Medco Research, Inc.


                                  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 year ended December 31, 1996
                                       OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to

                         Commission file number 0-13948

                              MEDCO RESEARCH, INC.
             (Exact name of registrant as specified in its charter)

                       Delaware                            95-3318451
            (State or other  jurisdiction of            (I.R.S. Employer  
             incorporation  or organization)           Identification No.)

                            85 T. W. Alexander Drive
                  Research Triangle Park, North Carolina 27709
               (Address of principal executive offices) (Zip Code)

                                 (919) 549-8117
              (Registrant's telephone number, including area code)

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

             Common Stock                 American Stock Exchange
           (Title of Class)     (Name of each exchange on which registered)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.

                                       YES  X     NO
                                           ---       ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of 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.[ ]

Based on the  closing  price on March 7,  1997 of  $9.375  for the  Registrant's
Common Stock as reported on the American Stock  Exchange,  the aggregate  market
value of Common Stock held by  nonaffiliates  of  Registrant  was  approximately
$97,325,700.

The number of shares outstanding of the Registrant's Common Stock was 10,638,332
at March 7, 1997.

Documents incorporated by reference:

Part III:  Sections  entitled  "Election of Directors",  "Board of Directors and
Executive Officers",  "Executive  Compensation",  "Security Ownership of Certain
Beneficial   Owners  and  Management"  and  "Certain   Transactions"   from  the
Registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders.

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                              Medco Research, Inc.


                                     PART I


ITEM 1.  BUSINESS

COMPANY PROFILE

Medco Research,  Inc. (the "Company") is a pharmaceutical  company  dedicated to
being a leader in the global  commercialization of cardiovascular  medicines and
adenosine-based products leading to superior growth in shareholder value.

The Company was  incorporated  in  California in September  1978 and  originally
founded as a contract  research  organization  offering  clinical and regulatory
support to the  pharmaceutical  industry.  In 1984, the Company  secured its own
product  rights,  went public,  raised  approximately  $4 million in the initial
offering, and began its transition to a pharmaceutical company. In January 1992,
it raised approximately $48 million in a secondary public offering. In May 1993,
the Company relocated to Research Triangle Park, North Carolina,  and in 1995 it
completed its reincorporation in Delaware.

The  Company's  business  approach  has been to  carefully  evaluate and acquire
product  candidates which have already  undergone some preclinical  (animal) and
clinical (human)  testing,  thereby reducing the costs and risks associated with
drug discovery and basic research.  These product  opportunities and the related
intellectual  property rights are typically obtained under license from academic
or corporate  sources who have received  United  States  patents  which,  in the
opinion of the  Company's  patent  counsel,  are  enforceable.  The Company then
sponsors and directs the clinical testing and any additional preclinical studies
needed  for  product  registration  and  marketing  approval.  These  late-stage
activities are often outsourced to independent  clinical research  organizations
to maximize  efficiency and minimize  internal  overhead.  The Company generally
will  license  the  manufacturing  and  marketing  rights  to the  product  to a
corporate  partner in exchange for licensing fees and royalty payments on future
product sales.  Formulation  development,  as well as  microbiology,  chemistry,
manufacturing and controls information,  are typically provided by the Company's
licensed  corporate  partner,  and the Company then submits to the United States
Food and Drug  Administration  (the  "FDA") a New Drug  Application  ("NDA")  to
obtain the FDA's clearance to market the drug.

Using this  royalty-based  business model,  which is relatively  uncommon in the
pharmaceutical  industry,  the Company has  commercialized  two drugs, has filed
NDAs  for two  others  and has  others  proceeding  through  various  stages  of
development,  all with a relatively  modest depletion of its cash. The Company's
first product, ADENOCARD(R), was approved by the FDA in October 1989. Its second
product,  ADENOSCAN(R),  was  approved  by the FDA in May  1995.  The  NDAs  for
VIASCINT(TM)   and  BIDIL(R)   were  filed  on  April  25,  and  July  3,  1996,
respectively.   On  February  27,  1997  the  Cardio-Renal   Advisory  Committee
("Committee")  of the FDA voted 9 to 3 not to  recommend  approval  of BIDIL for
treatment of congestive heart failure.  The Company currently has not received a
written  response  from  the  Committee  and the FDA  regarding  their  specific
concerns for BIDIL. The Company's plans for BIDIL will depend upon such response
and whether a  reasonable  investment  by the Company will enable the Company to
address and satisfy such concerns.

