SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 1998

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
              For the transition period from _________ to ________.

                           COPLEY PHARMACEUTICAL, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                  04-2514637
 (State or other jurisdiction of           (IRS Employer Identification No.)
  incorporation or organization)

    25 John Road                                      02021
    Canton, Massachusetts                           (Zip Code)
(Address of principal executive offices)

                         Commission file number: 0-20126

       Registrant's telephone number, including area code: (781) 821-6111


     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_______

The number of shares  outstanding of the registrant's only class of common stock
as of October 31, 1998 was 19,188,351 shares.


<PAGE>


                                       
                           COPLEY PHARMACEUTICAL, INC.
                                      INDEX
                  For the Nine Months Ended September 30, 1998

PART I.                            FINANCIAL INFORMATION           PAGE NO.

Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets as of September 30,
           1998 and December 31, 1997                                3

         Condensed Consolidated Statements of Operations
           and Comprehensive Income  for the three and nine          4
           months ended September 30, 1998 and 1997

         Condensed Consolidated Statements of Cash Flows
           for the nine months ended September 30, 1998 and 1997     5

         Notes to Condensed Consolidated Financial Statements     6 - 10

Item 2.  Management's Discussion and Analysis of Results of
           Operations and Changes in Financial Condition          11 - 17

PART II.                             OTHER INFORMATION

Item 1.  Legal Proceedings                                          18

Item 5.  Other Information                                          18

Item 6.  Exhibits and Reports on Form 8-K                           18

         Signature                                                  19

                                       2

<PAGE>


                          PART 1. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements
<TABLE>
                           COPLEY PHARMACEUTICAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                         September 30,      December 31,
 (In thousands, except share data)                                            1998              1997
 ----------------------------------------------------------------------------------------------------------
 ASSETS                                                                  (Unaudited)
 <S>                                                                   <C>             <C>
 Current assets:
     Cash and cash equivalents                                         $       13,119  $         13,847
     Available-for-sale securities                                             25,817            19,498
     Accounts receivable, trade, net                                           34,117            30,170
     Inventories:
         Raw materials                                                         10,759             7,282
         Work in process                                                        5,267             5,207
         Finished goods                                                         8,504            10,797
                                                                          ------------   ---------------
     Total inventories                                                         24,530            23,286
     Current deferred tax assets                                                5,434             5,239
     Other current assets                                                       4,781             4,189
                                                                          ------------   ---------------
         Total current assets                                                 107,798            96,229

 Property, plant and equipment, net                                            43,785            46,450
 Other assets                                                                   2,936             3,065
                                                                          ------------   ---------------
 Total assets                                                          $      154,519  $        145,744
                                                                          ------------   ---------------

 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
     Accounts payable, trade                                           $        2,973  $          2,583
     Accounts payable, related party                                           16,815            13,668
     Current portion of long-term debt                                            300               300
     Accrued compensation and benefits                                          1,533             1,275
     Accrued rebates                                                            8,826             9,071
     Accrued income taxes                                                       4,102               374
     Current portion of accrued recall related and litigation expenses          8,067             8,048
     Accrued expenses                                                           1,018               830
                                                                          ------------   ---------------
         Total current liabilities                                             43,634            36,149
 Accrued recall related and litigation expenses                                   ---             3,645
 Deferred tax liabilities                                                         940               269
 Long-term debt                                                                 4,500             4,800
                                                                          ------------   ---------------
 Total liabilities                                                             49,074            44,863

 Shareholders' equity:
     Preferred stock, $.01 par value; authorized 3,000,000 shares;
         none issued                                                              ---               ---
     Common stock, $.01 par value; authorized 60,000,000 shares;
         issued 25,370,745 shares                                                 254               254
     Additional paid-in capital                                                78,275            78,063
     Unrealized holding (loss)gain on available-for-sale securities                60               (16)
     Retained earnings                                                         39,387            35,133
     Treasury stock, at cost, 6,189,060 and 6,235,978 shares
         outstanding, respectively                                            (12,531)          (12,553)
                                                                          ------------    --------------
         Total shareholders' equity                                           105,445           100,881
                                                                          ------------    --------------
 Total liabilities and shareholders' equity                            $      154,519   $       145,744
                                                                          ------------    --------------
</TABLE>
         The   accompanying   notes  are  an  integral  part  of  the  Condensed
Consolidated Financial Statements.
                                       3
<PAGE>


<TABLE>
                           COPLEY PHARMACEUTICAL, INC.
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
                              COMPREHENSIVE INCOME

                 (Unaudited)                                                                           (Unaudited)
          For the three months ended                                                            For the nine months ended
                September 30,                                                                         September 30,
         1998                   1997         (In thousands, except per share data)          1998                  1997
     --------------         --------------                                             ---------------        --------------
 <C>                      <C>                <S>                                     <C>                    <C>             
                                             Net sales:
 $          16,931        $        19,665       Manufactured products                $         52,049       $        52,478
            18,409                 16,810       Distributed products                           46,226                35,313
     --------------         --------------                                             ---------------        --------------
            35,340                 36,475            Net sales                                 98,275                87,791
                                             Cost of goods sold:
            13,100                 13,864       Manufactured products                          39,820                39,331
            14,714                 12,270       Distributed products                           36,502                26,442
     --------------         --------------                                             ---------------        --------------
            27,814                 26,134            Cost of goods sold                        76,322                65,773

             7,526                 10,341                Gross profit                          21,953                22,018
                                             Operating expenses:
             2,954                  2,831       Research and development                        7,804                 9,080
             1,023                  1,160       Selling, marketing and distribution             3,448                 3,478
             1,608                  2,068       General and administrative                      4,387                 5,535
               183                    227       Recall related and litigation, net                378                 2,593
               ---                   (142)      Restructuring                                     ---                   170
     --------------         --------------                                             ---------------        --------------
             1,758                  4,197            Income from operations                     5,936                 1,162
               395                    360    Interest and other investment income               1,300                 1,013
              (110)                  (304)   Interest expense                                    (430)                 (434)
                29                    (59)   Other income (expense), net                          (46)               (1,559)
     --------------         --------------                                             ---------------        --------------
             2,072                  4,194            Income before income taxes                 6,760                   182
               975                  2,440    Provision for income taxes                         2,505                   305
     --------------         --------------                                             ---------------        --------------
 $           1,097        $         1,754    Net income (loss)                       $          4,255                  (123)
     --------------         --------------                                             ---------------        --------------
                                             Other comprehensive income, net of taxes
                71                     11     Unrealized gains (loss) on securities                78                    (8)
                                              Less: reclassification adjustment
                (4)                   ---     for (losses) included in net income                  (2)                  ---
     --------------         --------------                                             ---------------        --------------
 $           1,164        $         1,765    Comprehensive income (loss)             $          4,331       $          (131)
     --------------         --------------                                             ---------------        --------------
                                             Weighted    average    common
                                                 shares outstanding:
            19,179                 19,135          Basic                                       19,162                19,124
            19,360                 19,231          Diluted                                     19,303                19,124

