk

    Safeskin is exposed to exchange rate risk when its U.S. and non-U.S.
subsidiaries enter into transactions denominated in currencies other than their
functional currency. Certain firmly committed transactions are hedged with
forward foreign exchange contracts. As exchange rates change, gains and losses
on the exposed transactions are partially offset by gains and losses related to
the hedging contracts. Both the exposed transactions and the hedging contracts
are translated at current spot rates, with gains and losses included in
earnings. Safeskin's derivative activities, all of which consist of forward
foreign exchange contracts, are initiated primarily to hedge intercompany
receivables and payables.

    The forward foreign exchange contracts generally require Safeskin to
exchange U.S. dollars for foreign currencies based on pre-established exchange
rates at the contracts maturity dates. If the counterparties to the exchange
contracts (primarily AA rated international institutions) do not fulfill their
obligations to deliver the contracted currencies, Safeskin could be at risk for
currency related fluctuations (generally limited to unrealized gains).
Management believes using AA rated international institutions as counterparties
to the hedging contracts minimizes the risk of non-performance. As of December
31, 1998, there were no forward foreign exchange contracts outstanding. Further
disclosure relating to forward foreign exchange contracts is included in Note 2
in the Notes to Consolidated Financial Statements.

Interest Rate Risk

    Except for indebtedness under Safeskin's revolving credit facility which is
variable rate financing, the balance of Safeskin's indebtedness is fixed rate
financing. Safeskin believes that its exposure to market risk relating to
interest rate risk is not material. Safeskin does not expect changes in interest
rates to have a material effect on income or cash flows in fiscal 1999, although
there can be no assurances that interest rates will not significantly change.
Further disclosure relating to financial instruments is included in Note 6 and
Note 13 in the Notes to Consolidated Financial Statements.

Commodity Price and Availability Risk

    Safeskin is subject to risk associated with the consistent availability, at
budgeted prices, of raw rubber from independent growers and latex concentrate
from plant operators in Malaysia and Thailand and the availability of nitrile.
Safeskin enters into commodity forward contracts with suppliers. Such contracts
are executed to offset Safeskin's exposure to the potential change in prices
mainly for raw rubber and latex concentrate used in the manufacturing of
Safeskin's gloves.



                                       23
<PAGE>   24
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
                                                                                  Pages
                                                                                  -----
<S>                                                                               <C>
INDEPENDENT AUDITORS' REPORT                                                         25

CONSOLIDATED FINANCIAL STATEMENTS:

  Consolidated Balance Sheets at December 31, 1998 and 1997                          26

  Consolidated Statements of Operations for the Years Ended
    December 31, 1998, 1997 and 1996                                                 27

  Consolidated Statements of Comprehensive Income for the Years Ended
    December 31, 1998, 1997 and 1996                                                 28

  Consolidated Statements of Shareholders' Equity for the
    Years Ended December 31, 1998, 1997 and 1996                                     29

  Consolidated Statements of Cash Flows for the
    Years Ended December 31, 1998, 1997 and 1996                                     30

  Notes to Consolidated Financial Statements                                      31-45

FINANCIAL STATEMENT SCHEDULES:

INDEPENDENT AUDITORS' REPORT                                                         46

Schedule I - Condensed Financial Information of
Parent Company                                                                    47-49

Schedule II- Valuation and Qualifying Accounts                                       50
</TABLE>


                                      -24-


<PAGE>   25
                          INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors of
Safeskin Corporation:



We have audited the accompanying consolidated balance sheets of Safeskin
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of Safeskin Corporation for the year ended December 31, 1996 were
audited by other auditors whose report, dated February 17, 1997, expressed an
unqualified opinion on these statements.

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, such 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of Safeskin Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.



Deloitte & Touche LLP
San Diego, California
April 5, 1999


                                      -25-


<PAGE>   26
                              SAFESKIN CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                       1998               1997
                                                                       ----               ----
<S>                                                           <C>                <C>          
ASSETS
Current assets:
  Cash and cash equivalents                                   $   9,416,802      $  23,916,959
  Accounts receivable, net of allowance of
  $1,181,000 and $966,000, respectively                          32,511,412         22,195,828
  Inventory                                                      37,056,821         21,242,732
  Other current assets                                            9,829,335          5,692,369
                                                              -------------      -------------

            Total current assets                                 88,814,370         73,047,888

Property, plant and equipment, net                              119,456,352         52,904,271
Deferred taxes and other assets                                  40,690,386         12,568,245
                                                              -------------      -------------

            Total assets                                      $ 248,961,108      $ 138,520,404
                                                              =============      =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                            $   8,661,602      $   6,922,540
  Accrued liabilities                                            24,515,378         22,924,623
  Current portion of long-term debt                               4,500,000                 --
                                                              -------------      -------------

            Total current liabilities                            37,676,980         29,847,163

Long-term debt                                                   87,731,158                 --
Other long-term liabilities                                       2,140,682          2,094,928
                                                              -------------      -------------

            Total liabilities                                   127,548,820         31,942,091

Commitments and contingencies

Shareholders' equity:
  Preferred stock; $.01 par value; 10,000,000 shares
    authorized and no shares issued or outstanding in
    1998 and 1997                                                        --                 --
  Common stock; $.01 par value; 80,000,000 shares
    authorized; 54,600,499 and 52,964,224 shares
    outstanding in 1998 and 1997, respectively                      546,004            529,642
  Additional paid-in-capital                                     75,360,306         47,517,453
  Treasury stock, at cost; 1,999,900 and 0 shares in 1998
    and 1997, respectively                                      (73,589,169)                --
  Accumulated other comprehensive loss                          (26,993,003)       (45,687,717)
  Retained earnings                                             146,088,150        104,218,935
                                                              -------------      -------------

            Total shareholders' equity                          121,412,288        106,578,313
                                                              -------------      -------------

            Total liabilities and shareholders' equity        $ 248,961,108      $ 138,520,404
                                                              =============      =============
</TABLE>


See notes to consolidated financial statements.


                                      -26-


<PAGE>   27
                              SAFESKIN CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                         1998               1997               1996
                                                         ----               ----               ----
<S>                                             <C>                <C>                <C>          
Net sales                                       $ 231,783,872      $ 182,998,305      $ 146,089,348

Cost of goods sold                                110,746,344        102,229,142         87,004,617
                                                -------------      -------------      -------------

     Gross profit                                 121,037,528         80,769,163         59,084,731
                                                -------------      -------------      -------------

Operating expenses:
  Selling                                          24,834,113         18,615,057         15,014,132
  Research and development                          6,347,284          3,504,553          2,208,436
  General and administrative                       30,243,305         15,922,824         12,286,798
  Restructuring and other unusual charges          14,330,573                 --          2,979,146
                                                -------------      -------------      -------------

     Total operating expenses                      75,755,275         38,042,434         32,488,512
                                                -------------      -------------      -------------

     Income from operations                        45,282,253         42,726,729         26,596,219

Interest expense (income), net                      3,025,741           (822,981)           (58,337)
Other expense (income), net                        (3,085,438)        (2,699,335)           133,278
                                                -------------      -------------      -------------

Income before income tax provision                 45,341,950         46,249,045         26,521,278

Income tax provision                                3,472,735          4,998,794          2,938,879
                                                -------------      -------------      -------------

Net income                                      $  41,869,215      $  41,250,251      $  23,582,399
                                                =============      =============      =============

Per share amounts:
Earnings per share of common stock
and common stock equivalents:
    Basic                                       $         .78      $         .79      $         .46
    Diluted                                     $         .70      $         .70      $         .42

Weighted average number of shares of common
stock and common stock equivalents
outstanding: 
    Basic                                          53,344,082         52,260,538         50,943,814
    Diluted                                        60,119,567         58,537,694         55,550,668
</TABLE>


See notes to consolidated financial statements.


                                      -27-


<PAGE>   28
                              SAFESKIN CORPORATION
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                          1998             1997              1996
                                                          ----             ----              ----
<S>                                               <C>              <C>               <C>         
Net income                                        $ 41,869,215     $ 41,250,251      $ 23,582,399
Other comprehensive income (loss)        
     Foreign currency translation adjustments       18,694,714      (46,374,261)          337,693
                                                  ------------     ------------      ------------
Comprehensive income (loss)                       $ 60,563,929     $ (5,124,010)     $ 23,920,092
                                                  ============     ============      ============
</TABLE>


See notes to consolidated financial statements.


