DURAMED PHARMACEUTICALS INC, 10-K405, 1998-03-31

DURAMED PHARMACEUTICALS INC
10-K405, 1998-03-31
PHARMACEUTICAL PREPARATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 1997

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

For the transition period from __________ to __________

Commission File No. 0-15242

DURAMED PHARMACEUTICALS, INC.

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

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

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

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

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $90,065,521 as of March 13,
1998. As of March 13, 1998, 17,907,487 shares of Common Stock with a par value
of $.01 per share were outstanding.

Documents Incorporated by Reference

Not applicable.

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PART I

ITEM 1. BUSINESS.

GENERAL

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

The Company is committed to executing a development program designed to
generate a stream of new product offerings. The Company's strategy has been to
focus its product development activities primarily on prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers to entry, principally hormone replacement therapy
("HRT") products. In September 1996, the Company acquired substantially all of
the assets and certain of the liabilities of Hallmark Pharmaceutical, Inc.
("Hallmark"), a privately held pharmaceutical development company,
headquartered in Somerset, New Jersey, now referred to as "Duramed Somerset."
That acquisition expanded the Company's product development pursuits to include
modified release technologies as well as controlled substances.

The Company typically seeks to develop products that:

- are soon to be off patent,

- have not yet been developed generically even though patents
have expired (usually because of technological barriers), or

- are logical extensions of the Company's existing product line
due to their marketing or production characteristics.

Between 1991 and 1997, Duramed invested substantial resources in the development
of a generic conjugated estrogens product, filing its Abbreviated New Drug
Application ("ANDA") for this product with the U.S. Food and Drug Administration
("FDA") in 1994. In May 1997, the Company was notified by the FDA that at that
time it would not approve a generic conjugated estrogens product, although the
product had been developed by Duramed based on the guidance established by the
FDA in 1991 and current official USP compositional standards. Following that
decision, Duramed management decided, in addition to appealing the FDA's ANDA
decision, to pursue a branded product strategy for its synthetic conjugated
estrogens product. In February 1998, the Company announced the successful
completion of a multi-center, double-

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blind, placebo-controlled trial to evaluate its drug in the treatment of
postmenopausal vasomotor symptoms in women. This trial provided Duramed with the
clinical data that constituted the basis for the filing of a New Drug
Application ("NDA") with the FDA on March, 30, 1998. The Company's operating
strategy may include developing brand identity for certain other products in the
future.

MARKET AND COMPETITION

Generic drugs are the chemical and therapeutic equivalents of brand name drugs
that have gained market acceptance while under patent protection. In general,
prescription generic drug products are required to meet the same governmental
standards as brand name pharmaceutical products and must receive FDA approval
prior to manufacture and sale. Generic drug products are marketed after
expiration of patents held by the innovator company, generally on the basis of
FDA approved ANDAs submitted by the generic manufacturers. Generic drug products
typically sell at prices substantially below those of the equivalent brand name
products. The increasing emphasis on controlling health care costs, the growth
of managed care organizations and the significant number of drugs for which
patents will expire in the next few years are expected to create an opportunity
for continued growth in the generic drug market.

According to SBC Warburg Dillon Read Inc., generic pharmaceutical market
opportunities remain strong. In addition to about $7 billion in major
pharmaceutical products already off-patent, but without generic competition,
over the next five years patents will expire for branded products with more than
$11 billion in total sales.

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

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

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

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PRODUCTS

A summary, by therapeutic classification, of the products manufactured or
marketed by the Company at December 31, 1997 is given below:

Marketed
Duramed for
Therapeutic Category Manufactured Others Total
- -------------------------------------------- ----------------------- --------------------- ----------------------
Chemical Dosage Chemical Dosage Chemical Dosage
Entities Forms Entities Forms Entities Forms
======================= ===================== ======================

<S> <C> <C> <C> <C> <C> <C>
Adrenal Cortical Steroids 1 1 - - 1 1
Analgesic(1) - - 6 11 6 11
Anti-Convulsants - - 1 1 1 1
Anti-Diarrheal(2) 1 1 - - 1 1
Anti-Emetic(3) 1 2 - - 1 2
Anti-Glaucoma - - 1 2 1 2
Anti-Inflammatory - - 1 3 1 3
Anti-Parkinson Agents - - 1 3 1 3
Anti-Psychotic - - 1 4 1 4
Anti-Tuberculosis 1 1 - - 1 1
Anti-Viral - - 1 1 1 1
Cardiovascular Therapy 1 4 3 7 4 11
Cough/Cold/Decongestant 6 6 14 18 20 24
Diabetes(4) 1 2 - - 1 2
Gastrointestinai Stimulants - - 4 6 4 6
Hormonal Replacement(5) 1 4 1 2 2 6
Musculoskeletal Disorders - - 2 3 2 3
Sympathicolytic Mydriatic - - 1 1 1 1
Vascular Headaches 1 1 - - 1 1
Vitamin Supplements - - 3 5 3 5
----------------------- --------------------- ----------------------
TOTALS 14 22 40 67 54 89
======================= ===================== ======================
<FN>

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

The following notes provide the name, approval date and other information
pertaining to products approved by the FDA in 1997.

(1) Acetaminophen with Codeine tablets, the generic equivalent to Tylenol(R)
with Codeine, were approved by the FDA on November 18, 1997.

(2) Loperamide Liquid, the generic equivalent to Immodium AD(R), an
over-the-counter anti- diarrheal, was approved by the FDA on December 29,
1997.
</TABLE>

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(3) Prochlorperazine Tablets, 5mg and 10mg strengths, the generic equivalent to
Compazine(R) were approved by the FDA on May 1, 1997.

(4) Glipizide Tablets, 5mg and 10mg strengths, the generic equivalent to
Glyburide(R), were approved by the FDA on September 11, 1997.

(5) Estradiol Tablets, a women's hormone replacement therapy, in the 0.5 mg, 1
mg, and 2 mg strengths were approved December 29, 1997. The FDA granted
Duramed's Estradiol Tablets a therapeutic equivalency rating of AB,
designating Duramed's Estradiol Tablets as completely interchangeable with
Estrace Tablets(R), for all new and refill prescriptions in December 1997.
In addition, the FDA granted Duramed the rights to market a 1.5 mg
Estradiol Tablet, a strength which is presently unavailable from any other
source. Annual manufacturers' revenue for the product in 1996 was
approximately $100 million.

The Company does not have patent protection for any of its therapeutic products
and trademarks are of relatively minor importance at this time. In 1997, the
Company received its first U.S. patent for modified release technology. Duramed
has three additional patent applications pertaining to drug delivery systems
pending with the U.S. Patent and Trademark Office. All of the modified release
patents relate to technologies that would be used in the development of
proprietary products.

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

MANUFACTURING

Duramed currently manufactures 14 chemical entities in 22 dosage forms for its
line of prescription generic drug products. Methylprednisolone, which is
manufactured by Duramed, accounted for approximately 37%, 41% and 53%,
respectively, of the Company's sales in 1997, 1996 and 1995. Manufacturing
occurs primarily in the Company's Cincinnati, Ohio facility, which has highly
specialized containment facilities for the production of HRT and other products
requiring special handling.

Limited manufacturing capabilities exist at the Company's research and
development facility in Somerset, New Jersey. The Company obtained a DEA
license for this facility in January 1998 and therefore has the ability to
manufacture products containing controlled substances.

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WARNER-LAMBERT COMPANY AGREEMENT

In September, 1997 Duramed entered into a ten year renewable manufacturing
agreement with Warner-Lambert Company ("Warner-Lambert"). Under the terms of the
agreement, Duramed will manufacture a name brand pharmaceutical product for
Warner-Lambert, at its Cincinnati hormonal manufacturing facility, if the
product is successfully developed and approved by the FDA. This agreement made
a contribution to the fourth quarter 1997 results and will make a significant
contribution in 1998 and over the term of the agreement. For information
pertaining to the Warner-Lambert agreement see "Notes to Consolidated Financial
Statements" - Note C.

DISTRIBUTION AGREEMENTS

The Company's business strategy includes enhancing its market position by
entering into strategic alliance agreements. The Company has agreements with
several manufacturers whereby the Company markets and distributes 40 generic
prescription drug products in 67 dosage forms.

The terms of these agreements vary, but typically provide for a sharing of
profits between the Company and the manufacturer. For the years ended December
31, 1997, 1996 and 1995, respectively, the percentages of the Company's sales
comprised of products purchased from others and resold were 37%, 35% and 31%.
The gross profit generated by these sales was approximately $2.5 million, $2.6
million and $3.3 million in 1997, 1996 and 1995, respectively. For additional
information with respect to the Company's strategic alliance agreements see
"Notes to Consolidated Financial Statements - Note C."

ORTHO-MCNEIL PHARMACEUTICAL CORPORATION -- In September 1997, a new agreement
was reached with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil") which
replaced previous agreements that were linked to Duramed's ANDA for conjugated
estrogens. The new agreement provides for the continuation of the non-exclusive
distribution rights for the Ortho-McNeil products Acetaminophen with Codeine,
Tolmetin Sodium, Tolmetin Sodium DS, Oxycodone with Acetaminophen and
Estropipate through the end of 1998. These products represented 59%, 61% and
47% of net sales from products distributed on behalf of other manufacturers
during the years ended December 31, 1997, 1996 and 1995, respectively. In 1997,
Duramed received approval to manufacture and market Acetaminophen with Codeine,
one of the five products currently being supplied by Ortho-McNeil. The Company
has plans in place to enable it to continue to supply substantially all of the
other products currently supplied by Ortho-McNeil and, accordingly, does not
anticipate an adverse impact on the Company's operating results when the
Ortho-McNeil agreement expires.

STASON PHARMACEUTICALS -- In July 1997, Duramed entered into an agreement with
Stason Pharmaceuticals, Inc. ("Stason"), an affiliate of Standard Chemical and
Pharmaceutical Company, Ltd. of Taiwan. Under the terms of the agreement,
Duramed has exclusive marketing

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rights for identified Stason products in the U.S., and Stason has the right to
market identified Duramed products through Standard Chemical and Pharmaceutical
Co. in Taiwan and selected other Asian countries. The alliance also contemplates
a broad variety of future ventures, including technology transfer, access to key
bulk chemicals, cooperative research and development and an expansion of product
lines within the companies' respective territories. The Company expects to
commence marketing products from this agreement in the second quarter of 1998.

ORDER BACKLOG

The dollar amount of the Company's open orders at March 1, 1998 was
approximately $2.5 million as compared with approximately $1.6 million at March
1, 1997. The higher backlog was principally attributable to delays in receipt of
product from other manufacturers. Although open orders are subject to
cancellation without penalty, management expects to fill substantially all of
such open orders within the current fiscal year. The Company's backlog may not
be indicative of net sales during the following reporting period.

SALES AND MARKETING

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

In 1997, Walgreen Co. accounted for 12% of the Company's net sales. In 1996 and
1995, no single customer accounted for more than 10% of the Company's net sales.
The breakdown of sales, by major category reflects the growth of Duramed's
direct distribution activities, which accounted for almost 50% of sales in 1997.

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Chains 48.8% 41.1% 39.0%
Wholesalers 25.3 26.4 23.1
Distributors 23.5 30.8 36.9
Other 2.4 1.7 1.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

Management believes that the relationships the Company is developing with chain
store pharmacies will have a positive impact on future sales and margins. As new
products are added to the Company's product line, Duramed is in a position to
place those directly in the hands of the chain store pharmacists. According to
IMS America, Ltd. ("IMS"), in 1996 more than 39% of total retail dollars spent
on prescriptions were filled at chain store pharmacies, up 13.7% from the
previous year.

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

The branded pharmaceutical market, which Duramed would enter following FDA
approval of its synthetic conjugated estrogens product, is competitive but
presents different challenges than the generic market. Generic pharmaceuticals
generally are familiar to health care professionals because of their exposure to
the branded product. Newly approved branded products must be introduced to
health care professionals, including physicians, pharmacists and payors, to
create interest and demand. If the Company receives FDA approval of its NDA of
its synthetic conjugated estrogens product, it will be marketed under the brand
name Cenestin(TM).

At this time, management is evaluating the means by which it will undertake a
branded sales effort. Options include contracting for the use of a sales force,
a common industry practice, or entering into a distribution agreement with
another pharmaceutical distribution firm.

PRODUCT DEVELOPMENT

The Company's product development activities have increased significantly
during the past year, and the Company intends to continue funding product
development activities based upon available resources. During the fiscal years
ended December 31, 1997, 1996 and 1995, product development expenditures were
$12.5 million, $10.2 million, and $6.0 million, respectively, net of $3.5
million for the write-off of conjugated estrogens inventory in the first
quarter of 1997 and $8.6 million for purchase of in-process research and
development related to the acquisition of Hallmark, now known as Duramed
Somerset, in 1996.

Expenses related to the Hallmark acquisition that were included in product
development expenses comprised approximately $3.3 million and $2.8 million in
1997 and 1996, respectively. Product development expenditures are net of
reimbursements received from Schein under an agreement for the development of a
generic conjugated estrogens product (see "Notes to Consolidated Financial
Statements - Note L").

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

- an internal research and development staff, and

- joint product development efforts with, or purchasing new product
formulations from, other parties.

Duramed also would pursue the engagement of outside experts to develop specified
products on a consulting basis, under specific circumstances. At present,
activities in this area are not material.

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

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

Through the knowledge and experience attained through the pursuit of the
conjugated estrogens product, coupled with the development capabilities at
Duramed Somerset, the Company believes that it has assembled a strong product
development team with the abilities to successfully and efficiently formulate,
file and commercialize a portfolio of new products. Supporting this outlook, in
January 1998, the Company received its first U.S. patent for modified release
technology. Duramed has three additional patent applications pertaining to drug
delivery systems pending with the U.S. Patent and Trademark Office. All of the
modified release technology patents relate to capabilities that would be used in
the development of proprietary products.

The Company has nine ANDAs on file with the FDA. According to IMS data, the
market for one of the products on file, for which there is currently no generic
available, is $190 million. 1996 IMS data estimates the market for the other
eight products on file at $760 million. Additionally, the Company plans to
submit ANDAs for several products in 1998, including three hormonal products.