                                             Earnings (loss) per share:
             $0.06                  $0.09          Basic                                        $0.22                $(0.01)
             $0.06                  $0.09          Diluted                                      $0.22                $(0.01)
</TABLE>
        The   accompanying   notes  are  an  integral   part  of  the  Condensed
Consolidated Financial Statements.
                                       4
<PAGE>



<TABLE>
                           COPLEY PHARMACEUTICAL, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                     (Unaudited)
                                                                              For the nine months ended
                                                                                    September 30,
  (In thousands)                                                               1998                1997
                                                                           --------------      -------------
 <S>                                                                     <C>                  <C>
 Cash flows from operating activities:
     Net income (loss)                                                   $        4,255       $        (123)
     Adjustments to reconcile net income (loss) to net cash provided by                      
         (used in) operating activities:
         Depreciation and amortization                                            5,019               5,411
         Realized losses (gains) on sales of assets                                   8                (183)
         Change in deferred taxes                                                   476               2,025
     Changes in operating assets and liabilities:
        Decreases (increases) in assets:
           Accounts receivable                                                   (3,947)             (7,618)
           Inventories                                                           (1,244)              1,153
           Other current assets                                                    (592)              1,161
           Other assets, net of amortization                                         23               1,253
        Increases (decreases) in liabilities:
           Accounts payable                                                       3,537               2,744
           Accrued income taxes                                                   3,728              (2,017)
           Accrued expenses                                                      (3,425)             (6,533)
                                                                            ------------        ------------
              Net cash provided by (used in) operating activities                 7,838              (2,727)
                                                                            ------------        ------------

 Cash flows from investing activities:
     Capital expenditures                                                        (2,230)               (868)
     Purchases of available-for-sale securities                                   8,900             (13,754)
     Proceeds from sales of available-for-sale securities                         8,104                 ---
     Proceeds from maturities of available-for-sale securities                  (23,273)             11,250
     Proceeds from sales of property, plant and equipment                           ---                 201
                                                                            ------------        ------------
              Net cash provided by (used in) investing activities                (8,499)             (3,171)
                                                                            ------------        ------------
 Cash flows from financing activities:
     Stock option excercises                                                         30                 ---
     Issuance of common stock to Employee Stock Purchase Plan                       203                 202
     Payment of long-term debt                                                     (300)               (300)
                                                                            ------------        ------------
             Net cash provided by (used in) financing activities                    (67)                (98)
                                                                            ------------        ------------
 Net increase (decrease) in cash and cash equivalents                              (728)             (5,996)
 Cash and cash equivalents at beginning of period                                13,847              15,974
                                                                            ------------        ------------
 Cash and cash equivalents at end of period                              $       13,119       $       9,978
                                                                            ------------        ------------
</TABLE>
         The   accompanying   notes  are  an  integral  part  of  the  Condensed
Consolidated Financial Statements.
                                       5
<PAGE>
                           COPLEY PHARMACEUTICAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  For the nine months ended September 30, 1998



 Note A - General

In the opinion of Copley Pharmaceutical,  Inc. ("the Company"), the accompanying
condensed  consolidated  financial  statements  contain all normal and recurring
adjustments necessary to present fairly the financial position of the Company as
of September 30, 1998 and December 31, 1997,  the results of its  operations for
the three and nine months ended  September 30, 1998 and 1997, and its cash flows
for the nine  months  ended  September  30,  1998 and 1997.  While  the  Company
believes that the disclosures presented are adequate to make the information not
misleading,   these  consolidated   financial   statements  should  be  read  in
conjunction  with the Notes  included  in the  Company's  Form 10-K for the year
ended December 31, 1997. The results for the three-month  and nine-month  period
ended September 30, 1998 are not necessarily  indicative of the results that may
be expected for any future period.

The  Company's  quarterly  and annual  operating  results are affected by a wide
variety of factors that could have a material  adverse  effect on the  Company's
business, financial condition, results of operations and stock price. Statements
in  this  Report  on  Form  10-Q  which  are  not  historical  facts,  so-called
"forward-looking statements", are made pursuant to the safe harbor provisions of
the Private  Securities  Litigation Reform Act of 1995.  Investors are cautioned
that all forward-looking  statements involve risks and uncertainties,  including
those  detailed  in the  Company's  filings  with the  Securities  and  Exchange
Commission.  See, for example, "Item 7. Management's  Discussion and Analysis of
Financial  Condition and Results of Operations - Risk Factors and Future Trends"
contained in the Company's Form 10-K for the year ended December 31, 1997.

Note B - Related Party Transactions

On July 18, 1995, Hoechst  Corporation  ("HC"), the Company's indirect 51% fully
diluted shareholder,  completed its purchase of Marion Merrell Dow, Inc. ("MMD")
and  changed  MMD's  name  to  Hoechst  Marion  Roussel,  Inc.  ("HMRI").   This
transaction resulted in a related party relationship between the Company and its
customer  Rugby  Laboratories  ("Rugby"),  which  was a  subsidiary  of MMD  and
subsequently a subsidiary of HMRI.  Effective  February 27, 1998, Rugby was sold
by HMRI to an unrelated third party.

In connection with HC's acquisition of its majority interest in the Company, the
Company is a party to a Product  Agreement with HC pursuant to which the Company
is afforded the opportunity under specified  conditions to distribute and market
the generic version of products sold by  Hoechst-Roussel  Pharmaceuticals,  Inc.
("HRPI"),  which was an indirect  majority-owned  subsidiary of HC. This Product
Agreement had an initial term of five years,  until  November 11, 1998,  and has
been  extended  until June 1, 1999 at which time it will  expire.  On January 1,
1996,  HRPI was  merged  into HMRI.  HMRI has agreed to be bound by the  Product
Agreement  to the extent  that HRPI was bound;  that is, the  Product  Agreement
continues to be in effect for products  manufactured  by the former HRPI but not
for products manufactured by HMRI prior to the merger with HRPI nor for products
developed  by  HMRI  after  January  1,  1996.  In  furtherance  of the  Product
Agreement,  the Company and HMRI entered  into  separate  contracts  relating to
specific  products as these products became available for generic  distribution.
These  separate  contracts  will continue in effect beyond the expiration of the
Product Agreement.  In order to assure continuity of supply and to provide other
competitive benefits, the Company, in August 1997, renegotiated the distribution
contracts  relating to glyburide  and  micronized  glyburide;  as a result,  the
profit contribution of these products has decreased. In 1997 the Company entered
into an agreement to distribute HMRI's  pentoxifylline  product.  As a result of
these new and  renegotiated  distribution  contracts,  the Company has  incurred
increased  royalty costs. For the nine months ended September 30, 1998 and 1997,
approximately $34.3 million and $26.4 million, respectively, of generic versions
of products were purchased from HMRI under these Product Agreements.
                                        6
<PAGE>
                          COPLEY PHARMACEUTICAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                  For the nine months ended September 30, 1998