                                      -28-


<PAGE>   29
                              SAFESKIN CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                                        
                                                    COMMON STOCK                    ADDITIONAL                          
                                           -------------------------------           PAID-IN             TREASURY         
                                              SHARES             AMOUNT              CAPITAL           STOCK, AT COST          
                                           -----------       -------------          ----------         --------------   
<S>                                        <C>               <C>                 <C>                  <C>               
Balance, January 1, 1996                    49,922,124       $     499,220       $  30,639,580        $          --     
Exercise of common stock options             1,933,308              19,334           5,332,590                   --     
Other comprehensive income                          --                  --                  --                   --     
Forfeited stock related to stock grant        (233,336)             (2,333)           (858,093)                  --     
Amortization of deferred
  compensation related to stock grant               --                  --                  --                   --     
Tax benefit from exercise of
  options                                                                            3,729,263                          
Net income                                          --                  --                  --                   --     
                                         -------------------------------------------------------------------------------
Balance, December 31, 1996                  51,622,096             516,221          38,843,340                   --     
Exercise of common stock options             1,342,128              13,421           4,237,713                   --     
Other comprehensive loss                            --                  --                  --                   --     
Tax benefit from exercise of options                --                  --           4,436,400                   --     
Net income                                          --                  --                  --                          
                                         -------------------------------------------------------------------------------
Balance, December 31, 1997                  52,964,224             529,642          47,517,453                   --     
Exercise of common stock options             1,636,175              16,362           7,231,797                   --     
Repurchase of common stock                  (1,999,900)                 --                  --          (73,589,169)    
Other comprehensive income                          --                  --                  --                   --     
Tax benefit from exercise of options                --                  --          16,061,831                   --     

Fair value of options granted in
  acquisition                                       --                  --           1,564,000                   --     
Value of options extended related
  to employee terminations                          --                  --           2,985,225                   --
Net income                                          --                  --                  --                   --     
                                         -------------------------------------------------------------------------------
Balance, December 31, 1998                  52,600,499       $     546,004       $  75,360,306        $ (73,589,169)    
                                         ===============================================================================
</TABLE>



<TABLE>
<CAPTION>
                                           ACCUMULATED
                                              OTHER
                                          COMPREHENSIVE           DEFERRED             RETAINED
                                          INCOME (LOSS)         COMPENSATION           EARNINGS                TOTAL
                                          -------------        -------------           --------                -----
<S>                                       <C>                  <C>                  <C>                 <C>          
Balance, January 1, 1996                  $     348,851        $  (1,012,895)       $  39,386,285       $  69,861,041
Exercise of common stock options                     --                   --                   --           5,351,924
Other comprehensive income                      337,693                   --                   --             337,693
Forfeited stock related to stock grant               --              860,426                   --                  --
Amortization of deferred
  compensation related to stock grant                --              152,469                   --             152,469
Tax benefit from exercise of
  options                                                                                                   3,729,263
Net income                                           --                   --           23,582,399          23,582,399
                                        -----------------------------------------------------------------------------
Balance, December 31, 1996                      686,544                   --           62,968,684         103,014,789
Exercise of common stock options                     --                   --                   --           4,251,134
Other comprehensive loss                    (46,374,261)                  --                   --         (46,374,261)
Tax benefit from exercise of options                 --                   --                   --           4,436,400
Net income                                           --                   --           41,250,251          41,250,251
                                        -----------------------------------------------------------------------------
Balance, December 31, 1997                  (45,687,717)                  --          104,218,935         106,578,313
Exercise of common stock options                     --                   --                   --           7,248,159
Repurchase of common stock                           --                   --                   --         (73,589,169)
Other comprehensive income                   18,694,714                   --                   --          18,694,714
Tax benefit from exercise of options                 --                   --                   --          16,061,831

Fair value of options granted
  in acquisition                                     --                   --                   --           1,564,000

Value of options extended related
  to employee terminations                           --                   --                   --           2,985,225

Net income                                           --                   --           41,869,215          41,869,215
                                        -----------------------------------------------------------------------------
Balance, December 31, 1998                $ (26,993,003)       $          --        $ 146,088,150       $ 121,412,288
                                        =============================================================================
</TABLE>

                                      -29-
<PAGE>   30
                              SAFESKIN CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                    1998              1997              1996
                                                                    ----              ----              ----
<S>                                                         <C>               <C>               <C>         
Cash flows from operating activities:
  Net income                                                $ 41,869,215      $ 41,250,251      $ 23,582,399
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                           12,838,676         7,138,338         6,094,758
      Exchange gain                                           (2,614,886)      (16,849,739)               --
      Restructuring and other unusual charges                 15,180,573                --         2,979,146
      Non-cash severance expense                               2,985,225                --                --
      Loss on sale of equipment                                   63,572           125,725            57,919
      Deferred income taxes                                   (5,328,169)        6,308,400        (2,287,424)
      Amortization of deferred compensation                           --                --           152,469
  Changes in operating assets and liabilities:
      Accounts receivable                                     (7,888,217)       (1,794,099)       (2,319,400)
      Inventory                                              (14,101,994)         (548,485)       (3,895,369)
      Other assets                                             2,252,800        (4,683,784)        1,161,148
      Accounts payable and accrued liabilities                (7,808,406)       22,595,759         5,411,489
                                                            ------------      ------------      ------------
    Net cash provided by operating activities                 37,448,389        53,542,366        30,937,135
                                                            ------------      ------------      ------------

Cash flows from investing activities:
  Net cash paid for acquisitions                             (14,346,460)      (14,463,092)               --
  Proceeds from sale of subsidiary                               574,703                --                --
  Purchases of property, plant and equipment                 (65,360,446)      (35,182,574)      (20,230,415)
  Proceeds from sale of equipment                                  2,470            52,113            36,519
                                                            ------------      ------------      ------------
    Net cash used by investing activities                    (79,129,733)      (49,593,553)      (20,193,896)
                                                            ------------      ------------      ------------


Cash flows from financing activities:
  Proceeds from issuance of common stock                       7,248,159         4,251,134         5,351,924
  Repurchase of common stock                                 (73,589,169)               --                --
  Increase (decrease) in long-term debt                       92,231,158                --        (2,750,000)
                                                            ------------      ------------      ------------
    Net cash provided by financing activities                 25,890,148         4,251,134         2,601,924
                                                            ------------      ------------      ------------

Effect of exchange rate changes on cash                        1,291,039          (548,456)          833,333
                                                            ------------      ------------      ------------

Net increase (decrease) in cash and cash equivalents         (14,500,157)        7,651,491        14,178,496
Cash and cash equivalents at beginning of year                23,916,959        16,265,468         2,086,972
                                                            ------------      ------------      ------------
Cash and cash equivalents at end of year                    $  9,416,802      $ 23,916,959      $ 16,265,468
                                                            ============      ============      ============

Supplemental cash flow information:
    Amounts paid for:
      Interest                                              $  3,525,579      $         --      $    133,550
      Income taxes                                          $        750      $      1,600      $  1,831,678

Supplemental schedule of non-cash investing activities:
    Assets acquired and liabilities assumed related
      to the Company's acquisitions were as follows:
      Fair value of assets acquired                         $ 22,029,979      $ 14,728,362
      Liabilities assumed                                     (6,119,519)         (265,270)
      Options granted                                         (1,564,000)               --
                                                            ------------      ------------
      Net cash paid for acquisitions                        $ 14,346,460      $ 14,463,092
                                                            ============      ============
</TABLE>


See notes to consolidated financial statements.


                                      -30-
<PAGE>   31
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

1.      Description of Business:

        Safeskin Corporation (the "Company") is a leading manufacturer of high
        quality disposable latex medical examination gloves for the United
        States market. The Company manufactures its products primarily in
        Thailand and Malaysia, using proprietary formulations and processes, for
        sale primarily in the United States.

2.      Significant Accounting Policies:

        Principles of Consolidation

        The consolidated financial statements include the accounts of the
        Company and its domestic and foreign subsidiaries after elimination of
        all significant intercompany transactions and accounts.

        Use of Estimates

        The preparation of financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities
        and disclosure of contingent assets and liabilities at the date of the
        financial statements, and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from estimates.

        Foreign Currency Translation

        The accounts of the Company's foreign subsidiaries are measured using
        local currency as the functional currency. For those operations, assets
        and liabilities are translated into U.S. dollars at period-end exchange
        rates and income and expense accounts are translated at average exchange
        rates in effect during the year. Net currency exchange gains or losses
        resulting from such translation are included in accumulated other
        comprehensive loss.

        Foreign Currency Transactions and Hedging Activities

        The Company is exposed to exchange rate risk when its U.S. and non-U.S.
        subsidiaries enter into transactions denominated in currencies other
        than their functional currency. Certain firmly committed transactions
        are hedged with forward foreign exchange contracts. As exchange rates
        change, gains and losses on the exposed transactions are partially
        offset by gains and losses related to the hedging contracts. Both the
        exposed transactions and the hedging contracts are translated at current
        spot rates, with gains and losses included in earnings. The Company's
        derivative activities, all of which consist of forward foreign exchange
        contracts, are initiated primarily to hedge intercompany receivables and
        payables.

        The forward foreign exchange contracts generally require the Company to
        exchange U.S. dollars for foreign currencies based on pre-established
        exchange rates at the contracts maturity dates. If the counterparties to
        the exchange contracts (primarily AA rated international institutions)
        do not fulfill their obligations to deliver the contracted currencies,
        the Company could be at risk for currency related fluctuations
        (generally limited to unrealized gains). Management believes using AA
        rated international institutions as counterparties to the hedging
        contracts minimizes the risk of non-performance.


                                      -31-


<PAGE>   32
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        For the years ended December 31, 1998 and 1997, the Company recognized
        foreign exchange transaction net gains of $10,290,876 and $19,837,286
        related to transactions with its manufacturing subsidiaries in Malaysia
        and Thailand, offset by net losses on forward foreign exchange contracts
        of $7,858,753 and $16,441,247, which have been recorded net as other
        income in the accompanying statement of operations. Gains and losses
        from foreign currency transactions for the year ended December 31, 1996
        were not significant.

        Cash and Cash Equivalents

        The Company considers highly liquid investments, those with maturities
        of less than three months when acquired, to be cash equivalents.