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

The development of new generic products, including formulation, stability
testing and obtaining FDA approval, generally takes a minimum of 18-24 months.
Development of sustained release prescription products typically requires at
least two bioequivalence studies for most products and, therefore, total
development time, including FDA approval, may be two or three years. Liquid
product development frequently does not require bioequivalence studies and,
including formulation, stability testing and FDA approval, generally takes a
minimum of 12-18 months.

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

On May 5, 1997, the Company was notified by the FDA that, at that time, it would
not approve a generic conjugated estrogens product although the product had been
developed based upon the guidance established by the FDA in 1991 and current
official USP compositional standards. The Company has filed an administrative
appeal of the FDA's decision, but is not able to predict the outcome of this
action. In view of the FDA's decision, however, the Company determined that it
was prudent to write off the conjugated estrogens inventory; accordingly, a
charge in the amount of $3,465,000 was recorded for the first quarter of 1997
and was reflected in product development expenses for that quarter. The product
currently meets the required stability criteria and will be retained until such
time as it no longer passes those tests. In the event the Company is ultimately
successful in obtaining approval for the product, some or all of the inventory
write-off may be recovered.

In July 1997, the Company filed a Citizen Petition with the FDA, asking that the
Premarin(R) brand of conjugated estrogens tablets be declared deficient in its
labeling in that it fails to identify its active ingredients. The petition
requests that the FDA require the manufacturer of

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Premarin(R), Wyeth Ayerst Laboratories, to amend the labeling to comply with the
federal requirements and to withhold approval of any new drug applications for
new dosage strengths, new indications for Premarin(R), and any drug combinations
that include Premarin(R), until the drug is adequately characterized and its
active ingredients definitively identified. The FDA has acknowledged receipt of
the Citizen Petition but has yet to respond.

In August 1997, the Company filed an Investigational New Drug ("IND")
application for the initiation of a clinical study to evaluate synthetic
conjugated estrogens in the treatment of postmenopausal symptoms. That clinical
research effort was satisfactorily completed in February 1998 and provided the
clinical data that constituted the basis for filing of an NDA for the Company's
product on March 30, 1998.

Duramed filed the NDA for its synthetic conjugated estrogens product under
Section 505(b)(2) (and related regulations) of the Federal Food, Drug and
Cosmetic Act ("Act"). Under pertinent provisions of the Act an approved NDA
under Section 505(b)(2) has the potential of being granted three years non
patent market exclusivity upon approval, if certain criteria have been met.
This would delay effective approval of any subsequently approved application
submitted for the same drug substance for three years from the date of approval
of the first-approved application. Additionally, the three-year, non patent
market exclusivity would also preclude the FDA from approving any ANDA as a
generic equivalent to the NDA product during that time period. The Company
believes its NDA application meets these criteria and that it will be the first
product approved, however, the status of product applications filed by other
companies, if any, is not public information and whether the FDA will concur
that the Company has met the specified criteria is outside of the Company's
control. The FDA has granted the Company a waiver of the NDA user fee. The
Company expects its application will be reviewed within the twelve month user
fee review cycle.

Duramed Europe -- Duramed has funded research and development efforts at Duramed
Europe for four years. The Company is in the process, however, of restructuring
Duramed Europe so that the operation will be funded by an investment partner.
The Company believes it will be able to structure a transaction in which Duramed
retains a minority ownership interest in Duramed Europe as well as certain
rights to products developed by Duramed Europe. Management believes
restructuring Duramed Europe is in the Company's best interest to insure that
investment in Duramed Europe's long-term projects continue while reducing
Duramed's overall product development expenses.

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

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

Kiel Laboratories -- In 1995, Duramed and Kiel Laboratories, Inc. ("Kiel"),
based in Gainesville, Georgia, entered into an agreement under which Kiel would
develop and manufacture a number of oncology products for Duramed's exclusive
marketing and distribution. In return, Duramed would make payments to Kiel based
on achievement of specific performance milestones and share in any profits
generated after products were approved and marketed. Discussions in 1997
regarding the potential purchase of Kiel by Duramed have been suspended,
accordingly, the companies are operating under the terms of the 1995 agreement.

GOVERNMENT REGULATION

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

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

1. New Drug Application -- With respect to drug products with active
ingredients not previously approved by the FDA or new uses or new dosage
forms for previously approved active ingredients, a prospective
manufacturer must conduct and submit to the FDA complete

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clinical studies to prove that product's safety and efficacy. An NDA may
also be submitted for a drug product with previously approved active
ingredients if the abbreviated procedure discussed below is not available.

2. Abbreviated New Drug Application -- This is an abbreviated application
procedure for obtaining FDA approval for generic drug products which are
bioequivalent to brand name drugs. In contrast to NDAs, this application
procedure does not require completion of animal and clinical studies for
safety and efficacy, and instead requires data demonstrating that the
generic drug product is bioequivalent to the listed FDA reference product.
"Bioequivalence" means that the rate of absorption and distribution of a
generic drug in the body are equivalent to the previously approved listed
reference drug product and, therefore, that the generic drug will produce a
therapeutically equivalent effect.

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

The Company also is subject to environmental protection laws and regulations of
federal, state and local governmental authorities, including the Clean Air Act
and Occupational Safety and Health Administration ("OSHA") requirements. Under
the Clean Air Act, the Company is required to meet certain air emissions
standards. Under OSHA, the Company is required to meet certain safety standards,
including those relating to equipment and procedures, indoor air quality and
safety data sheets on material used at the Company's facilities. Compliance with
these laws had no material effect on the Company's capital expenditures,
operating results or competitive position during fiscal 1997, and the Company
anticipates no such material effect during fiscal 1998.

RAW MATERIALS

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

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LIABILITY INSURANCE

Duramed's business exposes it to the potential liability that is inherent in the
production of drugs for human use. Although the Company makes every effort to
maintain strict quality control programs and carries product liability insurance
of $5.0 million per incident and $5.0 million in the aggregate per year (with a
deductible amount of $25,000 per claim and $250,000 in the aggregate per year),
it cannot be fully protected from potential liability in this area by any
reasonable amount of insurance. Additionally, there can be no assurance that the
Company's product liability insurance can be renewed or renewed at a rate
comparable to that now being paid by the Company.

EMPLOYEES

As of March 19, 1998, the Company had 327 full-time employees. There are no
collective bargaining agreements in effect at the Company.

ITEM 2. PROPERTIES.

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

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

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

The Company's distribution and other support activities are conducted from a
leased 120,000 square foot facility in Mason, Ohio. The lease for this facility
extends to October 1, 1999 and contains options to renew for an additional five
years.

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

-14-
<PAGE> 15

its business plan.

ITEM 3. LEGAL PROCEEDINGS.

The Company is a party to an Agreement dated June 26, 1992 and amended on April
7, 1994 (the "Agreement") with Schein Pharmaceutical, Inc. ("Schein") relating
to the development of a generic version of the conjugated estrogens product
Premarin(R). On August 7, 1997, the Company filed a complaint for a declaratory
judgment against Schein in the Court of Common Pleas, Hamilton County, Ohio,
Case No. A9705498 ("Ohio action"). The Company seeks a declaration that the
Agreement applies only to a product approved on the basis of an ANDA and which
would be fully substitutable for Premarin(R) and that the Agreement does not
apply to the Company's efforts to develop or market any conjugated estrogens
product which would be approved and marketed on the basis of an NDA.

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

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

On January 30, 1998, Schein amended its answer in the Ohio action and asserted a
counterclaim against the Company and other unnamed defendants similar to the New
Jersey complaint. As a result, on March 4, 1998, the Company renewed its motion
to dismiss the New Jersey action because Schein had brought the same basic
claims as a counterclaim in the Ohio action.

The Company intends vigorously to prosecute its claim for declaratory relief in
the Ohio action and vigorously to defend Schein's claims in the New Jersey
action and counterclaim in the Ohio action. However, the outcome of these
lawsuits and claims cannot be predicted with certainty.

-15-
<PAGE> 16

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

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

None.

PART II

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

The Company's Common Stock is quoted on the Nasdaq National Market System under
the symbol "DRMD." The following table sets forth the range of high and low sale
prices for the Common Stock as reported by the Nasdaq National Market System for
the periods indicated for the years ended December 31, 1997 and 1996:

High Low
<S> <C> <C>
1997:
First Quarter ....................... $12.25 $7.00
Second Quarter ...................... 11.25 3.00
Third Quarter ....................... 7.00 3.25
Fourth Quarter ...................... 6.00 3.00
1996:
First Quarter ....................... $23.50 $14.00
Second Quarter ...................... 20.00 14.50
Third Quarter ....................... 18.75 12.75
Fourth Quarter ...................... 14.88 6.50
</TABLE>

As of December 31, 1997 the Company had 1,617 holders of record of the Common
Stock. The Company believes that, in addition, there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name."
The Company has not paid any cash dividends on its Common Stock since its
inception and does not intend to pay cash dividends in the foreseeable future.
Under the terms of the Company's current loan agreements with its bank, no
dividend declaration is permitted.

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<PAGE> 17

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data, derived from the audited
financial statements of the Company, for each of the five years in the period
ended December 31, 1997. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere herein.

Year ended December 31, 1997 1996 1995 1994 1993
(In thousands, -----------------------------------------------------------------
except per share data)

<S> <C> <C> <C> <C> <C>
Net sales $ 44,296 $ 43,855 $ 49,624 $ 45,274 $ 30,293
- -----------------------------------------------------------------------------------------------------

Pretax (loss) income (17,441) (20,810) (991) 5,765 1,240
- -----------------------------------------------------------------------------------------------------

Income taxes --- 3,901 --- (3,786) 25
- -----------------------------------------------------------------------------------------------------

Net (loss) income (17,441) (24,711) (991) 9,551 1,215
- -----------------------------------------------------------------------------------------------------

Preferred dividends 170 929 123 --- ---
- -----------------------------------------------------------------------------------------------------

Net (loss) income applicable to
common stockholders (17,611) (25,640) (1,114) 9,551 1,215
- -----------------------------------------------------------------------------------------------------

Net (loss) income per share
of common stock:

Basic (1.14) (2.44) (.14) 1.22 .17
------------------------------------------------------------------------------------------------

Diluted (1.14) (2.44) (.14) .93 .14
------------------------------------------------------------------------------------------------

Cash dividends
per common share --- --- --- --- ---
------------------------------------------------------------------------------------------------

Total assets 50,126 53,634 45,177 37,002 22,959
- -----------------------------------------------------------------------------------------------------

Long-term liabilities 12,159 11,878 19,837 18,267 23,201
- -----------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 18

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

OVERVIEW

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

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

Results for the three year period reflect the substantial resources Duramed
invested in the development of an ANDA, and subsequently, an NDA conjugated
estrogens product, for which the ANDA was filed in 1994. In May 1997, the
Company was notified by the FDA that, at that time, it would not approve a
generic conjugated estrogens product, although the product had been developed
based on the guidance established by the FDA in 1991 and current official USP
compositional standards. Following that decision, Duramed management decided ,
in addition to appealing the FDA's decision, to pursue an NDA branded product
strategy for its synthetic conjugated estrogens product. In February 1998, the
Company announced the successful completion of a multi-center, double-blind,
placebo-controlled trial to evaluate its drug in the

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<PAGE> 19

treatment of postmenopausal vasomotor symptoms in women. This trial provided
Duramed with the clinical data that constituted the basis for the filing of an
NDA with the FDA on March 30, 1998.

OUTLOOK

Business Strategy Outlook -- Management is pursuing a business strategy designed
to return the Company to profitability. The Company's ability to attain
profitability, the time frame required to do so, and the potential level of such
profitability, are primarily dependent upon several factors including: (1) the
potential for further price erosion, and associated gross margin declines, for
the Company's most significant current product, methylprednisolone; (2) the
level and timing of the profit contribution from products approved by the FDA in
recent months; and, (3) the approval of pending, or not yet filed, applications
with the FDA. Additionally, in September 1997, Duramed entered into a ten year
renewable manufacturing agreement with Warner-Lambert. This agreement made a
contribution to the 1997 fourth quarter results, and will make a significant
contribution in 1998 and over the term of the agreement. (See Notes to
Consolidated Financial Statements - Note C for a description of the agreement).

Management is encouraged by the results to date from the Company's product
development program and has concluded that it is in the best interests of the
Company and its stockholders to continue substantial spending for research and
development and for hiring incremental personnel and procuring necessary
equipment to prepare for the production and launch of certain products on file.
Since the beginning of 1997, the FDA has approved five ANDAs submitted by the
Company, as evidence of the success of the development program and the Company
has nine other ANDAs pending approval. According to IMS data, the market for one
of the products on file, for which there is currently no generic available, is
$190 million. 1996 IMS data estimates the market for the other eight products on
file at $760 million.

Management recognizes, however, that its actions are likely to result in
operating losses until such time as new products make a meaningful contribution
to results. Based on the Company's anticipated market share for products
approved in recent months and the anticipated timing of approval for currently
pending applications with the FDA, the Company does not anticipate substantial
contributions to revenues from such products before the second half of 1998
and, accordingly, does not anticipate a return to profitable operations until
late in the fiscal year.

In the meantime, the Company's product development program will not be supported
from the Company's operations and therefore will be funded through available
funds as well as borrowings under its line of credit. The extent of the
Company's need for additional capital is dependent on: (1) the level and timing
of the profit contribution from products approved by the FDA in recent months;
(2) the timing of approval of currently pending applications with the FDA; and,
(3) the ability of the Company to maintain the current business base as well as
the success of other aspects of its business plan.

-19-
<PAGE> 20

The terms of a recently completed private placement of Convertible Preferred
Stock require the Company to obtain the investor's concurrence to raise
additional capital under certain defined terms. If the Company needs to raise
additional capital, the extent of dilution to current shareholders is dependent
on the amount of capital required and the terms under which it is raised. If
capital is needed and is not available, or approval to raise such capital cannot
be obtained from the investor, implementation of the Company's plans will be
restricted or delayed with potentially a negative effect upon the Company's
prospects.

RESULTS OF OPERATIONS

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

Percentage of Sales
Year Ended December 31,
-----------------------
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
- ----------------------------------------------------------
Cost of goods sold 75.6 72.2 59.9
Gross margin 24.4 27.8 40.1

Product development 36.0 23.3 12.0
Purchase of in process
research and development --- 19.5 ---
Selling 7.2 10.3 7.3
General and administrative 17.4 17.8 17.3
Operating margin (36.2) (43.1) 3.5

Interest expense 3.2 4.2 5.5
Preferred dividends 0.4 2.1 0.2
Income taxes --- 8.9 *
- ----------------------------------------------------------

Net Loss (39.8)% (58.3)% (2.2)%
==========================================================

*Not a meaningful percentage.