The Company obtains its  comprehensive  general  liability,  product  liability,
excess liability and all risks property  insurance coverage through an insurance
and risk-sharing arrangement with HC and its parent, Hoechst  Aktiengesellschaft
("Hoechst AG"), and its various subsidiaries.  Insurance coverage is provided by
HC  through  its  wholly-owned  insurance  subsidiary,  as well  as by  external
parties.   The  Company's  total  expense  for  these  insurance   policies  was
approximately $3.4 million and $3.6 million,  respectively,  for the nine months
ended September 30, 1998 and 1997.

During the nine  months  ended  September  30, 1998 and 1997 the Company had net
sales of  approximately $0 and $157,000,  respectively,  to Wuxi Chia Tai Copley
Pharmaceutical,  a  Chinese  company  whose  majority  owner is Chia Tai  Copley
Pharmaceutical of which the Company is a 49% partner.

In June 1997, the Company  discontinued  its  partnership  participation  in MIR
Pharmaceutical,  a partnership  formed to market and manufacture  pharmaceutical
products  in  Russia,  and  whose  senior  vice  president  was a member  of the
Company's  Board of Directors  until July 27, 1998.  The Company may continue to
sell product through the MIR Pharmaceutical partnership.

Note C - Litigation and Contingencies

Albuterol Class Action Lawsuits
In connection  with the Company's  December 1993 and January 1994 product recall
of albuterol sulfate inhalation  solution,  0.5% ("albuterol"),  the Company has
been served with  complaints  in numerous  lawsuits in federal and state  court,
some of which are on behalf of numerous  claimants.  The plaintiffs  principally
seek  compensatory and punitive damages and allege that injuries and deaths were
caused  by  inhalation  of  allegedly   contaminated  product  manufactured  and
distributed by the Company.

The federal court lawsuits were consolidated in the United States District Court
for the  District  of  Wyoming  as a  multi-district  litigation  for  pre-trial
purposes  under the  caption  In Re:  Copley  Pharmaceutical,  Inc.  "Albuterol"
Products  Liability  Litigation.  The District  Court  certified a partial class
action for  determination  of liability  only and commenced a jury trial in June
1995. In August 1995,  prior to the  conclusion  of the jury trial,  the Company
entered into a settlement  agreement with the  representative  plaintiffs in the
class action lawsuit.  The settlement calls for the Company to receive a general
release of all non-death  claims in return for  contributions by the Company and
its insurers of a minimum of $65 million and a maximum of $130 million to settle
all non-death claims relating to the Company's  manufacture,  sale and recall of
albuterol.  An  additional  $20  million  is  allocated  under  the terms of the
settlement  as an estimate of the cost of  settling  claims by persons  alleging
wrongful  death,  which  claims are limited by the  settlement  to  compensatory
damages only and are subject to non-binding negotiation and arbitration.  Within
the Company's  minimum and maximum  contributions,  the amount to be paid by the
Company is subject to the number and seriousness of individual claims eventually
filed.  On November 15, 1995,  the District Court entered its Order giving final
approval of the settlement. This Order has become final and nonappealable.

The settlement  agreement  requires the $150 million maximum  contribution to be
funded by an initial $50 million  cash deposit and issuance of letters of credit
for the remaining balance, to be held by the Albuterol  Settlement Trust Fund as
security for potential future payments.  The Company negotiated  agreements with
its insurers  pursuant to which the Company and its insurers  have agreed to pay
defined percentages of required settlement payments and related expenses. During
the third  quarter of 1995,  the  Company  paid $5.1  million  to the  Albuterol
Settlement  Trust Fund and obtained  approximately  $17.1 million in irrevocable
stand-by  letters  of  credit  to cover  its  uninsured  obligation  to fund the
settlement  agreement.  The  settlement  agreement  required an  additional  $15
million cash deposit after the order  approving the settlement  became final and
nonappealable,  which  occurred in late  December  1996.  In January  1997,  the
Company made an additional  $2.25 million cash deposit and its stand-by  letters
of credit were  reduced by a like  amount.  The balance was funded by one of the
Company's insurers.  These cash contributions made by the Company totaling $7.35
million are nonrefundable pursuant to the terms of the settlement agreements.
                                       7
<PAGE>
                  COPLEY PHARMACEUTICAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                  For the nine months ended September 30, 1998

In  August  1997,  the  Wyoming  District  Court  ordered  the  Company  to make
additional cash deposits totaling $3.15 million to fund the Company's portion of
payments of settlement amounts for class action cases alleging wrongful death as
well as the settlement of opt-out cases,  legal fees and other related expenses.
The  Company's  stand-by  letters of credit  were  reduced  by a like  amount in
February  1998. In addition,  one of the Company's  insurers paid $17.85 million
and its letter of credit was released.

Approximately  5,600  proofs  of claim  (including  approximately  360  alleging
wrongful  death) have been filed with the Special Master  appointed by the Court
to oversee the Albuterol  Settlement Trust Fund. The Special Master has approved
approximately  4,200 class action claims totaling  approximately $59 million. No
awards have been made to  approximately  1,300  non-death  class  action  claims
(including  approximately 980 which have been disallowed by the Special Master).
In addition,  approximately 840 clients of Jacoby & Meyers,  representing nearly
all of that firm's  clients who are not  alleging a death  caused by  albuterol,
have agreed to be treated as if they were class  members and class  counsel have
agreed that these claimants will be paid out of the Albuterol  Settlement  Trust
Fund.  Based upon the Special  Master's  classification  of these claims,  these
Jacoby & Meyers claims have a value of approximately $11.5 million.

Recourse to the remaining  letters of credit in the class action settlement will
not occur until all claims are processed and settlement  amounts are recommended
by the Special  Master,  and is  contingent on the number of claims filed within
certain  categories.  Although  the total  number of claims  filed  against  the
Albuterol  Settlement  Trust Fund is less than the number of claims the settling
parties  anticipated  would be necessary  to require the maximum  funding of the
Albuterol Settlement Trust Fund, at this time the Company is unable to determine
how many of these claims will be awarded  damages by the Special  Master and, if
awarded  damages,  how much will be given to  various  claimants.  In  addition,
administrative fees and class action attorney fees and expenses will be paid out
of the Albuterol  Settlement  Trust Fund. On April 30, 1998 the Wyoming District
Court  awarded  plaintiffs'  attorney  $19.5  million  in  attorney's  fees  and
approximately $1.6 million in expense  reimbursement to be paid by claimants and
the Company.  The attorney's fees and expenses were previously  reserved as part
of the  Company's  recall and  litigation  accrual  and will not have a material
impact on the current  year's  earnings.  The Company  cannot  predict the total
amount to be paid out of the Albuterol Settlement Trust Fund.