        Property, Plant and Equipment

        Property, plant and equipment are recorded at cost. Additions and
        improvements are capitalized, while maintenance and repairs are expensed
        when incurred. Asset and accumulated depreciation accounts are relieved
        for dispositions with resulting gains or losses recorded in the
        statements of operations. Depreciation of plant and equipment is
        computed over estimated useful lives using the straight-line method as
        follows:


<TABLE>
<S>                                                      <C>
               Building and improvements                 10 to 50 years
               Machinery and equipment                    3 to 10 years
               Computer and office equipment              3 to 10 years
</TABLE>


        Inventory

        Inventory is valued at the lower of cost, determined on a first-in,
        first-out basis, or market, determined on a net realizable value basis.
        Consideration is given to obsolescence and other factors in evaluating
        net realizable value.

        Income Taxes

        The Company accounts for income taxes in accordance with the provisions
        of Statement of Financial Accounting Standards No. 109, Accounting for
        Income Taxes. This standard requires, among other things, recognition of
        future tax benefits, measured by enacted tax rates, attributable to
        deductible temporary differences between financial statement and income
        tax bases of assets and liabilities, and net operating loss
        carryforwards to the extent that realization of such benefits is more
        likely than not. The provision for income taxes consists of taxes
        payable for the year and the changes during the year of deferred income
        tax assets and liabilities. Valuation allowances are established when
        necessary to reduce deferred income tax assets to amounts expected to be
        realized.

        Shareholders' Equity

        On November 14, 1996, the Company authorized a two-for-one stock split
        of its common stock to be effective in the form of a stock dividend
        distributed on January 2, 1997 to shareholders of record at the close of
        business on November 29, 1996. The holders of the Company's common stock
        received a stock dividend at the rate of one share of common stock for
        each share of common stock owned. All share and per share amounts have


                                      -32-


<PAGE>   33
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        been retroactively restated to reflect the stock split.

        On February 17, 1998, the Company authorized a two-for-one stock split
        of its common stock to be effective in the form of a stock dividend to
        be distributed on April 1, 1998 to shareholders of record at the close
        of business on February 27, 1998. The holders of the Company's common
        stock received a stock dividend at the rate of one share of common stock
        for each share of common stock owned. The par value of each share will
        not change from $.01. All share and per share amounts have been
        retroactively restated to reflect the stock split.

        Revenue Recognition

        The Company recognizes revenue upon shipment of products to customers.
        The Company's net sales are derived from the sales of finished products,
        net of contractual allowable rebates and fees provided to distributors
        and group purchasing organizations for the resale of the Company's
        products in specific volumes to specified end user customers. The
        Company estimates allowable rebates on a monthly basis through the
        analysis of actual sales and inventory information from customers,
        contractual arrangements and historical trends related to actual rebates
        issued.

        Research and Development Expenses

        Expenditures for research and development of new products are expensed
        as incurred. Research and development expenses incurred by the Company
        were approximately $6,347,000, $3,504,000 and $2,209,000 for the years
        ended December 31, 1998, 1997, and 1996, respectively.

        Stock Based Compensation

        Statement of Financial Accounting Standard No. 123, Accounting for
        Stock-Based Compensation, ("SFAS 123") encourages, but does not require,
        companies to record compensation cost for stock-based employee
        compensation plans at fair value. The Company has elected to continue to
        account for stock-based compensation using the intrinsic value method
        prescribed in Accounting Principles Board Opinion No. 25, Accounting for
        Stock Issued to Employees, and related interpretations. Accordingly,
        compensation cost for stock options is measured as the excess, if any,
        of the quoted market price of the Company's stock at the date of grant
        over the exercise price of the option.

        Net Income Per Share

        The Company accounts for net income per share in accordance with the
        provisions of Statement of Financial Accounting Standards No. 128,
        Earnings Per Share. Net income per share is computed by dividing net
        income by the weighted average number of common shares outstanding and
        dilutive common stock equivalents. Common stock options are common stock
        equivalents and are included in the weighted average


                                      -33-


<PAGE>   34
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        number of common shares outstanding using the treasury stock method.

        Comprehensive Income

        The Company adopted Statement of Financial Accounting Standards No. 130,
        Reporting Comprehensive Income, during 1998. This standard expands or
        modifies disclosures, and accordingly, has no impact on the Company's
        financial position, results of operations or cash flows.

        Segment Reporting

        The Company adopted Statement of Financial Accounting Standards No. 131,
        Disclosures About Segments of an Enterprise and Related Information,
        during 1998. The implementation of this standard results in the use of a
        management approach in identifying segments of an enterprise. Management
        has determined that segment disclosures are not appropriate because the
        Company operates in only one segment.

        Derivative Instruments

        During 1998, Statement of Financial Accounting Standards No. 133,
        Accounting for Derivative Instruments and Hedging Activities, was issued
        effective for all fiscal quarters for fiscal years beginning after June
        15, 1999. This statement establishes accounting and reporting standards
        for derivative instruments, including certain derivative instruments
        embedded in other contracts, and for hedging activities. The Company
        does not expect the adoption of this statement to materially effect the
        consolidated financial statements.

        Reclassifications

        Certain amounts have been reclassified in the prior periods to conform
        with the current year presentation.

3.      Inventory:

        Inventory at December 31, 1998 and 1997 consisted of:


<TABLE>
<CAPTION>
                                          1998            1997
                                          ----            ----
<S>                                   <C>             <C>        
                  Raw materials       $ 5,587,270     $ 2,700,643
                  Work in process         908,723         690,480
                  Finished goods       30,560,828      17,851,609
                                      -----------     -----------
                                      $37,056,821     $21,242,732
                                      ===========     ===========
</TABLE>


4.      Property, Plant and Equipment:

        Property, plant and equipment at December 31, 1998 and 1997 consisted
        of:


<TABLE>
<CAPTION>
                                                      1998             1997
                                                      ----             ----
<S>                                               <C>              <C>         
                Land                              $  8,770,647     $  4,488,277
                Buildings and improvements          19,195,015        8,651,187
                Machinery and equipment             72,646,589       31,741,450
                Computer and office equipment       16,034,551        9,020,427
                Construction in progress            27,980,570       12,402,336
                                                  ------------     ------------
                                                   144,627,372       66,303,677
                Less accumulated depreciation       25,171,020       13,399,406
                                                  ------------     ------------
                                                  $119,456,352     $ 52,904,271
                                                  ============     ============
</TABLE>

        Statement of Financial Accounting Standard No. 121, Accounting for the
        Impairment of Long-Lived Assets and


                                      -34-


<PAGE>   35
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        Long-Lived Assets to be Disposed of ("SFAS 121"), requires the
        evaluation of long-lived assets for impairment whenever events or
        changes in circumstances indicate that the carrying amount of an asset
        may not be recoverable. (See Note 14).

5.      Accrued Liabilities:

        Accrued liabilities at December 31, 1998 and 1997 consisted of:


<TABLE>
<CAPTION>
                                                               1998            1997
                                                               ----            ----
<S>                                                        <C>             <C>        
             Accrued compensation                          $ 8,543,163     $ 4,061,135
             Accrued restructuring charges                   5,158,889              --
             Accrued equipment purchase orders               2,476,927       2,185,935
             Income taxes payable                            1,898,355         431,847
             Forward foreign exchange contract accrual              --      12,062,942
             Other                                           6,438,044       4,182,764
                                                           -----------     -----------
                                                           $24,515,378     $22,924,623
                                                           ===========     ===========
</TABLE>


        In connection with the restructuring activities related to the closure
        of the Company's facilities in Ipoh, Malaysia and Vista and Santa Maria,
        California, the Company accrued restructuring charges totaling


                                      -35-
<PAGE>   36
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        $5,158,889 at December 31, 1998. These charges related primarily to
        liabilities associated with anticipated employee termination costs
        totaling $3,809,545 and costs associated with the write-off of an
        equipment lease and costs to renovate a leased facility totaling
        $1,349,344. As a result of the restructuring activities, the Company
        anticipates that approximately 1,800 employees will be terminated
        primarily in Malaysia, in the first quarter of 1999. (See Note 14).


        As of December 31, 1997, the forward foreign exchange contract accrual
        results from outstanding forward foreign exchange contracts to purchase
        Malaysian ringgit in the amount of $35,466,327, with a weighted average
        exchange rate of 2.78 Malaysian ringgit to 1 U.S. dollar. As of December
        31, 1998, there were no forward foreign exchange contracts outstanding.

6.      Long-Term Debt:

        During 1998, the Company amended its unsecured domestic two-year credit
        facility for financing general working capital needs up to a maximum of
        $40,000,000 in borrowings (the "Credit Facility"). Obligations under
        this arrangement are due July 31, 2000 and bear interest at the London
        Interbank Offered Rate (LIBOR) plus .80% or the banks' reference rate.
        The credit facility specifies various financial covenants such as
        minimum quick ratio, tangible net worth, debt to equity, and
        profitability. As of December 31, 1998 and 1997, there were
        approximately $12,000,000 and $0, respectively, outstanding under this
        credit facility.

        On July 30, 1998, the Company, through its subsidiary Safeskin (B.V.I.)
        Limited ("Safeskin BVI"), entered into and closed a credit agreement for
        a $100 million loan facility (the "BVI Facility") with Union Bank of
        California, N.A., as Agent. The BVI Facility was secured by a first
        priority lien on the Common Stock of the Company purchased by Safeskin
        BVI, a first priority lien on all the assets of Safeskin BVI and a first
        priority pledge of the capital stock and beneficial interest in Safeskin
        Corporation (Thailand) Limited. Safeskin BVI had the option to accrue
        interest on the BVI Facility at an annual rate equal to either (i) the
        base rate plus 0.25% or (ii) LIBOR plus 1.75%. As of December 31, 1998,
        there was approximately $80,000,000 outstanding under this credit
        facility. This credit facility was restructured subsequent to December
        31, 1998, and as such has been recorded as long-term debt in accordance
        with the new agreements (see Note 13).