NET SALES

Net sales increased by $0.4 million (1.0%) in 1997, compared with a decrease of
$5.8 million (11.6%) in 1996. Net sales were essentially unchanged from 1996
levels with unit sales increases, primarily on products sourced through other
manufacturers, offsetting price erosion due to increased competition on the
Company's methylprednisolone product.

-20-
<PAGE> 21

The decline in net sales in 1996 was primarily attributable to lower revenues
from methylprednisolone, as well as general price erosion resulting from actions
by competing distribution channel members.

The 1996 sales declines were offset to a degree by continued growth in sales of
the Ortho-McNeil products, as well as sales of certain products that the Company
markets under various arrangements with the manufacturers.

Methylprednisolone accounted for 37% of sales in 1997, 41% of sales in 1996, and
53% in 1995. No other single product has accounted for more than 10% of net
sales in these years. In total, products manufactured by Duramed accounted for
63% of sales in 1997, 65% of sales in 1996 and 70% in 1995.

GROSS MARGIN

Gross margins, and the corresponding percentages of net sales for 1997, 1996 and
1995, were $10.8 million (24.4%), $12.2 million (27.8%), and $19.9 million
(40.1%), respectively. The reduced gross margin in 1997 primarily reflected the
continued decline in methylprednisolone profitability, principally due to price
erosion. The margin erosion for methylprednisolone was partially offset by sales
of products sourced from other manufacturers and, in the fourth quarter, the
positive contribution from the manufacturing agreement signed with
Warner-Lambert in September 1997.

The substantially lower gross margin in 1996 was attributable to lower unit
sales and lower prices on the Company's methylprednisolone product, and price
erosion on many of the products in the Company's line due to increased
competition. The gross margin in 1996 was also impacted by inventory charges of
approximately $900,000 to recognize impairment of value for finished products
with limited remaining shelf life. The gross margin in 1995 was favorably
impacted by the recognition of $1.5 million in deferred revenues, compared to
the recognition of $500,000 of deferred revenues in 1996.

Various factors are expected to impact the Company's gross margin in 1998 and
beyond. During the second half of 1997, three companies received FDA approval to
market a generic version of methylprednisolone. This additional competition is
expected to further depress the gross margin for methylprednisolone, but
management cannot predict the extent or timing thereof. The Company's gross
margin could be favorably impacted by successful introduction and marketing of
recently approved products, additional approvals of pending applications as well
as contributions from the Company's agreement with Warner-Lambert. FDA approval
of the Company's pending applications is outside the Company's control, however,
and management cannot predict the timing of such events.

-21-
<PAGE> 22

PRODUCT DEVELOPMENT

Product development expenditures for the years ended December 31, 1997, 1996 and
1995 were approximately $12.5 million, $10.2 million and $6.0 million,
respectively, net of $3.5 million for the write-off of conjugated estrogens
inventory in the first quarter of 1997, and $8.6 million for purchase of
in-process research and development related to the acquisition of Hallmark, now
known as Duramed Somerset, in 1996. The increase in product development
expenditures reflects the Company's continued commitment to investing in product
development.

Write-off of Conjugated Estrogens Inventory -- In view of the FDA's decision
regarding the Company's synthetic conjugated estrogens ANDA, the Company
determined that it was prudent to write off existing conjugated estrogens
inventory; accordingly, a charge in the amount of $3,465,000 was recorded in the
first quarter of 1997 and reflected in product development expenses for the
year. The product currently meets the required stability criteria and will be
retained until such time as it no longer passes those tests. In the event the
Company is ultimately successful in obtaining approval for the product, some or
all of the inventory write-off may be recovered.

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

Over the past four years, Duramed has funded research and development efforts at
Duramed Europe. Duramed is in the process of restructuring its ownership
interest in Duramed Europe so that operation will be funded by an investment
partner. The Company believes it will be able to structure a transaction such
that Duramed retains a minority ownership interest in Duramed Europe as well as
certain rights to products developed by Duramed Europe. Management believes
restructuring Duramed Europe is in the Company's best interest to ensure
continued development in these long-term projects while reducing Duramed's
overall product development expenses.

The Company expects the 1998 product development activity level to be comparable
to 1997.

SELLING

Excluding an incremental $750,000 charge recorded in the third quarter of 1996
to supplement the allowance for doubtful accounts, primarily as a result of the
bankruptcy petition filed by a large wholesaler customer, and a $300,000 charge
recorded in the fourth quarter of 1996 to establish a reserve for potential
shelf stock adjustments, selling expenses declined $286,000 between 1997 and
1996, and $161,000 between 1996 and 1995, due to steps implemented to control
costs.

-22-
<PAGE> 23

If the Company receives FDA approval of its NDA for its synthetic conjugated
estrogens product, Cenestin(TM), it will require a brand sales effort. Depending
on the Company's approach to entering the branded prescription market with
Cenestin(TM), selling and general administrative expenses may rise in 1998.

GENERAL AND ADMINISTRATIVE

In 1997, general and administrative expenses decreased by $94,000, as the
Company continued to monitor and control expense levels. In 1996, general and
administrative expenses declined by $782,000. The reduction was due to the
recognition in the fourth quarter of 1996 of a $330,000 reduction of general and
administrative expenses resulting from a sublessor's lease renewal (see "Notes
to Consolidated Financial Statements - Note E") and steps implemented by
management to reduce compensation costs and other controllable expenses.
Additionally, during 1997, 1996 and 1995 the Company incurred incremental
expenses of approximately $593,000, $503,000 and $756,000, respectively, in
connection with responding to various regulatory and legal issues associated
with the Company's pending ANDA for conjugated estrogens.

Year 2000 Compliance

The Company has instituted a plan in order to become Year 2000 compliant.
Successful executions of the plan will result in the Company becoming Year 2000
compliant early in 1999 at a cost of approximately $500,000. The plan also
includes an evaluation of the Year 2000 compliance of its major suppliers and
customers. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance.

NET INTEREST EXPENSE

The Company's borrowings are primarily variable rate facilities. In 1997, the
Company's net interest expense declined by $451,000 compared with 1996 due to
reduction of the Company's borrowings under its revolving credit facility. In
1996, the Company's net interest expense declined by $874,000 compared with
1995, due to reductions in average borrowings achieved by paying down bank
indebtedness with a portion of the proceeds of the issuances of the Company's
Series C and Series D Preferred Stock (see "Liquidity and Capital Resources"
below). Also, in 1997 and 1996 the Company earned interest income from the short
term investment of the proceeds from the issuance of Convertible Preferred
Stock.

INCOME TAXES

At December 31, 1997, the Company had cumulative net operating loss
carryforwards of approximately $49.1 million for federal income tax purposes
that expire in the years 2004 to 2012. Additionally, the Company had cumulative
losses from Duramed Europe that amounted to

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<PAGE> 24

approximately $4.7 million that are not deductible for U.S. tax purposes. In the
fourth quarter of 1996 the Company recognized a non-cash charge of $3.9 million
to restore fully a valuation allowance (which had been reduced in 1994)
pertaining to the Company's deferred tax assets, principally net operating loss
carryforwards.

Excluding the adjustments to the valuation allowance, the Company did not record
a provision for income taxes in either 1997, 1996 or 1995.

PREFERRED DIVIDENDS

Both the Company's Series C Convertible Preferred Stock (issued in November 1995
and February 1996) and Series D Convertible Preferred Stock (issued in August
1996) provided for an 8% dividend on unconverted preferred shares, while the
Company's Series E Mandatory Redeemable Preferred Stock (issued in June 1997)
provided for a 5% dividend on unconverted shares. Preferred stock dividends of
$170,000 in 1997 represent dividends associated with the unconverted portion of
Convertible Preferred Stock. Preferred dividends were $929,000 in 1996 and
$123,000 in 1995 (see "Notes to Consolidated Financial Statements - Note H").

LIQUIDITY AND CAPITAL RESOURCES

SERIES F MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK

In February 1998, the Company completed the private placement of $12 million
($11.4 million net of issuance cost) of Series F Mandatory Redeemable
Convertible Preferred Stock ("Series F Preferred Stock"). One half of the
preferred shares are convertible immediately with the remaining half convertible
after August 4, 1998. The conversion price for the first half of the Series F
Preferred Stock will be $7.30 per share for at least the first six months.
Thereafter, with respect to the second half of the Series F Preferred Stock and
any unconverted portion of the first half, the conversion price will vary
depending on the timing of conversions and the market price of the Common Stock.
The conversion price will range from a premium to the market price, to a
discount from the market price of the Common Stock.

The Series F Preferred Stock will pay a dividend of 5% annually, payable
quarterly in arrears, on all unconverted Series F Preferred Stock. Any of the
Series F Preferred Stock that remains outstanding will be redeemed automatically
on February 4, 2000. At the closing of this transaction, Duramed had
approximately 17.9 million shares of Common Stock outstanding. Depending on the
ultimate conversion price, the number of shares of Common Stock issued in
satisfaction of conversion could range from a low of 1,397,000 to a high of
3,582,000, with provision for cash redemption of any remaining unconverted
Series F Preferred Stock. The private placement agreement placed restrictions on
the Company's ability to raise additional capital without the investor's
concurrence.

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<PAGE> 25

ANALYSIS OF CASH FLOWS (amounts in millions)

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

<S> <C> <C> <C>
Net Cash Used In Operating Activities (14.3) (11.8) (6.0)
Net Cash Used For Investing Activities (1.6) (6.8) (5.2)
Net Cash Provided by Financing Activities 14.1 20.4 11.2
------ ------ ------
Net Change in Cash (1.8) 1.8 --
Cash at Beginning of Period 1.8 -- --
------ ------ ------
Cash and Cash Equivalents at End of Period -- 1.8 --
====== ====== ======
Supplemental Cash Flow Disclosures:
Interest Paid 1.4 1.9 2.7
Income Taxes Paid -- -- 0.1
</TABLE>

Operating Activities

The net cash used in operating activities primarily relates to funding of
operating losses resulting from the Company's continued commitment to product
development. Inventory decreased in 1997 principally due to the write-off of
$3,465,000 in conjugated estrogens inventory. Prepaid expense increased and
accounts payable decreased due to a change in terms under the new Ortho-McNeil
distribution agreement, whereby the Company is required to prepay for product
purchases in excess of an established credit limit. Additionally, prepaid
expenses increased in 1997 due to amounts paid on Warner-Lambert's behalf for
which the Company was subsequently reimbursed. The majority of the inventory
increase in 1996 was in the category of finished goods, reflecting planned
growth in inventory levels in order to stock new products which the Company
commenced marketing and distributing in 1996 and production of the conjugated
estrogens product in anticipation of FDA approval.

The decrease in receivables in 1996 was primarily attributable to the increase
in the allowance for doubtful accounts as a result of the bankruptcy petition
filed by a large wholesale customer, as well as a high receivable balance at the
end of 1995 due to promotion terms extended to customers during the later part
of the fourth quarter which included an additional thirty days dating to certain
customers. Receivables subject to the additional thirty day dating amounted to
$1,700,000.

Investing Activities

In 1997, capital expenditures were $1.6 million including an expansion of lab
facilities at the Company's Somerset, New Jersey facility. The $5.2 million in
capital expenditures in 1996 includes $4.0 million of equipment financed by
Ortho-McNeil. (See Notes to Consolidated Financial Statements - Note C).

-25-
<PAGE> 26

Investing activities in 1996 also included $1.6 million in conjunction with the
acquisition of the assets and business of Hallmark. For additional information
on the Hallmark acquisition see "Notes to Consolidated Financial Statements -
Note B."

Financing Activities

Financing activities have funded the Company's operations for the three-year
period. Issuances of Convertible Preferred Stock raised $9.6 million, $29.8
million and $10.8 million in the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, long-term borrowings added $9.1 million, $6.8
million and $8.1 million, in each year, respectively. These funds were offset
by payment of long-term debt in each of the three years and by a $8.7 million
reduction in the revolving credit facility in 1996. In 1997, the Company
increased borrowings under its revolving credit facility by $4.5 million.

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

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

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

-26-
<PAGE> 27

The Company has a revolving credit facility that currently permits the Company
to borrow up to $6.5 million, based upon eligible collateral. The Company had
$4.5 million in borrowings on its revolving credit facility at December 31, 1997
which was subsequently paid off with the proceeds from the Series F Preferred
Stock.

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

In September, a new agreement was reached with Ortho-McNeil that resulted in an
extension of product distribution rights for Ortho-McNeil products distributed
by the Company and a new equipment note for equipment provided in connection
with the Company's facility expansion that was completed in 1995. The equipment
note is secured by the equipment, requires monthly interest and principal
payments of $135,497 over a three year term, and bears a 14% interest rate. In
the fourth quarter of 1996, the Company recorded a $4.0 million asset and
liability for the equipment provided by Ortho-McNeil (see "Notes to Consolidated
Financial Statements - Note E").

The Company's bank holds warrants, exercisable until August 2005, to purchase
200,000 shares of the Company's Common Stock at a price of $18.125 per share.
These warrants were granted to the bank in consideration of certain
modifications to the Company's borrowing arrangements and additional extensions
of credit which were made during the second half of 1995.

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

AVAILABLE FUNDS

As of March 13, 1998, the Company had $1.7 million in short term cash equivalent
investments and no borrowings under its revolving credit facility. The Company's
current borrowing capacity under its revolving credit facility is $6.5 million,
based upon eligible collateral ($12.4 million as of March 13, 1998) available
through April 1, 1999.

-27-
<PAGE> 28

business plan. Additionally, capital will be required for facility and equipment
to execute the Company's Business Plan and to commercialize the Company's
synthetic conjugated estrogens product.