The settlement also is subject to certain other contingencies and does not cover
certain  individuals who previously  opted out of the class action.  The Company
continues  to be a defendant  in lawsuits  that were  brought by or on behalf of
less than five people who properly opted out of the class action.

Grand Jury Investigation

On May 28, 1997, the Company announced that it had entered into a plea agreement
pursuant to which it agreed to waive  indictment and plead guilty to a one count
Information charging a violation of Title 18, United States Code, Section 371, a
conspiracy  to defraud  the United  States and the Food and Drug  Administration
("FDA").  The Information  alleged that Copley made changes in the manufacturing
processes  for four drugs  (only two of which,  procainamide  500 mg tablets and
potassium  chloride  tablets,  currently are being  manufactured by the Company)
without  proper  notification  to the FDA and signed  false batch  records  with
respect to two of these drugs. As part of the plea agreement, the Company agreed
to pay a fine of $10.65 million plus  interest,  $3.55 million of which was paid
in each of June of 1997 and June of 1998,  with the  remainder due in June 1999.
The plea was accepted by the United  States  District  Court for the District of
Massachusetts on June 19, 1997.
                                       8
<PAGE>
                  COPLEY PHARMACEUTICAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                  For the nine months ended September 30, 1998

The plea agreement  followed a nearly  three-year  investigation  and grand jury
subpoenas  from  the  United  States  Attorney's  Office  in  Massachusetts  for
documents focusing particularly on albuterol and Brompheril(R)  products,  which
were recalled by the Company in December 1993 and September 1994,  respectively,
but extending beyond these products. The Company complied with the subpoenas and
cooperated  with  federal   authorities   throughout  the   investigation.   The
investigation   continues  with  respect  to  individuals,   some  of  whom  are
indemnified by the Company for legal fees and related expenses.

Also on May 28, 1997 the Company announced that it had entered into an agreement
with the FDA providing for an  independent  audit of 20 of Copley's  ANDAs.  The
Company is cooperating  fully with the FDA, and the independent  audit commenced
in July 1997 has been  substantially  completed.  The FDA has agreed that during
this audit it will continue to review the Company's  pending  ANDAs,  accept new
ANDAs from the Company and, where appropriate, approve Copley's ANDAs.

Shareholder Derivative Action

On  September  2,  1998,  Copley  Pharmaceutical,  Inc.  was served as a nominal
defendant in a shareholder  derivative  action  against six of its eight current
Directors.  The lawsuit,  which was brought by Great Neck  Capital  Appreciation
Investment  Partnership,  the alleged owner of an unspecified  number of Company
shares, is pending in Norfolk County,  Massachusetts  Superior Court. On October
2, 1998,  plaintiff filed a First Amended Shareholder  Derivative Complaint that
named  HCCP   Acquisition   Corporation,   Hoechst   Corporation   and   Hoechst
Aktiengesellschaft as additional defendants. The amended complaint's allegations
include  alleged breach of fiduciary duty and alleged waste of corporate  assets
and seeks  unspecified  money damages and  injunctive  relief.  According to the
amended complaint, "Copley is named as a defendant herein solely in a derivative
capacity.  This  action is brought  on its  behalf,  and no claims are  asserted
against  it." The Company is  obligated  todefend  and  indemnify  the  Director
defendants and has put its directors and officers insurance carrier on notice of
this claim.  The  Company  has been  advised  that the  defendants  will seek to
dismiss the amended complaint.

Marion Merrell Dow Inc. Bulk Diltiazem Lawsuit

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

International Trade Commission Complaint

On February 25, 1993,  the Company,  together with a number of other  off-patent
pharmaceutical manufacturers and certain chemical manufacturers,  was named as a
respondent  in a  complaint  filed by MMD and Tanabe  before  the United  States
International Trade Commission ("the ITC") captioned Complaint of Marion Merrell
Dow Inc. and Tanabe Seiyaku Co., Ltd.  Pursuant to Section 337 of the Tariff Act
of 1930. The complaint sought an order (i) prohibiting the importation of, among
other things,  the bulk diltiazem  purchased by the Company from Orion, and (ii)
requiring the Company to immediately stop selling its current diltiazem product,
which  incorporates  bulk  diltiazem  supplied  by Orion,  based on the  alleged
infringement by Orion of a process patent for one method of  manufacturing  bulk
diltiazem.
                                       9
<PAGE>
                  COPLEY PHARMACEUTICAL, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                  For the nine months ended September 30, 1998

Orion  agreed at its  expense to defend the  Company in this  action and the MMD
Bulk Diltiazem Lawsuit discussed previously and to indemnify the Company for any
damages  that might be assessed as a result of the  Company's  sale of diltiazem
obtained from Orion.  In October,  1998 a settlement  was reached in this action
and the MMD Bulk Diltiazem Lawsuit.  The settlement was made without any cost or
expense to the Company.

SmithKline Beecham Lawsuit

In August 1997,  the Company filed an ANDA for nabumetone  which  certified that
SmithKline  Beecham  Corporation's  ("SB")  patent  relating to  nabumetone  was
invalid and  unenforceable  and that the Company was entitled to manufacture and
sell  nabumetone  prior to the December 13, 2002  expiration of SB's  nabumetone
patent.  As a result,  on October 31, 1997 the Company was served with a summons
and  complaint  in a patent  infringement  action  entitled  SmithKline  Beecham
Corporation  and Beecham  Group  p.l.c.  v. Copley  Pharmaceutical,  Inc. in the
United States District Court for the District of Massachusetts. In their action,
plaintiffs  allege that because the Company seeks approval of its ANDA to engage
in the  commercial  manufacture,  use and sale of nabumetone as claimed in their
patent  before  the  patent's  expiration,   the  Company  has  infringed  their
nabumetone patent. Plaintiffs seek damages and an injunction against approval of
the Company's  nabumetone ANDA and its sale of nabumetone  prior to December 13,
2002. The  manufacturer and supplier of the bulk nabumetone that the Company has
designated  for use in its ANDA has agreed to defend the  Company in this action
and to indemnify  the Company for any damages that might be assessed as a result
of the Company's sale of nabumetone obtained from the manufacturer. Although the
Company  believes  that this  complaint  is without  merit and the  Company  has
meritorious  defenses  to these  actions,  there  can be no  assurance  that the
Company  will  prevail  or that an  adverse  outcome  would not have a  material
adverse effect on the Company's  consolidated  financial condition or results of
operation.