        The Company has foreign credit facilities for financing general working
        capital needs up to a maximum of approximately $9,100,000. These
        facilities bear interest ranging from 9.65% to 13.90% at December 31,
        1998 and 9.3% to 11.3% at December 31, 1997. These facilities are
        guaranteed by the Company. As of December 31, 1998 and 1997, there were
        no borrowings outstanding under these foreign credit facilities.

7.      Foreign Operations:

        The Company has wholly-owned subsidiaries that operate manufacturing
        facilities in the countries of Malaysia and Thailand. Principally all of
        the subsidiaries' sales are to other subsidiaries of the Company and
        are, therefore, eliminated in consolidation. Further, the Company has
        wholly-owned subsidiaries in Germany, the Netherlands and the United
        Kingdom that operate as limited-risk distributors. Domestic product
        sales was 89% of net consolidated sales for the year ended December 31,
        1998. For the years ended December 31, 1997 and 1996, domestic product
        sales were 88% of net consolidated sales.


                                      -36-


<PAGE>   37
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        Included in the consolidated balance sheets are the following domestic
        and foreign components at December 31, 1998 and 1997:


<TABLE>
<CAPTION>
                                                        1998             1997
                                                        ----             ----
<S>                                                 <C>              <C>          
            Current assets:
            Domestic                                $ 48,274,366     $ 43,960,273
            Foreign                                   40,540,004       29,087,615
                                                    ------------     ------------
                                                    $ 88,814,370     $ 73,047,888
                                                    ============     ============
            Property, plant and equipment, net:
            Domestic                                $ 10,391,275     $  7,184,131
            Foreign                                  109,065,077       45,720,140
                                                    ------------     ------------
                                                    $119,456,352     $ 52,904,271
                                                    ============     ============
            Other assets:
            Domestic                                $ 21,473,335     $  3,658,055
            Foreign                                   19,217,051        8,910,190
                                                    ------------     ------------
                                                    $ 40,690,386     $ 12,568,245
                                                    ============     ============
            Total assets:
            Domestic                                $ 80,138,976     $ 54,802,459
            Foreign                                  168,822,132       83,717,945
                                                    ------------     ------------
                                                    $248,961,108     $138,520,404
                                                    ============     ============
</TABLE>


                                      -37-


<PAGE>   38
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

8.      Income Taxes:

        The income tax provision for the years ended December 31, 1998, 1997 and
        1996, consists of the following:


<TABLE>
<CAPTION>
                                     1998              1997              1996  
                                     ----              ----              ----  
<S>                             <C>               <C>               <C>         
            Current:
            Federal             $ 20,741,000      $  2,131,000      $  3,078,000
            State                  3,654,000           509,000           312,000
            Foreign                  468,000           487,000            (5,000)
                                ------------      ------------      ------------
                                  24,863,000         3,127,000         3,385,000
                                ------------      ------------      ------------
            Deferred:
            Federal              (12,945,000)        1,618,000          (433,000)
            State                 (8,445,000)          254,000           (13,000)
                                ------------      ------------      ------------
                                 (21,390,000)        1,872,000          (446,000)
                                ------------      ------------      ------------
            Total provision     $  3,473,000      $  4,999,000      $  2,939,000
                                ============      ============      ============
</TABLE>


        The provision for income taxes is different from that which would be
        obtained by applying the statutory Federal income tax rate (35%) to
        income before provision for income taxes. The items causing this
        difference for the periods ended December 31, 1998, 1997 and 1996 are as
        follows:


<TABLE>
<CAPTION>
                                                                   1998         1997         1996 
                                                                   ----         ----         ---- 
<S>                                                                <C>          <C>          <C>  
               Statutory federal rate                               35.0%        35.0%        35.0%
               Foreign taxes less than federal statutory rate      (44.3)       (25.5)       (23.7)
               IRC Sec. 351 inventory basis difference             (52.2)           --           --
               US tax on foreign earnings                            4.5           --           --
               Change in valuation allowance                        73.7          1.1          2.0
               Miscellaneous                                        (9.0)          .2         (2.2)
                                                                  ------       ------       ------
               Effective tax rate                                    7.7%        10.8%        11.1%
                                                                  ======       ======       ======
</TABLE>


        Deferred income taxes reflect the net tax effects of temporary
        differences between the carrying amounts of assets and liabilities for
        financial reporting purposes and the amounts used for income tax
        purposes. Significant components of the net deferred tax asset as of
        December 31, 1998 and the deferred tax liability as of December 31, 1997
        are as follows:


<TABLE>
<CAPTION>
                                                          1998              1997 
                                                          ----              ---- 
<S>                                                   <C>               <C>         
                 Deferred tax assets (liability):
                 Net operating losses                 $ 62,053,000      $  4,565,000
                 Depreciation and amortization           1,418,000         2,428,000
                 Bad debt reserves                         492,000           439,000
                 Rebate reserves                         2,349,000           486,000
                 Inventory reserves                        342,000           110,000
                 Foreign exchange reserve                       --           827,000
</TABLE>


                                      -38-



<PAGE>   39
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------


<TABLE>
<CAPTION>
                                                          1998              1997 
                                                          ----              ---- 
<S>                                                   <C>               <C>         
                 Charitable contributions                   26,000           298,000
                 State taxes                            (3,217,000)         (266,000)
                 Other                                   1,983,000           753,000
                                                      ------------      ------------
                                                        65,446,000         9,640,000
                 Other liabilities                     (15,000,000)       (7,604,000)
                 Valuation allowance                   (38,321,000)       (3,905,000)
                                                      ------------      ------------
                 Total                                $ 12,125,000      $ (1,869,000)
                                                      ============      ============
</TABLE>


        A valuation allowance is provided when it is more likely than not that
        some portion or all of the deferred tax assets will not be realized.

        In Malaysia, the subsidiary company has been granted pioneer status
        under that country's Promotion of Investment Act of 1986. As a result of
        the pioneer status, the subsidiary company was exempt from paying tax on
        profit earned from pioneer products through September 1998. In Thailand,
        the subsidiary company has been granted exempt status with respect to
        profit earned through 2003 under that country's Investment Promotion
        Act, and has been granted a reduced tax rate through 2007. As the
        Company begins to build new production facilities in Thailand, it has
        applied for and received similar tax free status for these operations.

        As of December 31, 1998, the Company has net operating loss carryovers
        of approximately $144,571,000, $147,618,000 and $1,967,000 for federal,
        state, and foreign tax purposes. At December 31, 1997, the Company had
        net operating loss carryovers of approximately $6,780,000, $5,684,000
        and $1,967,000 for federal, state, and foreign tax purposes. These
        carryovers expire in various years through 2013.

        The Company does not provide for income taxes which would be payable if
        undistributed earnings of its foreign subsidiaries were remitted because
        the Company considers these earnings to be invested indefinitely. During
        the years ended December 31, 1998 and 1997, the Company recorded tax
        benefits from stock option exercises of $16,062,000 and $4,436,000,
        respectively, which were credited to shareholders' equity.


                                      -39-


<PAGE>   40
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

9.      Commitments and Contingencies:

        At December 31, 1998, approximate future minimum rental payments
        applicable to noncancelable operating leases for office and warehouse
        space were as follows:



<TABLE>
<S>                                                         <C>       
                             1999                           $1,814,760
                             2000                            1,739,321
                             2001                              587,645
                             2002                              444,676
                             2003                              256,654
                                                            ----------
                                                            $4,843,056
                                                            ==========
</TABLE>


        Rent expense for the years ended December 31, 1998, 1997 and 1996 was
        $2,585,000, $1,547,000 and $1,144,000, respectively.

        The Company has outstanding contractual commitments at December 31, 1998
        for the construction of plant and equipment in Thailand in the
        approximate amount of $12,481,000.

        Subsequent to December 31, 1998, the Company entered into various debt
        agreements which restructure the Company's existing credit facilities
        (see Note 13).

        Litigation

        As of December 31, 1998, approximately 213 product liability lawsuits
        seeking monetary damages, in most cases of an unspecified amount, were
        pending in federal and state courts against the Company and other
        manufacturers of latex gloves. These lawsuits allege injuries ranging
        from dermatitis to severe allergic reactions caused by the residual
        chemicals or latex proteins in gloves worn by medical workers while
        performing their duties. On February 26, 1997, the Judicial Panel on
        Multi-District Litigation entered an order transferring all latex
        allergy lawsuits brought on behalf of healthcare workers against the
        Company and other latex glove manufacturers in the Federal courts to the
        United States District Court for the Eastern District of Pennsylvania,
        consolidating those cases for discovery management and other pre-trial
        proceedings. The Company has referred the defense of these lawsuits to
        its insurance carriers.