The terms of the recently completed private placement of Convertible Preferred
Stock require the Company to obtain the investors concurrence to raise
additional capital under certain defined terms. If the Company needs to raise
additional capital, the extent of dilution to current shareholders is dependent
on the amount of capital required and the terms under which it is raised. If
capital is needed and is not available, or approval to raise such capital
cannot be obtained from the investor, implementation of the Company's plans will
be restricted or delayed with potentially a negative effect upon the Company's
prospects.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

During 1998 the Company will adopt the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which requires that segment information be disclosed based
upon how management internally evaluates the operating performance of its
business units. Application of the disclosure requirements under this standard
is not expected to have a material effect on the financial statements of the
Company in 1998.

INFLATION

Inflation has not had, and is not expected to have, a material impact upon the
Company's business.

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

NOT APPLICABLE.

-28-
<PAGE> 29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

Page
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets as of
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations for
the Years Ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .F-7

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

None.

-29-
<PAGE> 30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS

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

E. THOMAS ARINGTON, age 61. Mr. Arington has been the Company's President and
Chief Executive Officer since October 1987. He became a director of the Company
in December 1987 and its Chairman of the Board in May 1988. Prior to joining the
Company, he was President of MarketMaster, Inc., a health care consulting firm
which had the exclusive rights to market the Company's products. MarketMaster,
Inc. was acquired by the Company in December 1987. Mr. Arington's career has
also included 17 years with Lederle Laboratories, a division of American
Cyanamid, where he held a variety of executive management positions.

GEORGE W. BAUGHMAN, age 60. Mr. Baughman was elected a director of the Company
in April 1989. Mr. Baughman has been President and Chairman of Advanced Research
Associates, a consulting firm specializing in information systems and technology
and in financial analysis and planning, for more than the past five years. He
was employed by The Ohio State University for twenty-five years, retiring as
Director of Special Projects, Office of President.

DEREK G. LAYTON, PH.D., age 57. Dr. Layton has been a director of the Company
since November 1996 and President of Duramed Europe, Ltd., a wholly owned
subsidiary of the Company, since its formation in May 1994. Prior to joining the
Company, he was a partner with the executive search company Ward Howell, Inc. In
1983 Dr. Layton co-founded Porton International plc, an Anglo-American
conglomerate of companies focused on healthcare and biotechnology. He served as
Group Managing Director from 1983 to 1985 and as Chief Executive Officer from
1985 to 1989. Dr. Layton has held a number of senior academic positions in
Europe and the U.S. and acted as an advisor to several governments on the impact
of biotechnology on existing industries.

STANLEY L. MORGAN, age 80. Mr. Morgan was elected a director of the Company in
April 1989. Mr. Morgan is the retired Executive Vice President of Ben Venue
Laboratories, Inc., a leading pharmaceutical manufacturer of sterile dosage
forms and bulk pharmaceutical products. He served Ben Venue in many capacities
including Chief

-30-
<PAGE> 31

Administrative Officer, Chief Engineer and Executive Director of Research and
Development. Since retirement he has been a consultant to the pharmaceutical
industry.

S. SUNDARARAMAN, age 61. Mr. Sundararaman is the Company's Secretary and has
been a director of the Company since 1982. Mr. Sundararaman is Manager, Sales
Automation and Distribution, USA for Lufthansa German Airlines and has been with
that company since 1961.

EXECUTIVE OFFICERS

The current executive officers of the Company are as follows:

Name Age Title
- ---- --- -----

E. Thomas Arington 61 Chairman of the Board, President and
Chief Executive Officer

S. Sundararaman 61 Secretary and Director

Jeffrey T. Arington 37 Senior Vice President, Marketing,
Sales and Science

Timothy J. Holt 45 Senior Vice President, Finance and
Administration, Treasurer and Chief
Financial Officer

Information about Messrs. E. Thomas Arington and Sundararaman is given above.
Information about the Company's other executive officers is as follows:

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

TIMOTHY J. HOLT. Mr. Holt has been Senior Vice President, Finance and
Administration since April 1994. He served as Vice President, Finance of the
Company from 1985 through March 1994. Prior to joining the Company in 1985, Mr.
Holt was Vice President-Finance and Chief Financial Officer of Vortec
Corporation, a then

-31-
<PAGE> 32

publicly held company operating in the fields of specialty manufacturing and
home health care equipment, and also held financial management positions with
privately held companies including Eagle Software Publishing.

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten-percent
beneficial owners also are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. Based upon a review of copies
of such forms, the Company believes that all Section 16(a) filing requirements
were complied with on a timely basis during and for 1997.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by the Company to
(i) Mr. E. Thomas Arington, (ii) each of the Company's other executive officers
at the end of 1997 whose salary and bonus exceeded $100,000. Mr. Arington and
these other persons are sometimes referred to as the "named executive officers."

-32-
<PAGE> 33

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

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

Other Securities
Annual Underlying
Compen- Stock Option All Other
Name and Bonus sation Grants Compensation
Principal Position Year Salary ($) ($) ($)(1) (#) ($)(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington 1997 $ 519,234 --- --- --- $ 43,423
Chief Executive Officer 1996 369,213 --- --- 518,500 32,522
1995 422,142 --- --- --- 35,159

Jeffrey T. Arington 1997 $ 163,365 --- --- 22,000 $ 3,207
Senior Vice President, 1996 148,489 --- --- 17,000 3,107
Sales and Marketing 1995 155,262 --- --- --- 3,308

Timothy J. Holt 1997 $ 163,365 --- --- 20,000 $ 3,802
Senior Vice President, 1996 145,883 --- --- 15,000 3,188
Finance and Treasurer 1995 155,262 --- --- --- 5,540

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

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

(2) Amounts disclosed for 1997 are comprised of the following: (i) term and/or
whole life insurance premium payments for the benefit of Mr. E. Thomas
Arington ($33,940), Mr. Jeffrey T. Arington ($308) and Mr.Timothy Holt
($792); (ii) disability insurance premium payments for Mr.E. Thomas
Arington ($6,283); (iii) matching contributions to the Company's 401(k)
Plan on behalf of Mr.E. Thomas Arington ($3,200), Mr. Jeffrey T. Arington
($2,899) and Mr.Timothy J. Holt ($3,010) in respect of their contributions
to the Plan.
</TABLE>

-33-

<PAGE> 34
STOCK OPTIONS. The following table presents information on option grants during
1997 to the named executive officers. The Company's plans do not provide for the
grant of stock appreciation rights.

<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR

Individual Grants(1)

---------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of Price Appreciation for
Securities % of Total Option Term
Underlying Options Exercise ------------------------------
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)

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

<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington --- 0.0% $0.000 $0 $0

Jeffrey T. Arington 10,000 2.3% $5.000 2/11/07 $ 22,282 $ 65,097
12,000 2.7% $4.438 5/8/07 $ 33,489 $ 84,867

Timothy J. Holt 10,000 2.3% $5.000 2/11/07 $ 22,282 $ 65,097
10,000 2.3% $4.438 5/8/07 $ 27,907 $ 70,722

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

<FN>
(1) All options having an expiration date of February 11, 2007 were granted
originally on February 11, 1997 with an exercise price of $10.125 per
share, and all options having an expiration date of May 8, 2007 were
granted on May 8, 1997 with an exercise price of $4.438 per share. The
options granted on February 11, 1997 were repriced on May 8, 1997 to
$5.00.

The grants on February 11, 1997 for 10,000 shares to each of Messrs.
Jeffrey T. Arington and Timothy J. Holt became exercisable as to 100% of
the shares on February 11, 1998. All other options become exercisable at
a maximum rate of 20% of the shares per year beginning on the first
anniversary of the date of grant.
</TABLE>

-34-

<PAGE> 35

Each option becomes exercisable in full (i) if any person becomes, or commences
a tender offer which could result in the person becoming, the beneficial owner
of more than 50% of the outstanding shares of the Company's Common Stock or (ii)
in the event of the execution of an agreement of merger, consolidation or
reorganization pursuant to which the Company is not to be the surviving
corporation or the execution of an agreement of sale or transfer of all or
substantially all of the assets of the Company. Under certain change-of-control
circumstances, an optionee will be entitled to receive a cash payment equal to
the difference between the "fair value" of all unexercised option shares and the
aggregate option price of those shares.

With respect to each named executive officer, the following table sets forth
information concerning option exercises during 1997 and unexercised options held
at December 31, 1997.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>

Value of Unexercisable
Value Realized Number of Securities In-the-Money
($) Underlying Unexercised Options at FY-End
Options at FY-End (#) ($)
(Market Price on
Shares Acquired Exercise Less Exercisable/ Exercisable/
Name on Exercise (#) Exercise Price) Unexercisable Unexercisable

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

<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington --- --- 1,054,468 / 313,875 $3,534,899 / $215,632

Jeffrey T. Arington --- --- 105,851 / 28,150 $426,423 / $26,089

Timothy J. Holt --- --- 89,184 / 24,150 $347,930 / $22,216

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

COMPENSATION OF DIRECTORS. During 1997, nonemployee directors of the Company
received an annual fee of $10,000, fees of $1,200 for each Board meeting
attended, plus reimbursement of expenses, and fees of $500 for each Board
meeting held by conference telephone. Committee meeting fees are paid at the
same rates as fees for Board meetings; however, no fees are paid for committee
meetings held on the same dates as Board meetings. No fees are paid to directors
who are also employees of the Company. Each nonemployee director also is
annually awarded nondiscretionary options to purchase 5,000 shares of the
Company's Common Stock and is reimbursed by the Company for up to $7,500 per
year in legal and financial consulting expenses.

-35-
<PAGE> 36

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

EMPLOYMENT AGREEMENT. On March 30, 1994, the Company entered into an Amended and
Restated Employment Agreement (the "Agreement") with Mr. E. Thomas Arington. The
initial term of the Agreement continues until December 31, 1998, subject to
automatic annual extension if notice of termination is not given by either party
prior to specified dates. The effect of the Agreement is to provide for an
initial five year employment term, with subsequent "rolling three year" minimum
terms. The Agreement may be amended by agreement between the Compensation
Committee of the Board of Directors and Mr. Arington.

Under the Agreement, Mr. Arington is to receive a salary in an amount to be set
by the Compensation Committee, but not less than $33,333 per month. For 1996,
the Compensation Committee had determined to increase Mr. Arington's salary to
$500,000 per year. In view of the Company's operating results, however, Mr.
Arington declined the increase and, in addition, during the periods February 26
to July 29 and November 9 to December 30, 1996, voluntarily reduced his salary
by 50% below that paid in 1995. Mr. Arington's salary was set at $500,000 for
1997. The Agreement also entitles Mr. Arington to receive an annual bonus equal
to the following percentages of the Company's income before taxes: 6% for 1996,
and 5% for each of 1997 and 1998. After 1998, a bonus will be paid in such a
manner and amount as the Compensation Committee might at that time determine.
This incentive compensation arrangement was approved by the Company's
stockholders at the 1994 Annual Meeting of Stockholders.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. E. Thomas
Arington, the Company's Chief Executive Officer, determined the 1997 salaries of
the

-36-
<PAGE> 37

Company's other named executive officers, taking into consideration the target
range for total cash compensation established by the Compensation Committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 13, 1998, certain information with
regard to the beneficial ownership of the Company's common stock by (i) each of
the Company's stockholders known to hold more than 5% of the outstanding shares
of common stock, (ii) each director and executive officer named on the Summary
Compensation Table, individually, and (iii) all directors and executive officers
of the Company as a group.

Name Beneficial Ownership
---- --------------------
Number Of Shares (1) Percent
-------------------- -------

<S> <C> <C>
E. Thomas Arington 1,945,209 10.2%
7155 East Kemper Road
Cincinnati, OH 45249

George W. Baughman 73,000 *

Derek G. Layton 12,700 *

Stanley L. Morgan 79,000 *

S. Sundararaman 218,716 1.2%

Jeffrey T. Arington 154,883 *

Timothy J. Holt 122,831 *

All directors and 2,606,339 13.5%
executive officers
as a group (7 persons)

*Less than one percent.

<FN>

- ----------
(1) Excludes shares of Common Stock subject to options which cannot be
exercised within 60 days after March 13, 1998. Included options to
purchase the following numbers of shares: Mr. E. Thomas Arington,
1,159,093 shares; Mr. George W. Baughman, 25,000 shares; Dr. Derek G.
Layton, 12,700 shares; Mr. Stanley L. Morgan, 24,000 shares; Mr. S.
Sundararaman, 15,000 shares; Mr. Jeffrey T. Arington, 118,251 shares;
Mr. Timothy J. Holt, 101,184 shares; and all directors and executive
officers as a group, 1,455,228 shares.
</TABLE>

-37-
<PAGE> 38

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Mr. Philip B. Arington is employed by the Company as its Executive Director of
Sales. His total compensation for 1997 was approximately $108,000. Mr.
Christopher H. Arington is employed by the Company as its Business Director -
Southwest Region. For 1997, his total compensation was approximately $69,000.
Mr. Philip B. Arington and Mr. Christopher H. Arington, are sons of Mr. E.
Thomas Arington, the Company's Chairman of the Board and Chief Executive
Officer.

PART IV

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

(a) 1. All financial statements filed as a part of this report on Form 10-K are
listed under Item 8, above.

2. The following financial statement schedule is filed herewith:

Page
----
Valuation and Qualifying Accounts S-1

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

(b) Reports on Form 8-K: None

Exhibit Number Description

3.1 Certificate of Incorporation (a)

3.2 By-Laws (b)

4.1 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (b)

4.2 Rights Agreement between Duramed Pharmaceuticals, Inc. and The
Provident Bank as Rights Agent dated as of August 17, 1988 (c)

4.3 Certificate of Designation, Preferences and Rights of Series F
Preferred Stock

-38-
<PAGE> 39

10.1 Amended and Restated Loan and Security Agreement dated as of
December 31, 1994 between the Company and The Provident
Bank (d)

10.2 First Amendment to Amended and Restated Loan and Security
Agreement dated August 22, 1995 between the Company and The
Provident Bank (e)

10.3 Second Amendment to Amended and Restated Loan and Security
Agreement dated September 30, 1995 between the Company and
The Provident Bank (e)

10.4 Third Amendment to Amended and Restated Loan and Security
Agreement dated December 22, 1995 between the Company and
The Provident Bank Agreement (f)

10.5 Fourth Amendment to Amended and Restated Loan and Security
Agreement dated March 31, 1997 between the Company and The
Provident Bank (g)

10.6 Fifth Amendment to Amended and Restated Loan and Security
Agreement dated March 27, 1998 between the Company and The
Provident Bank

10.7 Warrant for the purchase of 200,000 shares of common stock
between the Company and The Provident Bank (e)

10.8 Form of warrant issued to shareholders of Hallmark
Pharmaceuticals, Inc. (h)

10.9 $8.5 million Promissory Note Adjustable Rate Mortgage Loan (i)

10.10 Open-End Mortgage (i)

10.11 Lease by and between the Company and Warner-Lambert Company dated
as of September 24, 1997 (i)

10.12 Guaranty Agreement between The Provident Bank and Warner- Lambert
Company dated as of September 24, 1997 (i)

10.13 Executive Compensation Plans and Arrangements
(i) Amended and Restated Employment Agreement dated as
of March 30, 1994 between the Company and E. Thomas
Arington (j)
(ii) Life and disability insurance policies for the
benefit of E. Thomas Arington (k)
(iii) Life insurance policy for the benefit of Timothy J.
Holt (k)
(iv) 1988 Stock Option Plan (l)
(v) 1991 Stock Option Plan for Nonemployee Directors (l)
(vi) 1997 Stock Option Plan (m)

23 Consent of Independent Auditors

24 Powers of Attorney

27 Financial Data Schedule*

- -----------------
*Contained only in electronic filing with Securities and Exchange
Commission.