Substantially all of the Company's royalty income in the three year period ended
December 31, 1996 resulted from sales in the United States by Fujisawa-USA, Inc.
("Fujisawa"), the Company's corporate partner, of ADENOCARD and ADENOSCAN.

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                              Medco Research, Inc.
STRATEGIC PLAN

Whereas large  pharmaceutical  companies  typically  seek  diversification  into
multiple  diagnostic and  therapeutic  areas,  small companies with more limited
resources must  concentrate  their efforts to be competitive and successful.  As
such, the Company  continues to focus primarily on cardiovascular  disease.  Its
expertise in adenosine drug development,  and more recently nuclear  cardiology,
is well-recognized  in the medical community.  The Company believes that medical
market trends, in particular  managed care,  present unique  opportunities  well
suited to these core competencies. Therefore, to further concentrate its efforts
and  corporate  partner  interests,  the Company at this time  intends to divest
unrelated  products and focus on the continued  acquisition  and  development of
cardiovascular medicines and adenosine-based products.

ADENOSINE PORTFOLIO

ADENOCARD(R) - a sterile  formulation  of adenosine for injection - indicated as
     the  drug of  choice  for the  treatment  of  abnormally  rapid  heartbeats
     originating  in the  upper  chambers  of the  heart,  so-called  paroxysmal
     supraventricular  tachycardia.  Commercially available from Fujisawa in the
     U.S.  and  Canada  since  1989 as  ADENOCARD,  the drug also is sold by the
     Company's  corporate partner Sanofi Pharma ("Sanofi") in the United Kingdom
     and other  countries  of the world as  ADENOCOR(R)  and in  Switzerland  as
     KRENOSIN(R).

ADENOSCAN(R) - a sterile formulation of adenosine for infusion - indicated as an
     adjunct to thallium  cardiac  imaging for the evaluation of coronary artery
     disease   in   patients   unable   to   exercise   adequately,    so-called
     pharmacological stress.  Commercially available from Fujisawa in the United
     States and Canada since 1995, the drug also is sold by Sanofi in the United
     Kingdom and pending  registration  and  approval in other  countries of the
     world.

ADENOSINE FOR  CARDIOPROTECTION  (MEDR-640) - sterile  formulations of adenosine
     for infusion - under  development  as a  cardioprotective  adjunct to early
     thrombolytic  therapy or emergency  angioplasty  in the  treatment of acute
     myocardial  infarction and as an additive to standard  cardioplegia  during
     open-heart  surgery.  Positive  clinical  results were reported at the 1995
     Annual  Meeting  of the  American  Heart  Association  and the 1996  Annual
     Meeting of American  College of Cardiology  supporting the Company's belief
     that the drug holds  significant  promise as an effective  cardioprotective
     agent.  Fujisawa is the  Company's  partner for this  product,  which is in
     Phase II clinical testing.

NUCLEAR CARDIOLOGY PORTFOLIO

VIASCINT(TM)    -    a    sterile     radiopharmaceutical     formulation     of
     iodine123-iodophenylpentadecanoic  acid  for  injection  -  subject  to FDA
     approval,  as to which no  assurance  can be given,  proposed to be used to
     determine the presence of "hibernating", or reversibly injured heart muscle
     and  thereby   predict  which   patients  are  most  likely  to  experience
     improvement in cardiac function following,  and thus benefit from, coronary
     artery  bypass  graft  (CABG)  surgery,  and to  assist  physicians  in the
     selection of patients for such  surgery.  The Company  completed  Phase III
     clinical  testing,  and the results indicated that the product provides the
     means to predict, with high accuracy,  which patients will have improvement
     in cardiac functioning  following  revascularization.  The Company filed an
     NDA in 1996. Nordion  International  Inc. currently has U.S.  manufacturing
     rights, and the Company has marketing rights. The Company is in the process
     of seeking a corporate partner to market this product.

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                              Medco Research, Inc.