        Since March 11, 1999, approximately fifteen lawsuits (collectively the
        "Securities Actions") have been filed in the U.S. District Court for the
        Southern District of California against the Company and certain officers
        and directors alleging violations of Sections 10(b) and 20(a) of the
        Securities and Exchange Act of 1934, and Rule 10b-5 promulgated
        thereunder. The Securities Actions were brought by plaintiffs in their
        individual capacity and on behalf of purposed class of persons who
        purchased or otherwise acquired the Company's publicly traded securities
        during various periods occurring between October 23, 1997 and March 11,
        1999. They allege that plaintiffs purchased the Company's securities at
        prices artificially inflated by defendants' misrepresentations and
        omissions concerning the Company's financial condition and prospects and
        seek an unspecified amount of damages. In addition, a shareholder
        derivative action has been filed against certain of the Company's
        directors, and the Company as a nominal defendant, in the Supreme Court
        of the State of California, San Diego County (the "Derivative Action").
        The Derivative Action alleges breach of fiduciary duty, waste of
        corporate assets and gross negligence in connection with the Company's
        stock buy back program and seeks an unspecified amount of damages.
        Defendants' time to respond to the allegations made in the Securities
        Actions and the Derivative Action has not yet expired, however, the
        Company believes that these claims are without merit and intends to
        contest the claims vigorously.


                                      -40-
<PAGE>   41
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        From time to time, the Company is involved in other litigation relating
        to claims arising out of its operations in the normal course of
        business. As of the date hereof, the Company is not a party to any other
        legal proceedings, the adverse outcome of which, in management's
        opinion, individually or in the aggregate, would have a material adverse
        effect on the Company's business, results of operation or financial
        condition.

        The Company's tax returns for the years ended December 31, 1995, 1996
        and 1997 are currently being audited by the Internal Revenue Service.

10.     Equity Compensation Plan and Stock Options:

        The Company's Equity Compensation Plan (the "Plan"), adopted in 1993,
        provides for the issuance of stock options, stock appreciation rights
        and restricted stock to eligible directors, certain employees, and
        consultants. The Company has reserved 14,689,118 shares of common stock
        for issuance under the Plan.

        All stock options are granted at a price not less than the fair market
        value on the date the option is granted. The stock options granted can
        be exercised over periods of zero to ten years from the date of grant
        and will expire ten years from the date of grant.

        The Company has adopted the disclosure-only provisions of SFAS No. 123,
        Accounting for Stock-Based Compensation. Had compensation costs for the
        Company's stock option plan been determined based on the fair value at
        the grant date for awards in 1998, 1997 and 1996 consistent with the
        provisions of SFAS No. 123, net income and net income per common share
        would have been reduced to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                    1998            1997           1996
                                                    ----            ----           ----
<S>                                              <C>            <C>             <C>        
        Net income:
        As reported                              $41,869,215    $41,250,251     $23,582,399
        Pro forma                                 23,047,236     38,791,856      21,221,580

        Basic earnings per share:
        As reported                                     $.78           $.79            $.46
        Pro forma                                        .43            .74             .42

        Diluted earnings per share:
        As reported                                     $.70           $.70            $.42
        Pro forma                                        .38            .66             .38
</TABLE>

        The fair value of each option grant is estimated as of the date of grant
        using the Black-Scholes option-pricing model with the following
        weighted-average assumptions used for grants in 1998, 1997 and
        1996:dividend yield of 0%; expected volatility of 55.4%, 51.6% and
        52.7%, respectively; risk-free interest rate ranging from 5.0% to 7.2%;
        and expected lives of 4 to 6 years.


                                      -41-


<PAGE>   42
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        Stock option activity for the years ended December 31, 1998, 1997 and
        1996 was as follows:


<TABLE>
<CAPTION>
                                                                                     WEIGHTED-AVERAGE
                                                                     OPTIONS              PRICES
                                                                     -------              ------
<S>                                                               <C>                <C>  
        Outstanding at January 1, 1996                              8,381,600              $3.43
               Granted                                              2,932,800              $6.12
               Exercised                                           (1,756,600)             $3.04
               Forfeited                                             (318,133)             $3.60
                                                                    ---------              -----
        Outstanding at December 31, 1996                            9,239,667              $4.35
               Granted                                              2,088,200             $15.26
               Exercised                                           (1,165,420)             $3.64
               Forfeited                                             (333,120)             $4.72
                                                                    ---------              -----
        Outstanding at December 31, 1997                            9,829,327              $6.74
               Granted                                              2,856,550             $33.67
               Exercised                                           (1,636,175)             $4.43
               Forfeited                                             (359,295)            $14.04
                                                                    ---------             ------
        Outstanding at December 31, 1998                           10,690,407             $14.04
                                                                   ==========             ======

        Shares exercisable as of December 31, 1998                  5,980,671             $10.75
                                                                    =========             ======
</TABLE>


        As of December 31, 1998, 1997 and 1996, options outstanding have
        exercise prices between $2.50 and $50.00, $2.50 and $28.13, and $2.50
        and $12.94, respectively, and a weighted-average remaining contractual
        life ranging from 4 to 6 years.

        During 1995, the Company issued a restricted stock grant of 400,000
        shares at $3.69, the fair market value at date of grant, to a former
        executive of the Company. Restrictions on the shares granted lapse in
        five annual installments beginning in January of 1996 through January
        2000. During 1996, 233,336 shares relating to this restricted stock
        grant were forfeited, in conjunction with the terms of a separation
        agreement between the Company and the former executive. At December 31, 
        1998, options to acquire the 166,664 shares had been exercised.

        In August 1990, the Company granted an option to an employee, which
        expires July 2000, to purchase 883,540 shares of common stock at an
        option price of $.06 per share. The option provides for the exercise of
        176,708 shares at the grant date and the exercise of 176,708 shares
        annually from April 1994 through April 1997. At December 31, 1997,
        options to acquire the 883,540 shares had been exercised.

11.     Major Customers and Concentrations of Credit Risk:

        Major customers are those that individually account for more than 10% of
        the Company's consolidated net sales. During 1998, two customers
        accounted for approximately 17.3% and 16.4% of consolidated net sales.
        During 1997, two customers accounted for approximately 22.2% and 19.6%
        of consolidated net sales. During 1996, two customers accounted for
        approximately 21.7% and 22.5% of consolidated net sales.

        The majority of the Company's sales are to medical supply distribution
        companies. This could unfavorably affect the Company's overall exposure
        to credit risk inasmuch as these customers could be affected by similar
        economic or other conditions. At December 31, 1998, 1997 and 1996,
        approximately 51.9%, 55.5%, and


                                      -42-


<PAGE>   43
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

        50.2%, respectively, of net receivables were represented by three
        customers. Historically, the Company's uncollectible accounts receivable
        have not been significant, and typically the Company does not require
        collateral for its receivables.

        In addition, in assessing its concentration of credit risk related to
        cash and cash equivalents, the Company places its cash and cash
        equivalents, which may at times exceed FDIC insurance limits, in foreign
        and domestic financial institutions.

12.     Employee Benefits:

        The Company's 401(k) defined contribution plan (the "401(k) Plan"),
        adopted in 1995, is available to eligible employees who have completed
        at least three months of service. Participants may defer, until
        termination of employment with the Company, salary up to the limit
        imposed by the Internal Revenue Code for any calendar year. In 1998,
        1997 and 1996, contributions were matched by the Company in an amount
        equal to 33-1/3% of the participant's contribution. For the years ended
        December 31, 1998, 1997 and 1996, the Company incurred costs of
        approximately $390,000, $276,000, and $139,000, respectively, in
        connection with the 401(k) Plan.

        The Company's deferred compensation plan, adopted in 1997, is available
        to certain eligible highly compensated employees. Participants may
        defer, until termination of employment with the Company, up to 50% of
        annual salary and 100% of incentive compensation in conjunction with
        this plan. In 1998 and 1997, contributions were matched by the Company
        in an amount equal to 25% of the participants' contributions. For the
        years ended December 31, 1998 and 1997, the Company incurred costs of
        approximately $385,000 and $45,000, respectively, in conjunction with
        this plan.


                                      -43-


<PAGE>   44
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

13.     Subsequent Events

        On March 5, 1999, the Company's existing bank borrowings were
        restructured as a $100 million facility, including a $60 million term
        loan (the "Term Loan") and a $40 million revolving credit facility (the
        "Revolver") both maturing in 2004. The Term Loan and the Revolver bear
        interest at approximately LIBOR plus 1.25%, however, the rate may vary
        according to certain financial ratios. In conjunction with the
        aforementioned bank borrowings, the Company issued $40 million of senior
        secured notes due 2009 (the "Notes") with a final maturity of ten years
        and an average life of seven-years. The Notes will constitute senior
        debt of the Company, ranking pari passu with the Company's other senior
        bank indebtedness. The Notes bear interest at an annual rate of 6.89%.
        The proceeds of the Term Loan, the Revolver and the Notes were used to
        repay outstanding amounts under the Credit Facility and the BVI
        Facility, which were subsequently canceled. The Term Loan, Revolver, and
        the Notes will all be secured by certain assets of the Company as well
        as a guarantee of all current and future significant domestic
        subsidiaries. The Company's future principal payments associated with
        the Term Loan will be due on a quarterly basis beginning on June 30,
        1999 through June 30, 2004. Applicable to the Term Loan and the Notes,
        future minimum principal payments will be as follows:


<TABLE>
<S>                                                 <C>        
                            1999                     $ 4,500,000
                            2000                       8,250,000
                            2001                      11,250,000
                            2002                      14,250,000
                            2003                      20,264,300
                            Thereafter                41,485,700
                                                    ------------
                                                    $100,000,000
                                                    ============
</TABLE>

        The Company also entered into a seven year lease (the "Lease") for a new
        corporate headquarters campus facility to be constructed for the
        Company. The lessor of the campus has committed to fund up to a maximum
        of $60 million for the construction of the campus, with the portion of
        the committed amount actually used to be determined by the Company. The
        Company has the option to purchase the leased premises at any time
        during the lease. If the Company elects not to purchase the premises,
        the Company has guaranteed that the lessor, upon subsequent sale of the
        building, will receive a percentage of the total amount of funding, up
        to $53.9 million. The Company's lease obligations, including the payment
        of rents and the payment of the guaranteed residual value is secured by
        the Company's interest in the real estate subject to the Lease and, pari
        passu with the lenders on the Term Loan, Revolver, and Notes, certain
        other assets of the Company.