Other Legal Proceedings

The Company has $8.1 million of estimated  recall related and legal  contingency
reserves  accrued at September 30, 1998.  These  reserves  reflect the Company's
estimates of its exposure at September 30, 1998 in its various legal proceedings
described above.  Actual settlements  amounts may differ from amounts estimated.
In addition,  the Company from time to time is subject to claims  arising in the
ordinary course of business. While the outcome of the claims cannot be predicted
with  certainty,  management  does not expect  these  matters to have a material
adverse  effect on the results of  operations  and  financial  condition  of the
Company.

Note D - Debt

At September  30,  1998,  the Company had $11.7  million in stand-by  letters of
credit  related to the Albuterol  Settlement  Trust Fund  outstanding  under its
working  capital  line of  credit  agreement.  Refer  to Note C of the  Notes to
Condensed  Consolidated  Financial  Statements  for  further  discussion  of the
Settlement Agreement.

                                       10
<PAGE>


                           COPLEY PHARMACEUTICAL, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                       AND CHANGES IN FINANCIAL CONDITION

Item 2.  Management's Discussion and Analysis of Results of Operations and
         Changes in Financial Condition

   Results of Operations
<TABLE>
       Net Sales
---------------------------------------------------------------------------------------------------------------------
 For the quarter ended                            (In thousands)             For the nine months ended
     September 30,                                                                  September 30,
  1998           1997       Change                 (Unaudited)                  1998           1997        Change
--------------------------------------------------------------------------------------------------------------------
  <C>           <C>           <C>             <S>                            <C>              <C>           <C>
  $16,931       $19,665       (13.9) %        Manufactured products          $52,049          $52,478       (0.8)%     
   18,409        16,810         9.5 %         Distributed products            46,226           35,313       30.9%
----------      --------                                                   ----------       ---------
  $35,340       $36,475        (3.1) %           Net sales                   $98,275          $87,791       11.9%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Net sales for the third quarter of 1998 were $35.3  million,  a decrease of $1.1
million,  or  (3.1)%,  from the same  period in 1997.  Increases  in unit  sales
volumes were not sufficient to offset a continued erosion of prices.

The  Company's  net sales were $98.3  million for the  nine-month  period  ended
September 30, 1998 as compared to $87.8 million for the same period in 1997. The
increase in net sales for the nine months ended September 30, 1998 resulted from
new product introductions,  most notably  pentoxifylline,  and higher unit sales
volumes which was partially offset by continued price erosion.
<TABLE>
   Gross Profit
-------------------------------------------------------------------------------------------------------------------------
  For the quarter ended                            (In thousands)               For the nine months ended
      September 30,                                                                   September 30,
  1998             1997         Change               (Unaudited)                   1998             1997         Change
--------------------------------------------------------------------------------------------------------------------------
   <C>             <C>          <C>           <S>                                  <C>             <C>              <C> 
   $3,831          $5,801       (34.0)%       Manufactured products                $12,229         $13,147          (7.0)%
                                                  As a % of manufactured
     22.6 %          29.5 %                          products net sales               23.5 %          25.1 %

   $3,695          $4,540       (18.6)%       Distributed products                 $ 9,724         $ 8,871            9.6%
                                                  As a % of distributed
     20.1 %          27.0 %                          products net sales               21.0 %          25.1 %

   $7,526         $10,341       (27.2)%       Gross profit                         $21,953         $22,018          (0.3)%
     21.3 %          28.4 %                       As a % of net sales                 22.3 %          25.1 %
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  Company's  gross profit was $7.5  million,  or 21.3% of net sales,  for the
third quarter of 1998 as compared to $10.3 million,  or 28.4% of net sales,  for
the same period in 1997. The lower gross profit as a percentage of net sales was
a result  of the  continued  erosion  of  prices,  a higher  mix of  distributed
products  which realize a lower gross profit and the prior year's quarter having
a one time  benefit  related to the  renegotiation  of the  distributed  product
agreements with Hoechst Marion Roussel, Inc.

For the nine-month  period ended  September 30, 1998, the Company's gross profit
was $22.0 million,  or 22.3% of net sales, as compared to $22.0 million or 25.1%
of net sales a year earlier.
                                       11
<PAGE>
                           COPLEY PHARMACEUTICAL, INC.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
                   CHANGES IN FINANCIAL CONDITION (Continued)


<TABLE>
     Operating Expenses
     -------------------------------------------------------------------------------------------------------------------------
     For the quarter ended                            (In thousands)                  For the nine months ended
         September 30,                                                                      September 30,
      1998           1997        Change                  (Unaudited)                     1998            1997         Change
     ---------------------------------------------------------------------------------------------------------------------------
      <C>            <C>       <C>           <S>                                         <C>              <C>         <C>   
      $2,954         $2,831      4.3%        Research and development                    $7,804           $9,080      (14.1)%
        17.4 %         14.4 %                   As a % of net manufactured sales           15.0 %           17.3 %

      $1,023         $1,160    (11.8)%       Selling, marketing and distribution         $3,448           $3,478       (0.9)%
         2.9 %          3.2 %                   As a % of net sales                         3.5 %            4.0 %

      $1,608         $2,068    (22.2)%       General and administrative                  $4,387           $5,535      (20.7)%
         4.6 %          5.7 %                   As a % of net sales                         4.5 %            6.3 %

        $183           $227    (19.4)%       Recall related and litigation, net          $  378           $2,593      (85.4)%
         0.5 %          0.6 %                   As a % of net sales                         0.4 %            3.0 %

       $ ---         $ (142)  (100)%         Restructuring                                  ---            $ 170     (100)%
         ---           (0.4) %                  As a % of net sales                         ---              0.2 %
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Research  and  development  expenses  increased  to $3.0  million  for the third
quarter of 1998 as compared to $2.8 million for the same period of 1997. For the
nine-month  period,  research  and  development  expenses  were $7.8  million as
compared to $9.1 million reported in the prior year.  Significant  reductions in
product  validation costs related to validation of a new  manufacturing  process
during the prior year.

Selling, marketing and distribution expenses decreased 11.8% to $1.0 million for
the third  quarter of 1998 as  compared  to $1.2  million for the same period of
1997. For the nine-month period,  selling,  marketing and distribution  expenses
decreased 0.9% to $3.4 million compared to $3.5 million reported a year earlier.
The decrease in selling, marketing and distribution expenses for the quarter and
nine months  ended  September  30, 1998  resulted  primarily  from a decrease in
freight expense. Prior year freight was inflated due to a carrier's union strike
which lead to higher pricing by competitors.