-39-
<PAGE> 40

(a) Filed as an Exhibit to Registration Statement No. 33-8215-C and
incorporated herein by reference.

(b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1988 and incorporated herein by reference.

(c) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of
Report August 28, 1988, and incorporated herein by reference.

(d) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1988 and incorporated herein by reference.

(e) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by reference.

(f) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.

(g) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.

(h) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
No. 333-06901, and incorporated herein by reference.

(i) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.

(j) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.

(k) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by reference.

(l) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993
Annual Meeting of Stockholders and incorporated herein by reference. ended
December 31, 1992 and incorporated herein by reference.

(m) Filed as an Exhibit to the Company's Proxy Statement relating to the 1997
Annual Meeting of Stockholders and incorporated herein by reference..

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

- 40 -

<PAGE> 41
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, as of the 31 day of
March 1998.

DURAMED PHARMACEUTICALS, INC.

BY: /s/ E. Thomas Arington
------------------------------------
E. Thomas Arington, President

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 indicated as of the 31 day of March 1998.

Signatures Title
---------- -----

President and Chief Executive
/s/ E. Thomas Arington Officer, Chairman of the Board
- ---------------------------- (Principal Executive Officer)
E. Thomas Arington

Senior Vice President, Finance and
/s/ Timothy J. Holt Administration, Treasurer
- ---------------------------- (Principal Financial and Accounting Officer)
Timothy J. Holt

/s/ George W. Baughman* Director
- ----------------------------
George W. Baughman

Director and President, Duramed Europe, Ltd.
- ----------------------------
Derek G. Layton

/s/ Stanley L. Morgan* Director
- ----------------------------
Stanley L. Morgan

/s/ S. Sundararaman* Director and Secretary
- ----------------------------
S. Sundararaman

*Pursuant to Power of Attorney

/s/ Timothy J. Holt
Timothy J. Holt, Attorney-in-Fact

-41-
<PAGE> 42

[ERNST & YOUNG LLP LETTERHEAD]

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Duramed Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Duramed
Pharmaceuticals, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Duramed Pharmaceuticals, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in a period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the relate financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.

/s/ Ernst & Young LLP

Cincinnati, Ohio
March 20, 1998

F-1

<PAGE> 43
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS

December 31, 1997 1996
- --------------------------------------------------------------------------------

Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,500 $ 1,811,182
Trade accounts receivable,
less allowance for doubtful
accounts: 1997 - $1,482,000
1996 - $1,339,000 8,108,462 7,460,452
Inventories 10,435,942 13,188,627
Prepaid expenses and other assets 2,650,274 1,455,251
----------- -----------
Total current assets 21,198,178 23,915,512
----------- -----------

Property, plant and equipment - net 28,419,056 29,302,056
----------- -----------

Deposits and other assets 508,707 416,288
----------- -----------

Total assets $50,125,941 $53,633,856
=========== ===========
</TABLE>

See accompanying notes.

F-2
<PAGE> 44

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY

December 31, 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,129,712 $ 4,461,434
Accrued liabilities 4,973,354 5,178,068
Current portion of long-term debt
and other liabilities 6,913,909 3,363,798
Current portion of capital lease obligations 1,064,210 1,113,114
------------ ------------

Total current liabilities 17,081,185 14,116,414
------------ ------------

Long-term debt, less current portion 11,053,498 9,989,461
Long-term capital leases, less current portion 1,105,571 1,727,587
Other long-term liabilities --- 161,171
------------ ------------

Total liabilities 29,240,254 25,994,633
------------ ------------

Stockholders' equity:
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
17,881,287 and 14,603,516 shares in 1997 and 1996,
respectively 178,812 146,035
Convertible Preferred Stock Series B,
par value $.001; issued and outstanding
-0- and 6,059 shares in 1997 and 1996,
respectively --- 6
Additional paid-in capital 90,728,595 80,073,586
Accumulated deficit (70,021,720) (52,580,404)
------------ ------------
Total stockholders' equity 20,885,687 27,639,223
------------ ------------

Total liabilities and stockholders' equity $ 50,125,941 $ 53,633,856
============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 45

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 44,296,444 $ 43,855,014 $ 49,623,526
Cost of goods sold 33,468,376 31,679,577 29,705,677
------------ ------------ ------------
Gross profit 10,828,068 12,175,437 19,917,849
------------ ------------ ------------

Operating expenses:
Product development 15,961,150 10,238,395 5,952,694
Purchase of in-process
research and development --- 8,557,275 ---
Selling 3,182,290 4,518,600 3,629,105
General and administrative 7,726,830 7,820,757 8,602,405
------------ ------------ ------------
26,870,270 31,135,027 18,184,204
------------ ------------ ------------

Operating (loss) income (16,042,202) (18,959,590) 1,733,645

Net interest expense 1,399,114 1,850,446 2,724,593
------------ ------------ ------------

Loss before income taxes
and preferred stock dividends (17,441,316) (20,810,036) (990,948)

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

Net loss (17,441,316) (24,711,036) (990,948)

Preferred stock dividends 170,023 929,471 122,739
------------ ------------ ------------

Net loss applicable to
common stockholders $(17,611,339) $(25,640,507) $ (1,113,687)
============ ============ ============

Basic and diluted loss per share $ (1.14) $ (2.44) $ (0.14)
============ ============ ============

</TABLE>

See accompanying notes.

F-4
<PAGE> 46

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Preferred Stock Common Stock
-------------------------------------------------------- ----------------------------------
Series B Series C Series D Series E Shares Amount
-------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 $ 75 $ --- $ --- $ --- 7,968,108 $ 79,680
Issuance of stock in connection
with benefit plans --- --- --- --- 14,250 143
Issuance of stock in connection
with stock options --- --- --- --- 92,091 921
Issuance of Series C
Convertible Preferred Stock --- 12,000,000 --- --- --- ---
Net loss for 1995 --- --- --- --- --- ---
Preferred Stock dividends --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1995 75 12,000,000 --- --- 8,074,449 80,744
Issuance of stock in connection
with benefit plans --- --- --- --- 12,486 125
Issuance of stock in connection
with stock options --- --- --- --- 349,838 3,499
Issuance of stock in settlement
of certain liabilities --- --- --- --- 723 7
Issuance of stock in connection
with Hallmark acquisition --- --- --- --- 640,000 6,400
Issuance of Series C
Preferred Stock --- 12,000,000 --- --- --- ---
Issuance of Series D
Preferred Stock --- --- 20,000,000 --- --- ---
Conversion of Series B
Preferred Stock (69) --- --- --- 686,000 6,860
Conversion of Series C
Preferred Stock --- (24,000,000) --- --- 1,672,417 16,724
Conversion of Series D
Preferred Stock --- --- (20,000,000) 2,832,966 28,330
Conversion of Convertible Note --- --- --- --- 334,637 3,346
Net loss for 1996 --- --- --- --- --- ---
Preferred Stock dividends --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1996 6 --- --- --- 14,603,516 146,035
Issuance of stock in connection
with benefit plans --- --- --- --- 37,196 372
Issuance of stock in connection
with stock options --- --- --- --- 137,251 1,372
Issuance of stock in settlement
of certain liabilities --- --- --- --- 89,369 894
Conversion of Series B
Preferred Stock (6) --- --- --- 60,590 606
Conversion of Series E
Preferred Stock Net --- --- --- --- 2,953,365 29,533
Net loss for 1997 --- --- --- --- --- ---
Preferred Stock dividends --- --- --- --- --- ---
----------- -------------- --------------- ----------- ------------------- -------------

BALANCE - DECEMBER 31, 1997 $--- $ --- $ --- $ --- 17,881,287 $ 178,812
=========== ============== =============== =========== =================== =============

Additional
Paid-In Accumulated
Capital Deficit Total
---------------- ---------------- ---------------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 $ 25,567,765 $(26,878,420) $ (1,230,900)
Issuance of stock in connection
with benefit plans 228,174 --- 228,317
Issuance of stock in connection
with stock options 256,142 --- 257,063
Issuance of Series C
Convertible Preferred Stock (1,242,471) --- 10,757,529
Net loss for 1995 --- (990,948) (990,948)
Preferred Stock dividends (122,739) --- (122,739)
- ------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1995 24,686,871 (27,869,368) 8,898,322
Issuance of stock in connection
with benefit plans 187,099 --- 187,224
Issuance of stock in connection
with stock options 929,640 --- 933,139
Issuance of stock in settlement
of certain liabilities 12,379 --- 12,386
Issuance of stock in connection
with Hallmark acquisition 11,093,600 --- 11,100,000
Issuance of Series C
Preferred Stock (1,142,633) --- 10,857,367
Issuance of Series D
Preferred Stock (1,051,165) --- 18,948,835
Conversion of Series B
Preferred Stock (6,791) --- ---
Conversion of Series C
Preferred Stock 23,983,276 --- ---
Conversion of Series D
Preferred Stock 19,971,670 --- ---
Conversion of Convertible Note 2,339,111 --- 2,342,457
Net loss for 1996 --- (24,711,036) (24,711,036)
Preferred Stock dividends (929,471) --- (929,471)
- ------------------------------------------------------------------------------------------------

BALANCE - DECEMBER 31, 1996 80,073,586 (52,580,404) 27,639,223
Issuance of stock in connection
with benefit plans 198,891 --- 199,263
Issuance of stock in connection
with stock options 313,259 --- 314,631
Issuance of stock in settlement
of certain liabilities 892,800 --- 893,694
Conversion of Series B
Preferred Stock (600) --- ---
Conversion of Series E
Preferred Stock Net 9,420,682 --- 9,450,215
Net loss for 1997 --- (17,441,316) (17,441,316)
Preferred Stock dividends (170,023) --- (170,023)
---------------- ---------------- ---------------

BALANCE - DECEMBER 31, 1997 $ 90,728,595 $(70,021,720) $ 20,885,687
================ ================ ===============
</TABLE>

See accompanying notes.

F-5
<PAGE> 47

DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(17,441,316) $(24,711,036) $ (990,948)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write off of conjugated estrogens inventory 3,465,044 --- ---
Deferred taxes --- 3,901,000 ---
Depreciation and amortization 2,446,050 2,065,240 1,837,382
Recognition of deferred revenues --- (500,000) (1,500,000)
Provision for doubtful accounts 176,588 1,213,808 84,773
Purchase of in-process research and development --- 8,557,275 ---
Common stock issued in connection with
employee compensation plans 199,263 187,224 228,317

Changes in assets and liabilities:
Trade accounts receivable (824,598) (130,849) (3,365,757)
Inventories (712,359) (3,703,937) (999,639)
Prepaid expenses and other assets (1,589,809) 106,720 42,360
Accounts payable (113,710) 818,003 (214,476)
Accrued liabilities 126,079 502,589 (1,063,073)
Other (81,524) (118,248) (82,395)
------------ ------------ ------------
Net cash used in operating activities (14,350,292) (11,812,211) (6,023,456)
------------ ------------ ------------

Investing activities:
Capital expenditures (1,572,323) (5,244,306) (5,248,610)
Payments in connection with acquisition --- (1,577,649) ---
------------ ------------ ------------
Net cash used for investing activities (1,572,323) (6,821,955) (5,248,610)
------------ ------------ ------------

Cash flows from financing activities:
Payments of long-term debt,
including current maturities (9,036,004) (7,688,898) (9,025,422)
Net increase (decrease) in revolving credit facility 4,462,656 (8,664,861) 1,199,692
Long-term borrowings 9,099,099 6,839,789 8,082,904
Issuance of preferred stock - net 9,560,848 29,806,202 10,757,529
Issuance of common stock 314,631 945,525 257,063
Dividends paid (286,297) (795,009) ---
------------ ------------ ------------
Net cash provided by financing activities 14,114,933 20,442,748 11,271,766
------------ ------------ ------------

Net change in cash (1,807,682) 1,808,582 (300)
Cash at beginning of period 1,811,182 2,600 2,900
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,500 $ 1,811,182 $ 2,600
============ ============ ============

Supplemental cash flow disclosures:
Interest paid $ 1,412,182 $ 1,901,092 $ 2,724,376
Income taxes paid --- --- 105,000
</TABLE>

See accompanying notes.

F-6
<PAGE> 48

DURAMED PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A. ACCOUNTING POLICIES

THE COMPANY'S BUSINESS
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") develops,
manufactures and markets prescription pharmaceutical products in tablet, capsule
and liquid forms to customers throughout the United States. The Company's
product development program is focused on hormonal replacement therapies and
modified release technology.

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

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

CASH AND CASH EQUIVALENTS
Duramed considers all investments with a maturity of three months or less as of
the date of purchase to be cash equivalents. As of December 31, 1997, the
Company had no short term investments classified as cash equivalents. The
Company's 1997 cash balance represents only the balance maintained in internal
cash funds. During 1997, the Company's day-to-day operations were funded and
financed through the issuance of convertible preferred stock and borrowings
under its revolving credit facility.