14.     Restructuring and Other Unusual Charges

        During 1996, Safeskin announced plans to move all of its remaining latex
        examination glove production from its Malaysian facility to its Thailand
        facility. Safeskin also announced that the Malaysian facility would
        continue to operate as Safeskin's manufacturing source of higher-value
        synthetic, surgical, and scientific products. In connection with the
        move, Safeskin recognized expense of approximately $3 million in the
        fourth quarter of 1996, reflected in the accompanying financial
        statements as a component of restructuring and other unusual charges. At
        December 31, 1996, the Malaysian facility was considered held for sale.
        During 1997, Safeskin extended the planned use of the Malaysian facility
        due to existing production requirements and the timing of bringing new
        production capacity on-line in Thailand. During 1998, Safeskin
        successfully increased its examination glove production capacity at its
        existing Thailand facility and commenced operations at its new 54-acre
        manufacturing facility in Thailand. This facility was constructed to
        provide additional capacity for the production of Safeskin's synthetic,
        surgical, and scientific products. As a result of this increased
        capacity in Thailand, during 1998 Safeskin decided to move all of its
        remaining examination, surgical, and synthetic glove production from its
        Ipoh, Malaysia and Vista, California production facilities to Safeskin's
        manufacturing facilities in Thailand by the end of the first quarter of
        1999. In addition, Safeskin announced that it had completed the
        integration of AQL in the fourth quarter of 1998 by relocating AQL's
        offices from Santa Maria, California to Safeskin's corporate
        headquarters in San Diego, California. In connection with the closure of
        Safeskin's facilities in Ipoh, Malaysia and Vista and Santa Maria,
        California, Safeskin recognized expense of $14,331,000 in the fourth
        quarter of 1998, reflected in the accompanying financial statements as a
        component of restructuring and other unusual charges. This expense
        consists of approximately $5,134,000 related to fixed assets written
        down to estimated fair value, $3,883,000 related to employee termination
        costs, $3,335,000 related to impairment of goodwill associated with the
        Tactyl acquisition, $1,535,000 related to the write-off of leased
        equipment and the costs to renovate a leased facility, and approximately
        $444,000 associated with various other unusual charges. All remaining
        assets were assumed to be scrapped at the disposition date. The net book
        value of assets expected to be disposed of totaled approximately $14
        million as of December 31, 1998.

15.     Acquisitions

        In May 1998, the Company acquired Sensicon Corporation, a San Diego 
        based developer and manufacturer of non-latex products. The 
        acquisition, which has been accounted for under the purchase method, 
        included an acquisition price of approximately $6 million in cash paid 
        at the closing. The excess purchase price over the fair value of the 
        net assets acquired of $5.9 million was recorded as goodwill, which is 
        being amortized over 15 years.

        In February 1998, the Company completed the acquisition accounted for
        under the purchase method of Absolute Quality Leadership, Inc. ("AQL"),
        a California-based marketer of glove products for the high-technology
        and scientific markets. The acquisition, which has been accounted for
        under the purchase method, included an acquisition price of
        approximately $8.8 million and $1,564,000 in stock options issued plus
        certain contingent payments totaling approximately $2 million based upon
        the performance of the Company's scientific business unit. The Company
        has changed the name of AQL to Safeskin Scientific Corporation. The
        excess purchase price over the fair value of the net assets acquired of
        $8.8 million was recorded as goodwill, which is being amortized over 15
        years.

        In March 1997, the Company acquired the synthetic glove business of 
        Tactyl Technologies, Inc., a San Diego based developer and manufacturer 
        of non-latex surgical gloves for the domestic and international 
        markets. The acquisition, which has been accounted for under the 
        purchase method, included an acquisition price of approximately $14.5 
        million in cash paid at the closing, plus up to an additional $5 
        million cash payment which was contingent upon the Tactyl business 
        achieving certain future sales and performance targets, including the 
        development of the next generation of synthetic latex technology. The 
        excess purchase price over the fair value of the net assets acquired of 
        $12.2 million was recorded as goodwill, which is being amortized over 
        15 years. In May 1998, Safeskin made a final payment related to this 
        agreement totaling approximately $3.3 million, which has been recorded 
        as an addition to goodwill and is being amortized over its remaining 
        life. During the fourth quarter of 1998, the Company recognized expense 
        of $3,335,000 related to goodwill impairment associated with the Tactyl 
        acquisition integration (see Note 14).



                                      -44-


<PAGE>   45
                              SAFESKIN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  ------------

16.     Quarterly Financial Data (Unaudited):

        Summarized quarterly financial data for the periods ended December 31,
        1998 and 1997 is as follows (in thousands except per share amounts):


<TABLE>
<CAPTION>
                                                                                    BASIC            DILUTED
                                                                  NET INCOME    EARNINGS (LOSS)    EARNINGS (LOSS)
                                   REVENUES      GROSS PROFIT       (LOSS)        PER SHARE          PER SHARE
                                   --------      ------------       ------      ---------------    ---------------
<S>                                <C>           <C>              <C>           <C>           <C>   

        1998:
        December 31                $59,878         $31,537         $  (954)         $(.02)             $(.02)
        September 30 (as restated)  59,968          30,907          14,512            .27                .24
        September 30
        (as previously reported)    61,568          31,972          16,152            .30                .27
        June 30                     58,642          30,752          14,997            .28                .25
        March 31                    53,298          27,842          13,314            .25                .22

        1997:
        December 31                $49,985         $22,234         $11,997          $ .23              $ .20
        September 30                46,897          20,265          11,560            .22                .20
        June 30                     44,948          19,839           9,203            .18                .16
        March 31                    41,168          18,431           8,490            .16                .15
</TABLE>

On March 11, 1999, the Company announced that it had determined that the 
distributors with which the Company does business were carrying higher than 
previously estimated levels of inventory of the Company's products. As such, 
the Company re-examined the 1998 financial statements considering the higher 
inventory levels and, as a result, determined that the accrual for sale 
rebates at September 30, 1998 was understated by approximately $1.6 million. In 
addition, the Company recorded certain other adjustments in the quarter ended 
September 30, 1998 that in the aggregate were not material. Accordingly, the
Company has restated the financial statements for the quarter ended September
30, 1998 for these adjustments, which resulted in a reduction in net income
compared to what was previously reported in the amount of approximately $1.6
million.
 

                                      -45-


<PAGE>   46
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Safeskin Corporation:

We have audited the consolidated financial statements of Safeskin Corporation as
of December 31, 1998 and 1997, and for the years then ended and have issued our
report thereon dated April 5, 1999; such financial statements and report are
included in this Annual Report on Form 10-K. Our audits also included the
financial statement schedules of Safeskin Corporation, listed in Item 14. These
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein. The financial statements of Safeskin
Corporation for the year ended December 31, 1996 were audited by other auditors
whose report, dated February 17, 1997, expressed an unqualified opinion on those
statements.


Deloitte & Touche LLP
San Diego, California
April 5, 1999


                                      -46-
<PAGE>   47
                              SAFESKIN CORPORATION
                              (PARENT COMPANY ONLY)

                                   SCHEDULE I
                CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

        The following condensed financial statements reflect those of the parent
company only. For this purpose only, the parent company has accounted for its
subsidiaries on the equity method of accounting.

        All footnote disclosures have been omitted because all the information
is included in the Safeskin Corporation consolidated financial statements
included elsewhere in this Report.