Tc99m-GLUCARATE   -  a   radiopharmaceutical   kit   for  the   preparation   of
     technetium99m-GLUCARATE for injection - under development for the early and
     rapid diagnosis of acute  myocardial  infarction,  particularly in patients
     with  nondiagnostic  electrocardiograms  (ECGs) and negative cardiac enzyme
     tests.  The Company  acquired  this product in January  1996 and  currently
     retains worldwide manufacturing and marketing rights to issued patents.


ADDITIONAL PORTFOLIO

BIDIL(R) - an oral dosage formulation  containing the combination of hydralazine
     hydrochloride   and  isosorbide   dinitrate  (two   generically   available
     vasodilators)  - subject to FDA  approval,  as to which no assurance can be
     given,  proposed to be used to improve  symptoms  and  survival in patients
     with  congestive  heart failure (CHF) who are  inappropriate  for treatment
     with   angiotensin-converting   enzyme   (ACE)   inhibitors.   The  Company
     transferred the manufacturing  process for BIDIL from its formulator to its
     commercial manufacturer. The Company filed an NDA in July 1996. On February
     27, 1997 the Cardio-Renal Advisory Committee ("Committee") of the FDA voted
     9 to 3 not to recommend approval of BIDIL for treatment of congestive heart
     failure. The Company currently has not received a written response from the
     Committee  and the FDA regarding  their  specific  concerns for BIDIL.  The
     Company's  plans for BIDIL will  depend  upon such  response  and whether a
     reasonable investment by the Company will enable the Company to address and
     satisfy such  concerns.  In 1996 the Company  reacquired  all marketing and
     manufacturing rights from Boehringer Mannheim  Pharmaceutical  Company. See
     "Product-By-Product Summaries - BIDIL" below.

ATP  - a sterile  formulation of adenosine  triphosphate - under development for
     the treatment of solid tumors or cancer-related  cachexia.  The product has
     completed one  single-center  Phase I and one multicenter Phase II clinical
     trial,   and  the  Company  believes  the  results  support  the  continued
     investigation  of the drug as an  adjunctive  therapy  that may improve the
     quality of life in patients  suffering from non-small cell lung cancer. The
     Company  currently  retains the United States  manufacturing  and marketing
     rights.  However,  the Company's  licensor is seeking an arbitration ruling
     that the license agreement has terminated because of the Company's material
     breach.  The Company believes the allegations are without merit.  Until the
     initiation of such arbitration the Company had been seeking to sublicense a
     corporate  partner to continue the  development of this product,  including
     the  right  to  manufacture  and  market  it.  See  Item  3  below,   Legal
     Proceedings.


PRODUCT-BY-PRODUCT SUMMARIES

                                  ADENOCARD(R)

The Product:  ADENOCARD is a sterile formulation of adenosine (3mg/ml) available
in 2ml vials and 2-4ml prefilled  syringes for intravenous  injection to restore
normal heart rhythm in patients with abnormally rapid heartbeats  originating in
the  upper  chambers  of  the  heart,   so-called  paroxysmal   supraventricular
tachycardia (PSVT).  Because of its very short half-life (less than 10 seconds),
ADENOCARD  works quickly and typically  without  prolonged side effects.  It has
been adopted by numerous medical  organizations as the  "drug-of-choice" for the
treatment of PSVT.

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                              Medco Research, Inc.


Regulatory  Status: In October 1988, the Company received FDA approval to market
ADENOCARD in the United  States,  and the drug is  commercially  available  from
Fujisawa in the United States and Canada.  In September  1991,  Sanofi  received
marketing approval (under the trade name ADENOCOR) in the United Kingdom and, in
May 1992,  received  marketing  approval  (under  the trade  name  KRENOSIN)  in
Switzerland. Sanofi also sells the drug in France, The Netherlands,  Luxembourg,
Spain, Denmark,  Italy, Ireland,  Australia,  Austria,  Greece,  Quatar, Jordan,
Saudi Arabia, Cyprus, Kuwait, Belgium and Germany.