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

December 31,
------------------------------------
1997 1996
------------------------------------
<S> <C> <C>
Raw materials $ 3,855,477 $ 6,767,105
Work-in-process 882,835 452,905
Finished goods 7,327,177 7,520,247
Obsolescence reserve (1,629,547) (1,551,630)
------------ ------------
Net inventory $ 10,435,942 $ 13,188,627
============ ============
</TABLE>

December 31, 1996 inventories include approximately $3.0 million (net of
inventory funded by another company) of inventory costs consisting both of raw
materials and conversion costs, relating to the conjugated estrogens product,
for which the Company was awaiting regulatory

F-7
<PAGE> 49

approval. The Company had manufactured a commercial launch quantity of its
conjugated estrogens product which was developed in accordance with the Food and
Drug Administration's (FDA) guidance established in 1991 and current official
U.S. Pharmacopeia (USP) compositional standards. On May 5, 1997, the Company was
notified by the FDA that at this time, it would not approve a generic conjugated
estrogens product developed in accordance with the guidance established by the
FDA in 1991 and current official USP compositional standards. The Company is
pursuing various options with respect to its conjugated estrogens product and
related inventory.

In view of the FDA's decision the Company determined that it was prudent to
write-off the generic conjugated estrogens inventory; accordingly, a charge of
$3,465,000 was recorded in the first quarter results and is reflected in product
development expenses for the year ended December 31, 1997.

The product currently meets the required stability criteria and will be retained
until such time as it no longer passes those tests. In the event the Company is
ultimately successful in obtaining approval for the product, some or all of the
inventory write-off may be recovered.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
is provided using principally the straight-line method over the estimated useful
lives of the assets. Major renewals and improvements are capitalized, while
ordinary maintenance and repairs are expensed. Property, plant and equipment
consist of the following:

December 31, Estimated
1997 1996 Useful Life
----------------------------- -------------
<S> <C> <C>
Land $ 1,000,000 $ 1,000,000
Buildings and improvements 18,785,948 18,211,740 20 to 30 Years
Equipment, furniture and fixtures 24,441,717 23,589,782 3 to 10 Years
------------ -------------
44,227,665 42,801,522
Less accumulated
depreciation and amortization 15,808,609 13,499,466
------------ -------------
$28,419,056 $29,302,056
============ =============
</TABLE>

F-8

<PAGE> 50

PRODUCT DEVELOPMENT COSTS
Product development costs are charged to expense when incurred. Product
development costs are net of reimbursements received from Schein
Pharmaceutical, Inc. ("Schein") which amounted to $1.1 million and $2.8 million
in 1996 and 1995, respectively, per the contractual agreement. No reimbusments
were received in 1997. (See Note L - Legal Proceedings, Commitments and
Contingencies). The reported costs include specifically identifiable expenses
and an allocation of certain expenses shared with the other departments within
the Company.

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

CONCENTRATION OF RISK
The financial instrument that potentially subjects the Company to credit risk is
accounts receivable. The Company sells its products to drug store chains, drug
wholesalers, private label distributors, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and governmental agencies. One customer
accounted for 12% of sales in 1997 and 13% of receivables as of December 31,
1997. The credit risk associated with this financial instrument is believed by
the Company to be limited due to the relatively large number of customers, their
geographic dispersion and the performance of certain credit evaluation
procedures. The Company maintains credit insurance for its accounts receivable
portfolio subject to certain limits and deductibles.

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

The Company's current product line is limited and the Company's current
operating results are heavily dependent on the performance of its
methylprednisolone product which accounted for 37%, 41% and 53% of net sales in
1997, 1996 and 1995, respectively.

The Company's need for additional financing is dependent upon several factors
including: (1) the level and timing of the profit contribution from products
approved by the FDA in recent months; (2) the timing of approval of currently
pending applications with the FDA; and (3) the ability of the Company to
maintain the current business base as well as the success of other aspects of
its business plan. Additionally, capital will be required for facility and
equipment to execute the Company's Business Plan and to commercialize the
Company's synthetic conjugated estrogens product.

The terms of the recently completed private placement of Convertible Preferred
Stock require the Company to obtain the investors concurrence to raise
additional capital under certain defined terms. If the Company needs to raise
additional capital, the extent of dilution to current shareholders is dependent
on the amount of capital required and the terms under which it is raised. If
capital is needed and is not available, or approval to raise such capital cannot
be obtained from the investor, implementation of the Company's plans will be
restricted or delayed with potentially a negative effect upon the Company's
prospects.

F-9
<PAGE> 51

LOSS PER COMMON SHARE
Beginning in 1997, loss per common share data is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
became effective for financial statements issued after December 15, 1997.
Amounts for prior years have been restated.

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

During 1998, the Company will adopt the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which requires that segment information be disclosed based
upon how management internally evaluates the operating performance of its
business units. Application of the disclosure requirements under this standard
is not expected to have a material effect on the financial statements of the
Company in 1998.

NOTE B. ACQUISITIONS

On September 13, 1996, Duramed completed the acquisition of the assets and
business of Hallmark Pharmaceuticals, Inc. ("Hallmark"), a privately held
pharmaceutical development company headquartered in Somerset, N.J. with
technical expertise and capabilities with respect to advanced drug delivery
systems technologies. As consideration, Duramed issued 640,000 shares of the
Company's common stock, and warrants to purchase 400,000 shares of common stock
at a purchase price of $25, and assumed certain obligations of Hallmark, a
portion of which Duramed paid off at closing. During 1997, the Company agreed to
reprice the warrants to $10. Also, as part of the accounting for the acquisition
of Hallmark, the Company incurred a charge of $847,200, net of related
obligations, for the impairment of value on the Company's marketing rights to a
product which had been scheduled for development by another entity, which
Hallmark had made significant progress in developing.

This acquisition was accounted for by the purchase method of accounting, and is
summarized below:

<S> <C>
Fair value of assets acquired $ 5,806,441
Liabilities assumed (1,921,795)
------------
3,884,646

Impairment of value - product marketing rights (847,200)
------------
3,037,446
------------
Purchase price:
Fair market value of common stock and warrants 11,100,000
Cash (including related acquisition costs) 494,721
------------
11,594,721
------------

Purchase of in-process research and development $ 8,557,275
============
</TABLE>

F-10
<PAGE> 52

The amount of the purchase of in-process research and development was determined
by using a discounted cash flow analysis applied to the anticipated profits from
products in development at Hallmark, and considered the costs to commercialize
these products and the expected probability of success in their development. The
technologies acquired will be applied towards the development of specific
products which require FDA approval to commercialize, and accordingly, are
deemed to have no alternative future use.

For the year ended December 31, 1996 the Company's results of operations, on a
pro forma basis as if Hallmark had been acquired at the beginning of the year,
would not be materially different from the results reported. Results of
operations on a pro forma basis for the year ended December 31, 1995 would
reflect no change in sales or revenues, with incremental product development
expenses and net losses of $3.4 million, resulting in a pro forma net loss of
$4.5 million, or $.56 net loss per share (diluted).

Duramed's financial statements reflect the full consolidation of Hallmark's
accounts since the date of acquisition.

NOTE C. STRATEGIC ALLIANCES

Ortho-McNeil Pharmaceutical Corporation -- In June 1994, the Company entered
into marketing, distribution and related agreements with Ortho-McNeil
Pharmaceutical Corporation ("Ortho-McNeil") for five generic products in nine
dosages forms. These agreements initially were linked to Duramed's then pending
ANDA for synthetic conjugated estrogens. Under the terms of the distribution
agreements with Ortho-McNeil, Duramed has certain non-exclusive distribution
rights to the Ortho-McNeil products Acetaminophen with Codeine, Tolmetin Sodium,
Tolmetin Sodium DS, Oxycodone with Acetaminophen and Estropipate (collectively
"the Ortho-McNeil products"). These products represented 59%, 61% and 47% of net
sales from products distributed on behalf of other manufacturers during the
years ended December 31, 1997, 1996 and 1995, respectively.

In addition to the distribution rights for the products, Ortho-McNeil provided
$2.0 million in cash to defray a portion of the costs associated with the
pursuit of approval and commercial launch of conjugated estrogens incurred
during 1995 and 1996. The $2.0 million payment is not required to be repaid to
Ortho-McNeil and has been amortized into income (1995 - $1.5 million; 1996 - $.5
million) to properly match the period during which expenses were incurred. In
addition, Ortho-McNeil provided the use of $4.0 million in equipment for the
Company's hormone replacement therapy ("HRT") facility expansion and
Ortho-McNeil's parent, Johnson & Johnson, guaranteed a $5.5 million construction
loan for the HRT facility expansion. (See Note E. Debt and Other Long-Term
Liabilities) Under the terms of the agreement, if FDA approval of the
conjugated estrogens product had been obtained by June 1996, title to the
equipment would have transferred to the Company over a specified period. Since
this requirement was not met, the Company was required, at Ortho-McNeil's
option, either to return the equipment or to purchase it at its fair market
value at that time. In the fourth quarter of

F-11
<PAGE> 53

1996, based upon the preceding factors the Company capitalized $4.0 million in
equipment and recorded a $4.0 million liability for the equipment provided by
Ortho-McNeil (see Note E - Debt and Other Long-Term Liabilities). In addition,
Ortho-McNeil was to receive royalties and to participate in marketing of the
Company's conjugated estrogens products and share in the profits if the Company
is successful in bringing the products to market.

In September 1997, Duramed and Ortho-McNeil agreed to terminate the marketing
agreement relative to its ANDA conjugated estrogens product.

Additionally, in September 1997, a new distribution agreement was reached with
Ortho-McNeil which provides for the continuation of the non-exclusive
distribution rights, through the end of 1998, to the Ortho-McNeil products. In
1997, Duramed received approval to manufacture and market Acetaminophen with
Codeine, one of the five products currently being supplied by Ortho-McNeil. The
Company has plans in place to enable it to continue to supply substantially all
of the other products currently supplied by Ortho-McNeil and, accordingly does
not anticipate an adverse impact on the Company's operating results when the
Ortho-McNeil agreement expires.

The Company has agreements with several manufacturers whereby the Company
markets and distributes their generic prescription drug products. The terms of
these agreements vary, but typically provide for a sharing of profits between
the Company and the manufacturer. For the years ended December 31, 1997, 1996
and 1995, respectively, the percentages of the Company's sales comprised of
products purchased from others and resold were 37%, 35%, and 31%. The gross
profit generated by these sales was approximately $2.5 million in 1997, $2.6
million in 1996, and $3.3 million in 1995.

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

F-12
<PAGE> 54

share in any profits generated after products were approved and marketed.
Discussions in 1997 regarding the potential purchase of Kiel by Duramed have
been suspended, accordingly, the companies are operating under the terms of the
1995 agreement.

Warner-Lambert Manufacturing Agreement -- In September 1997, the Company
entered into a ten year renewable manufacturing agreement with Warner-Lambert.
Under the terms of the agreement, Duramed will manufacture a name brand
pharmaceutical product for Warner-Lambert at its Cincinnati hormonal
manufacturing facility if the product is successfully developed and approved by
the FDA. The terms of the manufacturing agreement includes a monthly lease
payment for the term of the agreement as well as reimbursement of the costs of
Duramed personnel involved in the project and a batch manufacturing fee once
the product is commercialized. In addition, Warner-Lambert has guaranteed a
promissory note mortgage loan in the amount of $8.5 million, which is secured
by the Company's manufacturing facility.

Stason Pharmaceutical, Inc. -- In July 1997, Duramed entered into an agreement
with Stason Pharmaceuticals, Inc. ("Stason"), an affiliate of Standard Chemical
and Pharmaceutical Company, Ltd. of Taiwan. Under the terms of the agreement,
Duramed has exclusive marketing rights for identified Stason products in the
U.S., and Stason has the right to market identified Duramed products through
Standard Chemical and Pharmaceutical Co. in Taiwan and selected other Asian
countries. The alliance also contemplates a broad variety of future ventures,
including technology transfer, access to key bulk chemicals, cooperative
research and development and an expansion of product lines within the companies'
respective territories. The Company expects to commence marketing products from
this agreement in the second quarter of 1998.

NOTE D. ACCRUED LIABILITIES

The Company's accrued liabilities consist of the following:

December 31,
1997 1996
------------ -----------
<S> <C> <C>
Wages and other compensation $ 2,210,956 $ 2,136,180
Taxes, other than income taxes 632,255 477,826
Accrued bio-studies 334,495 606,728
Accrued Medicaid rebates 375,775 267,867
Other 1,419,873 1,689,467
------------ -----------

$ 4,973,354 $ 5,178,068
============ ===========
</TABLE>

F-13
<PAGE> 55

NOTE E. DEBT AND OTHER LONG-TERM LIABILITIES

The Company's debt consists of the following:

December 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Mandatory redeemable
convertible preferred stock $150,000 $ ---
Revolving credit facility 4,462,656 ---
Promissory note mortgage loan 8,393,750 ---
Manufacturing facility expansion loan --- 5,500,000
Equipment liability 3,601,214 4,000,000
Equipment loan 1,323,623 2,118,979
Note payable to State of Ohio --- 877,342
Installment notes payable 36,164 124,415
----------- -----------
17,967,407 12,620,736
Less amount classified as current 6,913,909 2,631,275
----------- -----------
$11,053,498 $9,989,461
=========== ===========
</TABLE>

During 1997, the Company funded its operations with net proceeds received from
the private placement of its Series D and Series E Convertible Preferred Stock.
(See Note H).

The terms of the revolving credit facility permit the Company to borrow up to
$6.5 million based upon current financial condition and operating performance
through April 1, 1999. Borrowings on the revolving credit facility bear interest
at the rate of prime plus 1%, and are collateralized by substantially all assets
of the Company including inventory, receivables and the manufacturing facility.
As of December 31, 1997, the Company had outstanding borrowings of $4,462,656
drawn against the revolving credit facility. As of March 1998, the Company had
remaining short term cash equivalent investments, and had no borrowings against
the revolving credit facility. (See Note N - Subsequent Financing).

Warner-Lambert has guaranteed a promissory note mortgage loan from the
Company's bank in the amount of $8.5 million, which is secured by a mortgage on
the Company's Cincinnati, Ohio manufacturing facility. (See Note C - Strategic
Alliances). The mortgage loan bears an interest rate which is variable based
upon the bank's prime rate (8.5% at March 13, 1998). The monthly payment
required is $35,417 plus interest. Principal payments are based upon a twenty
year amortization with a balloon payment due on October 1, 2007 of $4,250,000.
The proceeds from this loan were used in part to pay off the manufacturing
facility expansion loan and the note payable to the State of Ohio.