                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                           1998                  1997
                                                           ----                  ----
<S>                                               <C>                   <C>          
ASSETS
Current assets:
Cash and cash equivalents .....................   $         158         $  21,908,840
Accounts receivable ...........................      23,434,089            18,243,363
Inventory .....................................       3,891,471            10,092,806
Other current assets ..........................       3,316,079               836,805
                                                  -------------         -------------
Total current assets ..........................      30,641,797            51,081,814
Investment in and advances to wholly-owned
subsidiaries ..................................     204,082,958           111,140,323
Property, plant and equipment, net ............       9,876,330             6,240,405
Deferred taxes and other assets ...............      15,166,115               116,034
                                                  -------------         -------------
Total assets ..................................   $ 259,767,200         $ 168,578,576
                                                  =============         =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......   $  13,531,459         $  10,016,903
Payable to wholly-owned subsidiaries ..........      44,546,772            49,888,432
Current portion of long-term debt .............       4,500,000                    --
                                                  -------------         -------------
Total current liabilities .....................      62,578,231            59,905,335
Long-term debt ................................       7,731,158                    --
Other long-term liabilities ...................       2,140,682             2,094,928
                                                  -------------         -------------
Total liabilities .............................      72,450,071            62,000,263
Shareholders' equity:
Common stock ..................................         546,004               529,642
Additional paid-in-capital ....................      75,360,306            47,517,453
Treasury stock ................................      (7,684,328)                   --
Accumulated other comprehensive loss ..........     (26,993,003)          (45,687,717)
Retained earnings .............................     146,088,150           104,218,935
                                                  -------------         -------------
Total shareholders' equity ....................     187,317,129           106,578,313
                                                  -------------         -------------
Total liabilities and shareholders' equity ....   $ 259,767,200         $ 168,578,576
                                                  =============         =============
</TABLE>


                                      -47-


<PAGE>   48
                              SAFESKIN CORPORATION
                              (PARENT COMPANY ONLY)

                            SCHEDULE I - (CONTINUED)
                       CONDENSED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                           1998                  1997                  1996
                                                           ----                  ----                  ----
<S>                                               <C>                   <C>                   <C>          
Net sales .....................................   $ 195,452,471         $ 158,938,566         $ 128,614,248
Cost of goods sold ............................     148,649,166           121,347,644            95,576,710
                                                  -------------         -------------         -------------
      Gross profit ............................      46,803,305            37,590,922            33,037,538
                                                  -------------         -------------         -------------

Operating expenses:
      Selling .................................      19,849,696            19,292,100            15,935,764
      Research and development ................       5,307,131             3,120,780             2,042,754
      General and administrative ..............      26,209,675            14,731,012            12,286,798
      Restructuring and other unusual
             charges ..........................         113,050                    --                    --
                                                  -------------         -------------         -------------
       Total operating expenses ...............      51,479,552            37,143,892            30,265,316
                                                  -------------         -------------         -------------
       Income (loss) from operations ..........      (4,676,247)              447,030             2,772,222
Interest expense (income), net ................         624,852              (676,270)              (58,337)
Other expense (income), net ...................      (6,115,538)              331,739              (534,673)
Equity in net income of wholly-owned
subsidiaries ..................................     (44,527,511)          (45,457,484)          (23,156,046)
                                                  -------------         -------------         -------------
       Income before income tax provision .....      45,341,950            46,249,045            26,521,278
Income tax provision ..........................       3,472,735             4,998,794             2,938,879
                                                  -------------         -------------         -------------
       Net income .............................   $  41,869,215         $  41,250,251         $  23,582,399
                                                  =============         =============         =============
</TABLE>


                                      -48-


<PAGE>   49
                              SAFESKIN CORPORATION
                              (PARENT COMPANY ONLY)

                            SCHEDULE I - (CONTINUED)
                       CONDENSED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                            1998                 1997                 1996
                                                            ----                 ----                 ----
<S>                                                 <C>                  <C>                  <C>         
 Cash flows from operating activities:
Net income ......................................   $ 41,869,215         $ 41,250,251         $ 23,582,399
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................      3,777,241            1,445,783              761,231
Exchange (gain) loss ............................     (2,000,000)           2,000,000                   --
Restructuring and other unusual charges .........        113,050                   --                   --
Non-cash severance expense ......................      2,985,225                   --                   --
Loss on disposal of equipment ...................          6,669               21,209                6,542
Deferred taxes ..................................     (5,328,169)           6,308,400           (2,287,424)
Amortization of deferred compensation ...........             --                   --              152,469
Undistributed net income of wholly-owned
subsidiaries ....................................    (44,527,511)         (45,457,484)         (23,156,046)
 Change in operating assets and liabilities:
Accounts receivable .............................     (5,190,726)            (167,990)          (1,742,990)
Inventory .......................................      6,201,335           16,266,137           (7,602,653)
Other assets ....................................      3,747,594               41,332            3,188,760
Accounts payable and other accrued
 liabilities ....................................      5,560,309            5,970,404            5,738,454
Payable to wholly-owned subsidiaries ............     (5,341,660)           3,334,626           15,023,324
                                                    ------------         ------------         ------------
Net cash provided by operating activities .......      1,872,572           31,012,668           13,664,066
                                                    ------------         ------------         ------------

 Cash flows from investing activities:
  Decrease (increase) in investment in and
     advances to wholly-owned subsidiaries ......    (17,654,651)          (9,751,357)           1,927,507
   Net cash paid for acquisitions ...............    (11,076,460)         (14,463,092)                  --
  Proceeds from sale of subsidiary ..............        574,703                   --                   --
  Purchase of property, plant and equipment .....     (7,419,835)          (3,686,946)          (3,750,137)
  Proceeds from sale of equipment ...............             --               32,208                9,000
                                                    ------------         ------------         ------------
   Net cash used by investing activities ........    (35,576,243)         (27,869,187)          (1,813,630)
                                                    ------------         ------------         ------------

 Cash flows from financing activities:
Increase (decrease) in long-term debt ...........     12,231,158                   --           (2,750,000)
Proceeds from issuance of common stock ..........      7,248,159            4,251,134            5,351,924
  Repurchase of common stock ....................     (7,684,328)                  --                   --
                                                    ------------         ------------         ------------
   Net cash provided by financing activities ....     11,794,989            4,251,134            2,601,924
                                                    ------------         ------------         ------------

 Net increase (decrease) in cash and cash
     equivalents ................................    (21,908,682)           7,394,615           14,452,360
 Cash and cash equivalents at beginning of
     year .......................................     21,908,840           14,514,225               61,865
                                                    ------------         ------------         ------------
 Cash and equivalents at end of year ............   $        158         $ 21,908,840         $ 14,514,225
                                                    ============         ============         ============
</TABLE>


                                      -49-


<PAGE>   50
                              SAFESKIN CORPORATION
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                        DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                     BALANCE AT          CHARGES TO                             BALANCE AT
                                                    DECEMBER 31,         COSTS AND                             DECEMBER 31,
    DESCRIPTION                                        1997              EXPENSES           DEDUCTIONS             1998
    -----------                                        ----              --------           ----------             ----
<S>                                                 <C>                 <C>                 <C>                <C>       
Allowance for doubtful accounts receivable ....     $  966,000          $  231,000          $   16,000          $1,181,000
Allowance for inventory cost to net
realizable value ..............................     $  266,000          $1,267,000          $  164,000          $1,369,000

</TABLE>


<TABLE>
<CAPTION>
                                                     BALANCE AT         CHARGES TO                              BALANCE AT
                                                    DECEMBER 31,        COSTS AND                              DECEMBER 31,
    DESCRIPTION                                        1996              EXPENSES           DEDUCTIONS             1997
    -----------                                        ----              --------           ----------             ----
<S>                                                 <C>                 <C>                 <C>               <C>       
Allowance for doubtful accounts receivable ....     $  665,000          $  301,000          $       --          $  966,000
Allowance for inventory cost to net
realizable value ..............................     $1,112,000          $   33,000          $  879,000          $  266,000


                                                     BALANCE AT          CHARGES TO                             BALANCE AT
                                                    DECEMBER 31,         COSTS AND                             DECEMBER 31,
    DESCRIPTION                                        1995              EXPENSES           DEDUCTIONS             1996
    -----------                                        ----              --------           ----------             ----
<S>                                                 <C>                 <C>                 <C>                <C>       
Allowance for doubtful accounts receivable ....     $  321,000          $  344,000          $       --          $  665,000
Allowance for inventory cost to net
realizable value ..............................     $  180,000          $  932,000          $       --          $1,112,000
</TABLE>


                                      -50-


<PAGE>   51
ITEM 9.        DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

               None.


                                    PART III

ITEM 10, 11, 12 AND 13.

               The information required under these items is contained in the
Company's 1999 Proxy Statement, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal year
end. This information is incorporated herein by reference.


                                     PART IV

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

               (a)    DOCUMENTS FILED AS A PART OF THIS REPORT:

                      1.     Financial Statements

                      The financial statements required by this item are
                      included and listed in the accompanying Index to
                      Consolidated Financial Statements and Schedules in Part
                      II, Item 8 of this Report.

                      2.     Financial Statement Schedules

                      The financial statement schedules required by this item
                      are included and listed in the accompanying Index to
                      Consolidated Financial Statements and Schedules in Part
                      II, Item 8 of this Report.