General and  administrative  expenses were $1.6 million for the third quarter of
1998 as compared to $2.1 million for the same period in 1997. For the nine-month
period ended September 30, 1998,  general and  administrative  expenses  totaled
$4.4 million  compared to $5.5 million a year earlier.  This decrease,  for both
periods,  was  primarily  attributable  to overall  cost  reductions,  including
significantly lower directors' and officers' insurance premiums,  and efficiency
improvements.

For the three and nine month  periods  ended  September  30, 1998 and 1997,  net
recall related and litigation  expenses  consisted of the 1997 adjustment to the
Company's  reserve to reflect the plea  agreement  with the  Massachusetts  U.S.
Attorney and resultant fine, and other uninsured legal expenses  incurred by the
Company for representation in its various legal proceedings.  Refer to Note C of
the Notes to Condensed  Consolidated Financial Statements for further discussion
of the plea agreement and the Company's other outstanding legal proceedings.

The  restructuring  charges recorded in 1997 primarily reflect a small reduction
in the Company's work force as part of its cost reduction initiatives.
                                       12
<PAGE>
                           COPLEY PHARMACEUTICAL, INC.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
                   CHANGES IN FINANCIAL CONDITION (Continued)
<TABLE>
   Interest and Other Income (Expense)
-----------------------------------------------------------------------------------------------------------------------
 For the quarter ended                           (In thousands)                For the nine months ended
     September 30,                                                                   September 30,
   1998            1997       Change               (Unaudited)                      1998            1997        Change
-------------------------------------------------------------------------------------------------------------------------
    <C>            <C>        <C>          <S>                                    <C>             <C>            <C> 
                                           Interest and other
    $ 395          $ 360         9.7%        investment income                    $ 1,300         $ 1,013         28.3%
     (110)          (304)      (63.8)%     Interest expense                          (430)           (434)        (0.9)%
       29            (59)     (149.2)%     Other income (expense)                     (46)         (1,559)       (97.0)%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Interest and other investment income increased to $395,000 for the third quarter
of 1998 as compared to $360,000 for the same period of 1997.  For the nine-month
period,  interest  and other  investment  income  increased  to $1.3  million as
compared to $1.0 million reported a year earlier. In both cases the increase was
due to increased average investment holdings.

Interest expense decreased to $110,000 for the third quarter of 1998 as compared
to $304,000  for the same period of 1997.  For the  nine-month  period  interest
expense decreased 0.9% to $430,000 as compared to $434,000 for 1997. The changes
in interest expense for both the quarter and the nine months ended September 30,
1998 were due  primarily  to the  accrual of interest  relating to  installments
payable  under the  Company's  plea  agreement.  Refer to Note C of the Notes to
Condensed  Consolidated  Financial Statements for further discussion of the plea
agreement  with  the U.S.  Attorney.  Other  expenses  of $1.6  million  for the
nine-month  period ended  September 30, 1997  consisted  primarily of a one-time
charge  related  to the  Company's  decision  to  discontinue  its  funding of a
collaborative  effort  in the  field of  ophthalmology  and to  discontinue  its
partnership participation in MIR Pharmaceutical, a company formed to manufacture
and sell  pharmaceutical  products  in  Russia,  refer to Note B of the Notes to
Condensed  Consolidated  Financial  Statements  for further  discussion  of this
Related Party Transaction.
<TABLE>
   Taxes and Net Income (Loss)
---------------------------------------------------------------------------------------------------------------------
 For the quarter ended                         (In thousands)              For the nine months ended
     September 30,                                                               September 30,
  1998            1997         Change              (Unaudited)                   1998             1997        Change
------------------------------------------------------------------------------------------------------------------------
  <C>              <C>         <C>          <S>                                  <C>                <C>       <C>     
    $ 975          $2,440      (60.0)%      Income tax expense (benefit)         $ 2,505             $305        721%
     47.1 %          58.2 %                 Effective tax rate                      37.1 %          167.6 %
  $ 1,097          $1,754      (37.5)%      Net income (loss)                    $ 4,255            $(123)    (3,559)%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Net  income for the third  quarter  of 1998 was $1.1  million or $0.06 per share
compared  to a net  income  of $1.8  million  or $0.09  per  share for the third
quarter of 1997.

The 47.1%  effective  tax rate for the  quarter is based on a change in the year
end  forecasted  tax rate  resulting  from  higher  unit sales and timing of new
product introductions.
                                       13
<PAGE>
     The higher  effective  tax rate  recognized  during the prior year resulted
from  certain of the recall and  litigation  expenses not being  deductible  for
federal and state income tax reporting purposes.

For the nine-month  period ended  September 30, 1998,  the Company  reported net
income  of $4.3  million  or $0.22  per  share as  compared  to net loss of $0.1
million or $0.01 per share for the same period in 1997.

Changes in Financial Condition

Capital Resources and Liquidity
----------------------------------------------------------
                          September 30,      December 31,
In thousands                       1998              1997
----------------------------------------------------------
                            (Unaudited)
Cash and short-term
   investments                  $38,936           $33,345
Working capital                  64,164            60,080
Long-term debt                    4,500             4,800
Shareholders' equity            105,445           100,881
----------------------------------------------------------

Working  capital  increased $4.1 million from December 31, 1997 to $64.2 million
at  September  30,  1998  primarily  due  to  working  capital   generated  from
operations.

The Company  has a working  capital  line of credit  agreement  that  provides a
maximum borrowing capacity of $30.0 million.  At September 30, 1998, the Company
had $11.7  million  of  stand-by  letters  of credit  issued  under this line of
credit.  These stand-by  letters of credit were obtained by the Company pursuant
to the  requirements  of the  Albuterol  Settlement  Trust  Fund  to  cover  its
uninsured  obligation.  Recourse to the letters of credit are  contingent on the
number of claims filed within  certain  categories  and will not occur until all
claims are  processed  and  settlement  amounts are  recommended  by the Special
Master.  Refer  to  Note C of the  Notes  to  Condensed  Consolidated  Financial
Statements for further discussion of the Albuterol Class Action Lawsuits.

New Directors

On August 24, 1998,  Daniel L. Korpolinski  assumed the offices of President and
Chief  Executive  Officer of the  Company.  Mr.  Korpolinski  also was elected a
Company Director serving on the Board of Directors. In October, 1998 the Company
announced  that Jess G.  Thoene,  MD had been  elected an  Independent  Director
serving  on the Board of  Directors,  filling  one of the  Independent  Director
positions  that  have  been  vacant  since the  resignation  of two  Independent
Directors in July 1998.  The Company  continues to evaluate  candidates  for the
remaining vacant Independent Director position.