F-14
<PAGE> 56

The $5.5 million manufacturing facility expansion loan which provided a portion
of the financing for the expansion of the Company's manufacturing facility was
paid off in September 1997.

The equipment liability represents an obligation to Ortho-McNeil Pharmaceutical
Corporation ("Ortho-McNeil") for equipment that is part of the Company's
facility expansion. The equipment note bears interest at 14% and requires a
monthly interest and principal payment of $135,497 for a three year term. The
note is secured by the equipment.

The equipment loans represent financing by the Company's bank for equipment
purchases, bear interest at the rate of prime plus 1%, and require monthly
installments of principal and interest. One of the loans is payable over a three
year term and requires a monthly principal payment of $42,355 plus interest
through April 1, 1999; the other loan is payable over a five year term and
requires a monthly principal payment of $23,925 plus interest through March 1,
2000. These loans are collateralized by the assets financed.

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

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

The Company's other long-term liabilities consist of the following:

December 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Abandoned facility obligation - net $ --- $893,694
Less amount classified as current --- 732,523
--------- --------
$ --- $161,171
========= ========
</TABLE>

The abandoned facility obligation represented the amounts due, net of sublease
income, under terms of a lease which extended through September 30, 1998. In
December 1996, the Company was advised that the current tenant had renewed, for
a five year term, its sublease on the building. As a result of the renewal, the
Company's obligation was reduced by approximately $330,000, which was recorded
as a reduction of general and administrative expenses. In the first quarter of
1997, the Company agreement with the lessor and settled the remaining
obligation through the issuance of 89,369 shares of Duramed common stock.

F-15
<PAGE> 57

At December 31, 1997, maturities of long-term indebtedness for the ensuing five
years were as follows:

Year ending December 31:

Debt
----

<S> <C>
1998 $ 6,913,909
1999 2,408,790
2000 1,525,958
2001 425,000
2002 425,000
Thereafter 6,268,750
-----------
17,967,407
Less current installments 6,913,909
-----------
$11,053,498
===========
</TABLE>

NOTE F. LEASES

The Company conducts product development, and limited manufacturing activities,
from a leased 38,000 square foot facility in Somerset, New Jersey. Annual rent
through the lease term is $171,000. The lease pertaining to this facility
expires on May 31, 2000. The Company has notified the owner of the facility of
its intent to purchase the facility which, under the terms of the original
agreement, would require the Company to close the transaction on June 1, 1998.
The Company and the owner have agreed to amend the original agreement to extend
the purchase option to June 1, 2000.

In December 1994, the Company entered into a lease for approximately 28,200
square feet of a facility in Cincinnati, Ohio which is used for executive
offices, certain corporate support groups and distribution. The lease term for
this facility extends to February 28, 2000, with a provision for three one-year
renewals. Annual rent is $256,000 through 1997, and increases to $265,000 during
the final year of the lease.

In October 1997, the Company entered into a lease for a facility of
approximately 120,000 square feet to be used for distribution and certain other
support groups. The lease term for this facility extends to October 1, 1999 and
contains an option to renew for an additional five years. In addition to the
leased offices, warehouses and distribution facility, the Company leases various
machinery and equipment.

F-16
<PAGE> 58

Aggregate rental expense for the years ended December 31, 1997, 1996, 1995 was
approximately $892,000, $642,000, and $694,000, respectively. The following
summarizes minimum future lease payments as of December 31, 1997:

Year Ending December 31:

Operating Capital
Leases Leases
----------- ------------
<S> <C> <C>
1998 $ 876,464 $ 1,324,666
1999 764,101 842,636
2000 115,498 406,678
2001 --- 111,504
2002 --- 19,665
Thereafter --- 5,246
----------- ------------
Total minimum lease payments $ 1,756,063 2,710,395
===========
Less amount representing interest 540,614
------------
Present value of net minimum lease payments 2,169,781
Less current installments 1,064,210
------------
Obligations under capital leases
less current installments $ 1,105,571
============
</TABLE>

Assets under capital leases amounted to approximately $7.9 million and $7.3
million in 1997 and 1996, respectively, with related amortization of $3.4
million and $2.8 million.

NOTE G. EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc.
401(k)/Profit Sharing Plan," available to eligible employees. Under the Plan the
Company matches 50% of employee contributions to a maximum of 2% of each
employee's compensation. The Company match of $185,000, $182,000 and $206,000 in
1997, 1996 and 1995, respectively, was made with the Company's common stock, as
permitted by the Plan. The Plan also has a profit sharing provision at the
discretion of the Company's Board of Directors. The Company has not made a
profit sharing contribution to the Plan. All full-time employees are eligible to
participate in the deferred compensation and Company matching provisions of the
Plan. Employees are immediately vested with respect to the Company matching
provisions of the Plan.

NOTE H. COMMON AND PREFERRED STOCK

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

On July, 8, 1993, as part of an agreement with its bank, the Company issued
74,659 shares of Series B Convertible Preferred Stock ("Series B Preferred
Stock"). The Series B Preferred Stock is non-voting and is

F-17
<PAGE> 59

convertible at any time into 746,590 shares of the Company's common stock. At
December 31, 1997, all shares of Series B Preferred Stock were converted into
shares of the Company's common stock.

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

During June 1997, the Company raised $10.0 million ($9.5 million net of issuance
costs) through an offering of 100,000 shares of Series E Mandatory Redeemable 5%
Cumulative Convertible Preferred Stock, ("Series E Preferred Stock"). The Series
E Preferred Stock has a stated value of $100 and is convertible at the option of
the holder into shares of the Company's common stock at a discount to the
average of the closing bid prices of the common stock over the ten day trading
period ending the day prior to the date of conversion. Half of the shares of
Series E Preferred Stock became convertible on August 3, 1997; the remaining
half became convertible on September 2, 1997. The number of common shares to be
issued is limited to 2,956,246. Any Series E Preferred Stock which remains
outstanding thereafter would be subject to cash redemption. As of December 31,
1997, $9.85 million of Series E Preferred Stock had been converted to common
stock. In January, 1998 the remaining $150,000 obligation was settled through a
combination of cash redemption and issuance of common stock. The Company issued
2,956,246 shares of common stock in connection with conversions of Series E
Preferred Stock at an average conversion price of $3.47 per common share.

NOTE I. LOSS PER COMMON SHARE

F-18
<PAGE> 60

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

Loss Applicable to Common Stockholders

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

<S> <C> <C> <C>
Net loss ($17,441,316) ($24,711,036) ($990,948)
Less dividends on Preferred
shares 170,023 929,471 122,739
------------ ------------ ------------
Net loss applicable to
common stockholders ($17,611,339) ($25,640,507) ($ 1,113,687)
============ ============ ============
</TABLE>

Weighted average common shares outstanding for the computation of basic and
diluted loss per share were 15,510,890, 10,522,213 and 8,026,359 in 1997, 1996
and 1995, respectively.

For 1997, 1996 and 1995 the recognition of outstanding options and warrants in
the amount of 4,028,319, 3,785,366, and 2,747,768, respectively were not
recognized in computing net loss per share as their effect would be
anti-dilutive.

NOTE J. STOCK OPTIONS AND WARRANTS

STOCK OPTION PLANS
For financial statement purposes, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its stock based compensation
plans rather than the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25,
because the exercise price of the Company's stock options is equal to or greater
than the closing market price on the date of grant, no compensation expense is
recognized. At the time the options are exercised, the proceeds increase
stockholders' equity.

During 1997, the Company had four stock option plans which had been approved by
the Company's stockholders. The 1986 Stock Option Plan (the "1986 Plan"), which
expired in 1996 (insofar as the grant of new options was concerned), permitted
the granting of options for up to 160,000 shares of the Company's common stock.

F-19
<PAGE> 61

The 1988 Stock Option Plan (the "1988 Plan"), which was replaced by the 1997
Stock Option Plan (the "1997 Plan") on February 11, 1997 (insofar as the grant
of new options was concerned), permitted the granting of options for up to
4,360,000 shares. The 1997 Plan permits the granting of options up to 1,500,000
shares which includes 705,321 shares transferred from the 1988 Plan along with
an additional 794,679 shares. The 1997 Plan is substantially identical to the
1988 Plan. Options granted under the 1986, 1988 and 1997 Plans become
exercisable based upon the terms and conditions established at the time of the
grant. The 1991 Stock Option Plan for Nonemployee Directors (the "Directors
Plan") provides for the issuance of non-qualified options for up to 150,000
shares of common stock. The Directors Plan is a "formula plan" under which each
new nonemployee director is granted, at the close of business on the date he or
she first becomes a director, options to purchase 10,000 shares of common
stock. Annually, each then serving nonemployee director, other than a new
director, is also automatically granted options to purchase 5,000 shares of
common stock at a price equal to the closing market price on the date of grant.
Options granted under the plans generally expire 10 years after the date of
grant.

F-20
<PAGE> 62

The following summarizes the activity in the 1986, 1988, 1997 and Directors
Plans:

1986 Plan 1988 Plan
-----------------------------------------------------------------------------------------------------
Weighted
Shares Option Price Average Shares Option Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1994 105,206 $ 0.50 to $13.75 --- 1,420,463 $ 0.50 to $16.50
Granted --- --- --- --- 241,950 $14.25 to $19.25
Forfeited --- --- --- --- (27,800) $ 1.13 to $19.25
Exercised (19,328) $ 0.50 to $13.75 --- (62,408) $ 1.13 to $ 9.00

Outstanding at
December 31, 1995 85,878 $ 0.50 to $ 6.00 $ 1.96 1,572,205 $ 0.50 to $19.25
Granted 11,231 $17.50 to $17.50 $17.50 1,002,408 $ 6.88 to $19.75
Forfeited --- --- --- --- (40,158) $ 1.13 to $19.75
Exercised (21,210) $ 0.50 to $ 6.00 $ 2.15 (148,673) $ 0.50 to $16.50

Outstanding at
December 31, 1996 75,899 $ 0.50 to $ 8.63 $ 2.87 2,385,782 $ 0.50 to $ 8.63
Granted --- --- --- --- 440,429 $ 3.31 to $10.75
Forfeited --- --- --- --- (103,960) $ 1.13 to $8.63
Exercised (1,417) $ 0.50 to $ 5.75 $ 1.55 (22,499) $ 1.13 to $8.63

Outstanding at
December 31, 1997 74,482 $ 0.50 to $ 5.00 $ 2.31 2,699,752 $ 0.50 to $ 5.00

================================================================================================================================
Exercisable at
December 31, 1995 72,078 $ 0.50 to $ 6.00 --- 1,162,405 $ 0.50 to $19.25
December 31, 1996 57,168 $ 0.50 to $ 5.75 $ 1.74 1,369,726 $ 0.50 to $ 8.63
December 31, 1997 66,059 $ 0.50 to $ 5.00 $ 1.97 1,670,141 $ 0.50 to $ 5.00

================================================================================================================================
Available for future
grants at
December 31, 1997 --- --- --- --- --- --- ---

================================================================================================================================

1988 Plan 1997 Plan Directors Plan
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Shares Option Price Average Shares Option Price Average
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1994 --- --- --- --- --- 51,000 $ 0.50 to $ 7.50 ---
Granted --- --- --- --- --- 15,000 $16.50 to --- ---
Forfeited --- --- --- --- --- --- --- ---
Exercised --- --- --- --- --- (1,000) $ 1.94 to --- ---

Outstanding at
December 31, 1995 $ 4.60 --- --- --- --- 65,000 $ 0.50 to $16.50 $ 6.84
Granted $15.72 --- --- --- --- 15,000 $15.00 to $15.00 $15.00
Forfeited $ 9.66 --- --- --- --- --- --- --- ---
Exercised $ 2.20 --- --- --- --- (26,000) $ 0.50 to $ 4.00 $ 1.86

Outstanding at
December 31, 1996 $ 5.51 --- --- --- --- 54,000 $ 4.00 to $ 8.63 $ 7.54
Granted $ 5.54 400 $ 3.88 to $ 5.75 $ 4.81 20,000 $ 5.50 to $ 5.50 $ 5.50
Forfeited $ 8.40 --- --- --- --- --- --- --- ---
Exercised $ 5.26 --- --- --- --- --- --- --- ---

Outstanding at
December 31, 1997 $ 3.66 400 $ 3.88 to $ 5.75 $ 4.81 74,000 $ 4.00 to $16.50 $ 9.98

================================================================================================================================
Exercisable at
December 31, 1995 --- --- --- --- --- 65,000 $ 0.50 to $16.50 ---
December 31, 1996 $ 3.60 --- --- --- --- 39,000 $ 4.00 to $ 8.63 $ 7.13
December 31, 1997 $ 2.91 --- --- --- --- 54,000 $ 4.00 to $16.50 $11.64

================================================================================================================================
</TABLE>

F-21
<PAGE> 63

The exercise prices of options outstanding at December 31, 1997 ranged from $.50
to $16.50. The weighted average remaining contractual life of those options was
6.64 years. Pro forma information regarding net loss and net loss per share is
required by Statement 123, which also requires that information be determined as
if the Company has accounted for its stock options granted and/or modified
subsequent to December 31, 1994 using the fair value method of that Statement.
During 1996 and 1997, options were granted which had a weighted average fair
value on the date of grant of $4.95 and $1.97, respectively. The fair value for
these options was estimated at the date of grant and at the date of the
repricing using the Black-Scholes model using the following assumptions:

FAIR VALUE ASSUMPTIONS

1997 1996
---- ----

<S> <C> <C> <C>
Dividend yield 0% 0%
Expected volatility 37.7% 46.0%
Risk free interest rate 5.50% 6.75%
Expected life in years 5 Years 5 Years
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and directors stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, existing models do not necessarily provide a reliable
single measure of the fair value of its options. For purposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense over
the options vesting periods. Beginning in 1996, certain options were repriced.
The impact of repriced options for 1996 and 1997 are reflected as additional
compensation expense under the proforma disclosure requirements of FASB 123. At
the time of the repricing, the fair value of the option changes and, according
to FASB 123, this incremental difference is measured as the excess of (1) the
fair value of the modified option and (2) the value of the old option
immediately before its terms are modified. According to the proforma disclosure
requirements of FASB 123, both the incremental value of the repriced option and
the value established at the original grant date are amortized to expense over
the remaining vesting term of the option along with the value established at the
original grant date. The expense provision in connection with FASB 123 that
would have been recorded in 1997 and 1996 was $4.1 million and $1.9 million,
respectively, and would have generated the following pro forma results:

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

<S> <C> <C> <C>
Net loss applicable to ($21,739,354) ($27,547,664) ($2,446,261)
common stockholders

Loss per share (diluted) ($1.40) ($2.62) ($0.30)
</TABLE>

F-22
<PAGE> 64

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

OTHER OPTIONS AND WARRANTS
On December 18, 1992, in consideration for certain defined business
arrangements, the Company granted options to Invamed, Inc. to purchase 135,000
shares of the Company's common stock at an exercise price of $3.25 per share;
these options were exercised by Invamed during 1996. On December 20, 1993, the
Company granted additional options to purchase 300,000 shares of the Company's
common stock at an exercise price of $6.5625 per share as compensation for
certain defined business arrangements. These options are fully vested and expire
five years from the date of grant.