                      3.     Exhibits

                      The following is a list of all exhibits filed as a part of
                      this Report:


<TABLE>
<CAPTION>
      EXHIBIT   DESCRIPTION OF DOCUMENT
      -------   -----------------------
<S>             <C>
        3.1     Amended and Restated Articles of Incorporation(1)

        3.2     Amended and Restated Bylaws(8)

        10.1    Safeskin Corporation Amended and Restated Equity Compensation
                Plan(1)

        10.2    Employment Agreement, dated June 15, 1993, between Neil K.
                Braverman and Safeskin Corp.(1)

        10.3    Employment Agreement, dated June 15, 1993, between Richard Jaffe
                and Safeskin Corp.(1)

        10.4    Office Lease Agreement, dated November 14, 1989, between Crocker
                Center Associates IV, Ltd. and Safeskin Corp.(1)

        10.5    Standard Industrial Sublease, dated April 14, 1993, between Tri
                Gem Computer, Inc. and Safeskin Corporation(1)

        10.6    Lease, dated August 7, 1992, between Merritt-Bavar Limited
                Partnership and Safeskin Corporation(1)

        10.7    Accounts Financing Agreement, dated February 27, 1989, between
                Congress Financial Corporation (Florida) and Safeskin Corp., and
                amendment thereto(1)

        10.8    Promissory Note, dated November 9, 1993, by Safeskin Corp. to
                Bankers Trust Company(1)
</TABLE>


                                      -51-


<PAGE>   52
<TABLE>
<CAPTION>
      EXHIBIT   DESCRIPTION OF DOCUMENT
      -------   -----------------------
<S>             <C>
        10.9    Promissory Note, dated December 31, 1991, by Safeskin Corp. to
                The Jaffe Family Partnership(1)

        10.10   Promissory Note, dated July 23, 1992, by Safeskin Corp. to Mr.
                Neil K. Braverman(1)

        10.11   Promissory Note, dated December 21, 1992, by Safeskin Corp. to
                Mr. Neil K. Braverman(1)

        10.12   Promissory Note, dated December 21, 1992, by Safeskin Corp. to
                The Jaffe Family Partnership(1)

        10.13   Letter of Offer of Banking Facilities, dated November 25, 1992,
                by Perwira Habib Bank Malaysia Berhad to Safeskin Corporation
                (Malaysia) Sdn. Bhd., and amendment thereto(1)

        10.14   Letter of Offer of Banking Facilities, dated March 4, 1992, by
                Standard Chartered Bank to Safeskin Corporation (M) Sdn. Bhd.(1)

        10.15   Guarantee, dated February 3, 1992, by Safeskin Corp. to Standard
                Chartered Bank(1)

        10.16   Letter of Offer of Banking Facilities, dated January 30, 1992,
                by Perwira Habib Bank Malaysia Berhad to Safeskin Latex Company
                Sdn. Bhd.(1)

        10.17   Corporate Guarantee, dated March 24, 1992, by Safeskin
                Corporation (Malaysia) Sdn. Bhd. to Perwira Habib Bank Malaysia
                Berhad(1)

        10.18   Debenture, dated June 27, 1991, between Safeskin Corporation
                (Malaysia) Sdn. Bhd. and Perwira Habib Bank Malaysia Berhad(1)

        10.19   Debenture, dated March 10, 1992, between Safeskin Corporation
                (Malaysia) Sdn. Bhd. and Perwira Habib Bank Malaysia Berhad(1)

        10.20   Debenture, dated June 1, 1992, between Safeskin Corporation (M)
                Sdn. Bhd. and Standard Chartered Bank(1)

        10.21   Corporate Guarantee, dated February 8, 1993, by Safeskin
                Corporation to Perwira Habib Bank Malaysia Berhad(1)

        10.22   Letter of Offer of Banking Facilities, dated December 28, 1992,
                by The Hong Kong and Shanghai Banking Corporation Limited to
                Safeskin Corporation (M) Bhd. Sdn.

        10.23   Continuing Guaranty, dated February 22, 1993, by Safeskin Corp.
                to The Hong Kong and Shanghai Banking Corporation Limited(1)

        10.24   Agreement, dated December 7, 1992, between Norsechem Latex
                Products (M) Sdn. Bhd. and Safeskin Corporation (M) Sdn. Bhd.(1)

        10.25   Corporate Guarantee and Indemnity, dated February 18, 1993, by
                Safeskin Corp. to Norsechem Latex Products (M) Sdn. Bhd. and
                Synthetic Bakelites (Malaysia) Sdn. Bhd.(1)

        10.26   Bank Guarantee and Indemnity, dated February 27, 1993, The Hong
                Kong and Shanghai Banking Corporation Limited to Synthetic
                Bakelites (Malaysia) Sdn. Bhd.(1)

        10.27   Stock Option Grant by Safeskin Corp. to Lee Chee Ming(1)

        10.28   Collective Agreement, dated October 25, 1991, between Safeskin
                Corporation (M) Sdn. Bhd. and Kesatuan Pekerja-Pekerja Safeskin
                Corporation (M) Sdn. Bhd.(1)

        10.29   Trust Deed, dated June 9, 1993, with respect to shares of
                Safeskin Latex Company Sdn. Bhd.(1)

        10.30   Trust Deed, dated June 9, 1993, with respect to shares of
                Safeskin Latex Company Sdn. Bhd.(1)

        10.31   Letter of Review of Credit Facilities--Enhancement, dated August
                18, 1993 by Perwira Habib Bank Malaysia Berhad(1)

        10.32   Corporate Guarantee, dated October 8, 1993, by Safeskin
                Corporation to Perwira Habib Bank Malaysia Berhad(1)

        10.33   Industrial Real Estate Lease, dated January 1, 1994, between
                California State Teachers Retirement System and Safeskin
                Corporation(2)

        10.34   Employment Agreement, dated July 20, 1995, between David L.
                Morash and Safeskin Corp.(3)

        10.35   Employment Agreement, dated June 29, 1995, between Judy W.
                Grimes and Safeskin Corporation (4)

        10.36   Office Lease, dated October 31, 1995, between SDC LP and
                Safeskin Corporation

        10.37   Credit Agreement, dated July 15, 1996, by Safeskin Corporation
                to Union Bank(5)

        10.38   Letter of Agreement between Judy Grimes and Safeskin
                Corporation(5)

        10.39   Consulting Agreement, dated as of January 1, 1997, between Neil
                K. Braverman and Safeskin Corporation (6)
</TABLE>


                                      -52-


<PAGE>   53

<TABLE>
<CAPTION>
      EXHIBIT   DESCRIPTION OF DOCUMENT
      -------   -----------------------
<S>             <C>
        10.40   Amended and Restated Assets Purchase Agreement, dated as of
                March 24, 1997, by and among TT Acquisition Company, EQ
                Corporation and Tactyl Technologies, Inc.(6)

        10.41   Executive Deferred Compensation Plan of Safeskin Corporation(7)

        10.42   Services Agreement between Safeskin Corporation and Perot
                Systems Corporation dated February 3, 1998 (9)

        10.43   Amended and Restated Loan Agreement between Safeskin Corporation
                and Union Bank of California, N.A. dated May 4, 1998 (10)

        10.44   Loan Agreement dated as of July 30, 1998 among Safeskin (B.V.I.)
                Limited and Union Bank of California, N.A. (11)

        10.45   Revolving/Term Loan Agreement dated as of July 30, 1998 among
                Safeskin Corporation and Union Bank of California, N.A. (11)

        11      Statement re: Computation of Per Share Earnings (12)

        21      Subsidiaries of the Registrant (12)

        23.1    Consent of Deloitte & Touche LLP (12)

        23.2    Consent of PricewaterhouseCoopers LLP (12)

        99      Report of Independent Accountants (12)
</TABLE>

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

                (1)     Filed as an exhibit to the Company's Registration
                Statement on Form S-1, No. 33-68284, as filed with the
                Securities and Exchange Commission and incorporated herein by
                reference.

                (2)     Filed as an exhibit to the Company's Form 10-K for the
                fiscal year ended December 31, 1993.

                (3)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending September 30, 1995 as 10a.

                (4)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending September 30, 1995 as 10b.

                (5)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending June 30, 1996.

                (6)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending March 31, 1997.

                (7)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending September 30, 1997.

                (8)     Filed as an exhibit to the Company's Form 10-K for the
                fiscal year ended December 31, 1997.

                (9)     Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending March 31, 1998.


                                      -53-
<PAGE>   54
                (10)    Filed as an exhibit to the Company's Form 10-Q for the
                fiscal quarter ending June 30, 1998.

                (11)    Filed as an exhibit to the Company's Form 10Q for the
                fiscal quarter ending September 30, 1998.

                (12)    Filed as an exhibit hereto.

        (b)     REPORTS ON FORM 8-K:

                None.


                                      -54-


<PAGE>   55
                                   SIGNATURES

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

                                 SAFESKIN CORPORATION


                                 By:/s/ Richard Jaffe
                                 -------------------------------
Dated: April 6, 1999             Richard Jaffe, Chairman, President and Chief
                                 Executive Officer


               Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
        Signature                            Title                          Date
        ---------                            -----                          ----
<S>                             <C>                                     <C> 
/s/ Richard Jaffe               Chairman, President, Chief Executive    April 6, 1999
----------------------          Officer and Director
Richard Jaffe                   

/s/ David L. Morash             Executive Vice President                April 6, 1999
----------------------          and Chief Financial Officer
David L. Morash                 

/s/ Seth S. Goldman             Vice President, Finance                 April 6, 1999
----------------------          Controller and Secretary
Seth S. Goldman                 

/s/ Neil K. Braverman           Director                                April 6, 1999
----------------------
Neil K. Braverman

/s/ Irving Jaffe                Chairman Emeritus and Director          April 6, 1999
----------------------
Irving Jaffe

/s/ Howard L. Shecter           Director                                April 6, 1999
----------------------
Howard L. Shecter

/s/ Joseph Stemler              Director                                April 6, 1999
----------------------
Joseph Stemler

/s/Cam L. Garner                Director                                April 6, 1999
----------------------
Cam L. Garner

/s/Jeffrey Stiefler             Director                                April 6, 1999
----------------------
Jeffrey Stiefler
</TABLE>


                                      -55-


<PAGE>   56
               EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT     DESCRIPTION OF DOCUMENT
-------     -----------------------
<S>         <C>
11          Statement re: Computation of Per Share Earnings
21          Subsidiaries of the Registrant
23.1        Consent of Deloitte & Touche LLP
23.2        Consent of PricewaterhouseCoopers LLP
27          Financial Data Schedule
99          Report of Independent Accountants
</TABLE>


                                      -56-