Year 2000 Issue/Year 2000 Readiness Disclosure Statement

Overview

The Company is in the process of analyzing and  addressing  what is known as the
Year 2000 Issue.  The Year 2000 Issue has arisen because many existing  computer
programs  use only two  digits  to  identify  a year in the  data  field.  These
programs  were  designed and  developed  without  considering  the impact of the
upcoming change in the century and, accordingly, could misconstrue dates such as
"00" as the year 1900 rather than 2000.  The  failure of computer  programs  and
systems to properly  recognize  dates beginning in the year 2000 could result in
systems failures,  miscalculations  and an inability to process  transactions or
engage in similar normal business  activities.  For example,  in connection with
the Company's  business it is necessary for computers to properly  calculate and
place on product packaging the expiration dates of the Company's products, which
currently run into the year 2000.

The Company's Year 2000 Compliance Program.

The Company has initiated its Year 2000 Compliance Program, the purpose of which
is: to  identify  important  systems  that are not yet Year 2000  compliant;  to
initiate replacement or remedial action to assure that key systems will continue
to operate in the Year 2000 and to test the replaced or remediated  systems;  to
identify and contact key suppliers,  vendors, customers and business partners to
evaluate  their ability to maintain  normal  operations in the Year 2000; and to
develop  appropriate  contingency  plans for dealing with  foreseeable Year 2000
complications.
                                       14
<PAGE>
The Company has  appointed  a Year 2000  Project  Manager who is
responsible  for the  Company's  Year 2000  Compliance  Program  and who reports
directly to senior  management.  The Company is also using an outside consultant
to review  the  Company's  Year 2000  Compliance  Program,  suggest  appropriate
modifications,  assist  the  Company  in its  implementation  of the  Year  2000
Compliance  Program  and  assist  the  Company  in  formulating  its  Year  2000
contingency plans.

Information Technology Systems

The Company's critical internal information technology ("IT") systems consist of
its Prism  manufacturing and JD Edwards  financial  accounting and Harbinger EDI
400 software  packages.  The Company has  contacted the vendors of these systems
and  obtained  written  certification  that these IT systems  are  currently  in
material  Year 2000  compliance.  The  Company  also has  completed a pilot room
testing of these  systems.  The Company  plans to evaluate its  non-critical  IT
systems  over the  remainder  of 1998 and into 1999 and will  modify or  replace
these systems as it deems appropriate.

Non-Information Technology Systems

The  Company  has  recently  commenced  an  assessment  of  its  non-information
technology  systems (such as,  manufacturing,  product  testing and research and
development  equipment,  building  security,  voice  mail,  telephone  and other
systems  containing  embedded   microprocessors)   and  is  in  the  process  of
determining  the  nature and extent of the work  required  to make any  material
non-IT  systems  Year 2000  compliant.  The  Company's  strategy  is to focus on
mission  critical  systems  first and these  systems have been  identified.  The
Company has sent Year 2000 compliance inquiries to the vendors of these systems,
is tracking  responses to its inquiries and,  depending on vendor  response,  is
planning to have the inquiry  process  completed by the end of 1998. In addition
to the vendor  inquiries,  the Company has  recently  commenced  an  independent
evaluation and testing of its critical  non-IT systems and has scheduled  August
31, 1999 as the completion date for that process. However, the Company is in the
early  stages of  evaluation  and testing and will  monitor its progress and the
scheduled completion date as the evaluation and testing process continues. After
the Company has progressed  substantially  with its critical non-IT systems,  it
plans to expand its  evaluation  and testing to less critical  non-IT systems in
order of relative importance, depending upon the availability of resources. As a
pharmaceutical   manufacturer,   the  Company's  research  and  development  and
manufacturing  operations are subject to government  regulation.  Replacement of
equipment  for  products  subject to FDA approval  and  manufacturing  standards
cannot be accomplished  without filings and review by FDA. While the Company has
commenced its assessment of its critical non-IT systems, the Company is still in
the early stages of its  assessment.  The failure of the Company to properly and
timely  identify  equipment  that will not function  properly as a result of the
Year 2000 Issue could result in the  Company's  inability to repair or remediate
that equipment before December 31, 1999. In addition,  equipment failures due to
the Year 2000 Issue could result not only in  significant  replacement  costs to
the  Company  but also in a  significant  delay in product  shipments  while the
Company  seeks to validate  replacement  equipment,  which could have a material
adverse effect on the Company.

Third Party Suppliers, Vendors and Customers

The Company's Year 2000 Compliance Program also includes an investigation of the
Year 2000  compliance of its major  suppliers,  vendors,  customers and business
partners.  For  example,  third  parties  handle the  payroll  function  for the
Company,  the vast  majority of the  Company's  product  orders are  received by
computer over the telecommunications systems, and the Company also relies on the
services of banks, utilities, and commercial airlines, among others. The Company
is currently obtaining  assurances from key service providers that there will be
no interruption of service as a result of the Year 2000 Issue, and to the extent
that such assurances are not given,  the Company  intends to devise  contingency
plans to ameliorate the negative effects on the Company.  The Company expects to
complete  the  inquiry  process by the end of 1998,  depending  upon third party
responses,  and will address contingency  planning  thereafter.
                                       15
<PAGE>
     There can be no  assurances  that the  contingency  plans  will  adequately
prevent a service  interruption  by the  Company's  third party  suppliers  from
having a material adverse effect on the Company.

The Company is  contacting  its key bulk  chemical  and  packaging  suppliers to
determine their Year 2000 compliance  status.  As with certain of its equipment,
the  Company  cannot  change  suppliers  of bulk active  ingredients  unless the
alternative supplier has been approved through the FDA regulatory process. Where
possible,  the Company tries to qualify two or more sources of supply.  However,
certain of the  Company's  current  and future  products  will  depend on a sole
source of raw material supply. Should one or more of these sole source suppliers
become unable to deliver  product in a timely manner due to the Year 2000 Issue,
the  Company  would need to identify  and  qualify a new source of supply.  This
process  is likely  to  involve  significant  delays  and cost and could  have a
material adverse effect on the Company.  In addition,  the Company is contacting
significant  customers to determine their progress  towards Year 2000 compliance
and to identify  issues,  if any,  which  might  develop  because of  customers'
failure  to be  prepared  for the Year  2000  Issue.  In the  event  issues  are
identified,  the  Company  expects  to try to develop  procedures  to permit the
Company  to  continue  to supply the  customer  involved  despite  the Year 2000
Issues. The Company has been assured by its key financial institutions that they
are currently Year 2000 compliant or will be Year 2000 compliant in early 1999.