On August 22, 1995, in consideration of modifications to the Company's borrowing
arrangements and additional extensions of credit, the Company granted to its
bank warrants to purchase 200,000 shares of the Company's common stock at an
exercise price of $18.125 per share. These warrants vested immediately upon
grant and expire ten years from the date of grant.

On September 13, 1996, in connection with the Company's acquisition of Hallmark,
the Company issued 400,000 warrants for purchase of the Company's common stock
at $25.00 per share. These warrants were repriced on July 9, 1997 to $10.00 per
share. The warrants have a term of five years and become exercisable at the rate
of 33.3% per year beginning September 13, 1997.

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

At December 31, 1997, an aggregate of 4,031,200 shares of common stock were
reserved for issuance.

F-23
<PAGE> 65

NOTE K. INCOME TAXES

Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The standard
requires the use of the liability method to recognize deferred income tax assets
and liabilities, using expected future tax rates. In 1993, a valuation allowance
was provided for the total amount of deferred tax assets, due to the Company's
limited historical profitability and other uncertainties. In 1994, based upon a
forecast of future operating results, the Company concluded that it would, more
likely than not, be able to realize a portion of the benefit of its net deferred
tax assets. Accordingly, in the fourth quarter of 1994 the valuation reserve was
reduced, and a $3.9 million deferred tax benefit was recorded. At December 31,
1995 the Company continued to maintain the net deferred tax asset at $3.9
million. The carrying value of the deferred tax asset and related valuation
allowance was based on a forecast of future operating results. This forecast
included only revenues from those products which were currently manufactured,
purchased and marketed and excludes revenues associated with products that were
under development or that had not yet obtained regulatory approval. Based on
this criteria, and the fact that the Company anticipated incurring a taxable
loss for 1997 the Company recognized a charge of $3.9 million, in the fourth
quarter of 1996 to restore fully the valuation allowance on the Company's
deferred tax assets (principally net operating loss carryforwards).

Excluding the adjustments to the valuation allowance, the Company did not record
a provision for income taxes in 1997, 1996 or 1995.

Deferred income taxes provided under FAS 109 are determined based upon the
temporary differences between the financial statements and the tax basis of
assets and liabilities. The tax effects of temporary differences that give rise
to deferred income tax assets and liabilities at December 31, 1997 and December
31, 1996 are presented below:

December 31, December 31,
1997 1996
---------- ---------
(000's omitted)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 20,456 $ 16,855
Abandoned facility obligations --- 340
Accrued employee benefits 774 544
Inventory obsolescence allowance 2,942 718
Accounts receivable allowance 563 395
Hallmark acquisition 4,052 3,198
Property, plant and equipment (630) (392)
Other 1,103 767
---------- ---------
Total deferred tax assets 29,260 22,425
Less valuation allowance 29,260 22,425
---------- ---------
Net deferred tax assets $ --- $ ---
========== =========
</TABLE>

F-24

<PAGE> 66

The components of the provision (benefit) for income taxes follow:

Year Ended December 31
(000's omitted)
1997 1996 1995
----- ------ -----
<S> <C> <C> <C>
Current $ --- $ --- $---
Deferred --- --- ---
Adjustment to net valuation allowance* --- 3,901 ---
----- ------ -----
Net (benefit) provision $ --- $3,901 $ ---
===== ====== =====
<FN>

*These adjustments represents the impact of adjustments to the net deferred tax
assets as required by FAS 109.
</TABLE>

At December 31, 1997 and 1996, the Company had cumulative net operating loss
carryforwards of approximately $49.1 million and $34.9 million, respectively,
for federal income tax purposes which expire in the years 2004 to 2012.
Additionally, the Company had cumulative losses from Duramed Europe that
amounted to approximately $4.7 million and $3.0 million, respectively, in 1997
and 1996, which are not deductible for U.S. tax purposes.

The reconciliation of income tax at the U.S. federal statutory rate to income
tax (benefit) expense is:

Year Ended December 31
(000's omitted)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rate $(6,104) $(7,284) $ (347)
Deferred tax expense (benefit) --- 3,901 ---
Losses for which benefit not provided 6,104 7,284 347
------- ------- -------
Actual tax (benefit) provision $ --- $ 3,901 $ ---
======= ======= =======
</TABLE>

NOTE L. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

The Company is a party to an Agreement dated June 26, 1992 and amended on April
7, 1994 ("the Agreement") with Schein Pharmaceutical, Inc. ("Schein") relating
to the development of a generic version of the conjugated estrogens product
Premarin(R). On August 7, 1997, the Company filed a complaint for a declaratory
judgment against Schein in the Court of Common Pleas, Hamilton County, Ohio,
Case No. A9705498 ("Ohio action"). The Company seeks a declaration that the
Agreement applies only to a product approved on the basis of ANDA and which
would be fully substitutable for Premarin(R) and that the Agreement does not
apply to the

F-25
<PAGE> 67

Company's efforts to develop or market any conjugated estrogens product which
would be approved and marketed on the basis of an ANDA.

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

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

F-26
<PAGE> 68

NOTE M. YEAR 2000 COMPLIANCE

NOTE N. SUBSEQUENT FINANCING

On February 5, 1998 the Company announced the private placement of $12.0 million
($11.4 million net of issuance costs) of Series F Mandatory Redeemable
Convertible Preferred Stock ("Series F Preferred Stock). The financing was
managed by Shoreline Pacific, Institutional Finance Division of Financial West
Group.

Duramed will use these funds to continue its product development and capital
expenditure programs. One half of the Series F Preferred Stock is convertible
immediately with the remaining half convertible after August 4, 1998. The
conversion price for the first half of the Series F Preferred Stock will be
$7.30 per share for at least the first six months. Thereafter, with respect to
the second half of the Series F Preferred Stock and any unconverted portion of
the first half, the conversion price will vary depending on the timing of
conversions and the market price of the common stock. The conversion price will
range from a premium to the market price, to a discount from the market price of
the common stock.

At the closing of this transaction, the Company had approximately 17.9 million
common shares outstanding. Depending on the ultimate conversion price, the
number of common shares issued in satisfaction of conversion could range from a
low of 1,397,000 to a high of 3,582,000, with provision for cash redemption of
any remaining unconverted Series F Preferred Stock.

The Company used a portion of the proceeds from the issuance of Series F
Preferred Stock to pay off borrowings under its revolving credit facility. As of
March 13, 1998, the Company had $1.7 million in short term cash equivalent
investments and no borrowings under its revolving credit facility. The Company's
borrowing capacity under its revolving credit facility is $6.5 million, based
upon eligible collateral ($12.4 million as of March 13, 1998) available through
April 1, 1999.

F-27
<PAGE> 69

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES

- ------------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------------
Balance at Beginning Deductions- Balance at End
DESCRIPTION of Period Describe of Period
Charged to Costs Charged to Other
and Expenses Accounts-Describe
- ------------------------------------------------------------------------------------------------------------------------------------

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

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

YEAR ENDED DECEMBER 31, 1995
Allowance for funds advanced to
Hallmark Pharmaceuticals, Inc. --- $ 1,458,952 --- $ 1,458,952
Allowance for doubtful trade
accounts receivable $ 504,850 $ 84,773 $ 13,326 (2) $ 576,297
Allowance for inventory obsolescence $ 741,864 $ 209,520 $ 399,929 (4) $ 551,455

<FN>
(1) Incorporated with closing of acquisition in 9/96.
(2) Uncollectible accounts written off, net of recoveries.
(3) Products reserved as short dated inventory then subsequently sold.
(4) Reversal due to change in status of product.
</TABLE>

S-1

<PAGE> 1

Exhibit 10.6

FIFTH AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------

This Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated as of March 27, 1998, between DURAMED PHARMACEUTICALS, INC., a
Delaware corporation (referred to herein as "Borrower") and THE PROVIDENT BANK
("Bank"), an Ohio banking corporation.

WITNESSETH

WHEREAS, Borrower and Bank have previously entered into an Amended and
Restated Loan and Security Agreement dated December 31, 1994 as previously
amended by a First Amendment to Amended and Restated Loan and Security Agreement
dated August 22, 1995, a Second Amendment to Amended and Restated Loan and
Security Agreement dated as of September 30, 1995 a Third Amendment to Amended
and Restated Loan and Security Agreement dated December 22, 1995 and a Fourth
Amendment to Amended and Restated Loan Agreement dated March 31, 1997 (the "Loan
and Security Agreement");

WHEREAS, Borrower wishes to extend the maturity of certain of the
Loans;

WHEREAS, Bank is willing to extend the maturity of the Loans subject to
the terms of this Agreement; and

WHEREAS, the terms used in this Agreement shall have the meanings as
defined in the Loan and Security Agreement.

NOW, THEREFORE, in consideration of the mutual undertakings herein
contained, the parties hereto desiring legally to be bound, hereby agree as
follows:

1. The terms of the Ten Million Five Hundred Thousand Dollar
($10,500,000) Promissory Note dated December 31, 1994 are hereby amended to
provide that the maturity date of the Note is extended to April 1, 1999.
Borrower shall have no further right to borrow in excess of Six Million Five
Hundred Thousand Dollars ($6,500,000) under the Ten Million Five Hundred
Thousand Dollar ($10,500,000.00) Promissory Note dated December 31, 1994.

2. Section 5.15 of the Loan and Security Agreement is hereby amended to
amend clause (a) of the first sentence thereof to read as follows:

"(a) Stockholder's Equity shall at all times be not less than
the sum of $14,000,000 plus the cumulative amount of any
increase in Duramed's Stockholder's Equity resulting from the
conversion of Duramed's Series F Convertible Preferred Stock
on or prior to the date of measurement."

<PAGE> 2

3. Borrower hereby represents and warrants that no Event of Default, or
event which with the passage of time or the giving of notice, or both, should
become an Event of Default, has occurred and is continuing as of the date
hereof.

4. All of the terms and conditions of the Loan and Security Agreement
not amended hereby shall continue in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to
Amended and Restated Loan and Security Agreement to be executed and delivered as
of the date first above written.

DURAMED PHARMACEUTICALS, INC.

By: /s/ TIMOTHY J. HOLT
-------------------------------------
Timothy J. Holt

THE PROVIDENT BANK

By: /s/ ROBERT L. HOVERSON
-------------------------------------
Robert L. Hoverson

<PAGE> 1
Exhibit 23

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-17030) pertaining to the 1986 Stock Option Plan of Duramed
Pharmaceuticals, Inc.; and in the Registration Statements (Forms S-8 No.
33-68476, No. 33-24122, No. 33-30716 and No. 333-17259) pertaining to the 1988
Stock Option Plan of Duramed Pharmaceuticals, Inc. and in the Registration
Statement (Form S-8 No. 33-684746) pertaining to the Stock Option Plan for
non-employee directors and in the Registration Statements (Forms S-3 No.
33-87948, No. 33-64561, No. 333-09765, No. 333-17261, No. 333-28139, and No.
333-29171, and Form S-4 No. 33-06901) and in the related Prospectus as of our
report dated March 20, 1998 with respect to the consolidated financial
statements and schedule of Duramed Pharmaceuticals, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1997.

ERNST & YOUNG LLP

Cincinnati, Ohio
March 20, 1998

<PAGE> 1

Exhibit 24

POWER OF ATTORNEY

We, the undersigned directors of Duramed Pharmaceuticals, Inc. (the
"Company") hereby appoint E. Thomas Arington and Timothy J. Holt or either of
them, with full power of substitution, our true and lawful attorneys and agents,
to do any and all acts and things in our names and on our behalf as directors of
the Company which said attorneys and agents, or either of them, may deem
necessary or advisable to enable the Company to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations or requirements of
the Securities Exchange Act of 1934, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission, in connection with the
filing of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 including, without limitation, signing for us, or any of us,
in our names as directors of the Company, such Form 10-K and any and all
amendments thereto, and we hereby ratify and confirm all that said attorneys and
agents, or either of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder, this Power of Attorney has
been signed below by the following persons in the capacities indicated as of the
31st day of March, 1998.

Chairman of the Board
- --------------------------
E. Thomas Arington

/s/ George W. Baughman Director
- --------------------------
George W. Baughman

Director
- --------------------------
Derek G. Layton

/s/ Stanley L. Morgan Director
- --------------------------
Stanley L. Morgan

/s/ S. Sundararaman Director
- --------------------------
S. Sundararaman

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,500
<SECURITIES> 0
<RECEIVABLES> 9,590,462
<ALLOWANCES> 1,482,000
<INVENTORY> 10,435,942
<CURRENT-ASSETS> 21,198,178
<PP&E> 44,227,666
<DEPRECIATION> 15,808,610
<TOTAL-ASSETS> 50,125,941
<CURRENT-LIABILITIES> 17,081,185
<BONDS> 10,903,498
150,000
0
<COMMON> 178,812
<OTHER-SE> 20,706,875
<TOTAL-LIABILITY-AND-EQUITY> 50,125,941
<SALES> 44,296,444
<TOTAL-REVENUES> 44,296,444
<CGS> 33,468,376
<TOTAL-COSTS> 36,650,666
<OTHER-EXPENSES> 23,687,980
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,399,114
<INCOME-PRETAX> (17,441,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,441,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,611,339)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)

</TABLE>