Year 2000 Costs and Expenses

 To date, the costs  associated  with the Year 2000 Issue and the Company's Year
2000  Compliance  Program have not been  material and were less than $50,000 for
the first three quarters of 1998 and consisted mainly of internal payroll costs.
The  Company's  policy is to expense all costs  related to Year 2000  compliance
unless the useful life of the technological asset is extended or increased.  The
Company will incur costs that include internal resources,  external  consulting,
software and equipment  upgrades and replacement.  Based on currently  available
information,  the Company believes that the expense  associated with its ongoing
efforts  will not be material  and will be funded  through  operations,  but the
Company has not  completed its  evaluation  of its non-IT  systems and its third
party relationships. If unforeseen compliance efforts are required or if present
compliance  efforts are not  completed  on time,  or if the cost of any required
updating,  modification  or  replacement  of the Company's  systems or equipment
exceeds the  Company's  estimates,  the Year 2000 Issue could result in material
costs and have a material adverse effect on the Company.

Contingency Plans and Worst Case Scenario

At the  present  time,  the  Company has not  formulated  contingency  plans and
completed tests for addressing  systems failures due to the Year 2000 Issue. The
Company  has  received  written  certifications  confirming  that  its  critical
internal IT systems are compliant,  and the Company and its Year 2000 consultant
will  evaluate  the need for  contingency  plans for these  systems  given those
assurances.  The Company has recently  begun the process of evaluating  the Year
2000 Issue with respect to its internal  non-IT  systems and with respect to its
major suppliers,  vendors,  customers and business partners.  As this evaluation
process  proceeds,  the Company will be working with its Year 2000 consultant to
formulate appropriate contingency plans. While the Company's plan calls for most
contingency  planning to be completed no later than June 30, 1999, the Company's
ability to prepare  contingency  plans will  depend on the timing and results of
its evaluation and testing process.  As issues are identified and analyzed,  the
Company  expects that new and existing  contingency  plans will be modified over
time.

One possible  worst case scenario for the Company  resulting  from the Year 2000
Issue  would be that one or more of the  Company's  sole  source  bulk  chemical
suppliers  would  become  temporarily  unable to deliver  raw  materials  to the
Company as a result of a system  failure.  If this were to happen,  the  Company
would not be permitted to  substitute  another  manufacturer's  raw material for
that of its sole source  supplier.  The Company would not be able to continue to
manufacture  product  using that raw material  once its  inventories  of the raw
material were expended.
                                       16
<PAGE>

The Company's  contingency  planning were this to happen with respect to an
important product might include  pre-qualifying a second source for critical raw
materials  when possible  and/or might  include  building up key sole source raw
material inventories in advance of December 31, 1999.

Various   statements  in  these  discussion  of  the  Year  2000  issue  are
forward-looking  statements (statements which are not historical in fact) within
the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.  These
statements  include  statements  of  the  Company's  expectations,   anticipated
schedules  and  expected  completion  dates,   estimated  costs  and  statements
regarding expected Year 2000 compliance.  These  forward-looking  statements are
subject to various risks which may  materially  affect the Company's  efforts to
achieve  Year  2000   compliance  to  accomplish  its  goals  and  to  meet  its
expectations  with  respect  to  Year  2000  issues.  These  risks  include  the
possibility  that  the  Company  will  not be able to  complete  the  plans  and
modifications  that  it has  identified,  on a  timely  basis,  if at  all,  the
availability  of skilled  consultants,  the difficulty of evaluating and testing
the wide  variety of  information  systems and  components,  both  hardware  and
software,  that  must be  evaluated,  the  variety,  number  and  complexity  of
equipment  used in the Company's  operations and the large number of vendors and
customers  with which the Company  interacts.  The  Company's  assessment of the
effects  of the Year  2000  issue  on the  Company  are  based,  in  part,  upon
information received from third parties and the Company's reasonable reliance on
that information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company  reasonably  relied must be considered as a
risk factor that might affect the  Company's  Year 2000  efforts.  Further,  the
delay or  failure  of third  parties to  respond  to  inquires  will  hinder the
Company's  ability to evaluate and remediate the Year 2000 issue. The Company is
in the early  stages of  evaluating  certain  aspects  of the Year 200 Issue and
expects  that its  assessment  of the Year 2000 Issue will evolve as its Year
2000  compliance  program  progresses and the evolution and testing process
continues.
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<PAGE>


PART II.  OTHER INFORMATION

Item 1.       Legal Proceedings

See  descriptions  of legal  proceedings  in Note C of the  Notes  to  Condensed
Consolidated  Financial Statements in Part I of this Form 10-Q, which are hereby
incorporated by reference herein.

Item 5.       Other Information

The deadline for submission of proposals by  shareholders  pursuant to Rule
14a-8 issued under the  Securities  Exchange Act of 1934 (the "Act"),  which are
intended  for  inclusion  in  the  proxy   statement  to  be  furnished  to  all
shareholders  entitled to vote at the next annual meeting of shareholders of the
Company,  is  December  18,  1998.  Pursuant to recent  amendments  to the rules
relating to proxy  statements under the Act, the shareholders of the Company are
hereby notified that the deadline for providing  timely notice to the Company of
matters that  shareholders  desire to  introduce  at the next annual  meeting of
shareholders of the Company (which are not otherwise  submitted for inclusion in
the proxy  statement in  accordance  with the  preceding  sentence) is March 15,
1999. Management proxies will be authorized to exercise discretionary  authority
with respect to any such  shareholder  proposal  not  included in the  Company's
proxy  materials  for the next annual  meeting  for which the  Company  receives
notice  of such  proposal  after  March  15,  1999.  In  order  to  curtail  any
controversy  as to the date on which a proposal was received by the Company,  it
is suggested that proponents  submit their  proposals by Certified Mail,  Return
Receipt Requested.

Item 6.       Exhibits and Reports on Form 8-K

 (a) Exhibits
           10.1   Employment Agreement dated August 24, 1998 between the Company
                  and  Daniel L. Korpolinski.

 (b) Reports on Form 8-K

       Form 8-K dated August  24, 1998 - Item 5: Other Events.
       The Company announced the appointment of Daniel L. Korpolinski
       as the Company's  President and Chief Executive Officer.

       Form 8-K dated  September 2, 1998- Item 5: Other Events.
       The  Company  announced  that it had  been  served  as a
       nominal  defendant in a  shareholder  derivative  action
       against six of its seven current Directors.

       No other  reports  on Form 8-K were  filed  during the
       three months ended September 30, 1998.

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<PAGE>

                                    SIGNATURE

Pursuant  to the  requirements  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.



         Signature                    Title                           Date

/s/  Daniel M. P. Caron      Vice President-Finance, Chief     November 16, 1998
------------------------    Financial Officer and Treasurer
     Daniel M. P. Caron    (principal financial and principal
                                   accounting officer)




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