Product  License:  In March 1985,  the  University  of Virginia  Alumni  Patents
Foundation  granted to the Company an exclusive license to exploit in the United
States and Canada the use of adenosine  for the  treatment  of  supraventricular
tachycardia  that is caused by re-entry in the A-V node or an accessory  pathway
of the human heart. In November 1986,  licensor  received a United States Patent
on such use.  For these  rights,  the  Company  paid a  one-time,  nonrefundable
license fee and agreed to pay 10% of all net sales of ADENOCARD made directly by
the  Company  and  50%  of  all  royalties  received  by the  Company  from  its
sublicensees  until the expiration of the term of the patent rights or until the
license is terminated as provided in the agreement. The Licensor, as it has done
in the past, is conducting an audit of the Company's  royalty  obligations under
the  license  agreement.   In  connection  with  this  audit  licensor  is  also
questioning  whether the introduction  and sale of the Company's  ADENOSCAN drug
and the related decline in ADENOCARD  sales,  without  compensation to licensor,
violates the license.  The Company  believes it is in full  compliance  with the
terms of the license, and it has been so advised by counsel.

Competition: Intravenous calcium channel blockers and beta-blockers (generically
available  from  numerous  sources)  are  principal  competitors.  In  addition,
catheter-based  ablation  therapy is  becoming  more  common and may compete for
certain patient types.

Manufacturing and Marketing:

1.  Agreement with Fujisawa.  In November  1985, the Company  granted  LyphoMed,
Inc., a manufacturer  and marketer of critical care  injectable  pharmaceuticals
and other  products  which  subsequently  was merged into Fujisawa and herein is
referenced  as  Fujisawa,  an  exclusive  license  to  manufacture  and  market
ADENOCARD in the United States and Canada. Fujisawa  agreed to pay the Company a
royalty  equal to 25% of its net  sales of  ADENOCARD  in each  country  for the
duration of patent  protection or any other exclusive  marketing rights that may
be  granted  to the  Company  by  governmental  agencies,  whichever  is longer.
Fujisawa also agreed to pay the Company a royalty equal to 7% of Fujisawa's  net
sales of  ADENOCARD  during any  subsequent  term of the  agreement,  which will
continue  after the initial term until either party  terminates the agreement by
giving the other party 90 days written notice.

2. Agreement with Sanofi  Pharma.  In December 1987, the Company  granted Sanofi
Pharma  ("Sanofi"),  a multinational  pharmaceutical  company  headquartered  in
France, the rights to exclusively manufacture and market ADENOCARD in Europe and
countries other than the United States and Canada. Sanofi agreed to use its best
efforts to commercialize  ADENOCARD in such territories  subsequent to receiving
governmental marketing approvals and to pay the Company royalties equal to 5% of
its net sales of ADENOCARD. Royalties will be paid on a country by country basis
for the longer of six years or the period of any marketing exclusivity.

                                  ADENOSCAN(R)

The Product:  ADENOSCAN is a sterile formulation of adenosine (3mg/ml) available
in 30ml or 20ml vials for infusion  indicated as an adjunct to thallium  cardiac
imaging in the  evaluation  of coronary  artery  disease in  patients  unable to
exercise adequately.  The procedure is called  pharmacological  stress, since in
many ways the effects of  adenosine  simulate  those of  exercise.  ADENOSCAN is


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                              Medco Research, Inc.


administered by brief intravenous  infusion,  and thallium (a radioactive agent)
is injected during the procedure. Cardiac images are subsequently acquired (with
gamma cameras)  which  visually  display the presence and severity of underlying
coronary artery disease.  Because of its very short half-life,  side effects are
generally very brief.

Regulatory  Status:  In October 1992,  the Company  received  approval to market
ADENOSCAN  in  Canada;  and in May  1995,  the  Company  received  from  the FDA
marketing  clearance for ADENOSCAN in the United  States.  In June 1995,  Sanofi
received  marketing approval for ADENOSCAN in the United Kingdom and in February
1997,  Sanofi  registered  ADENOSCAN  in 14  member  countries  of the  European
Community through the mutual  recognition  procedure.  The final  administrative
procedure involving the granting of a National Marketing License authorizing the
sale of the product  will be sought from the health  authorities  in each of the
member countries.

Product License: The Company owns the product as it is the exclusive assignee of
patents issued in the U.S. and Canada,  with  counterpart  applications  pending
approval in other  countries  of the world,  covering  the use of adenosine as a
pharmacological  stressor  in cardiac  imaging.  In  addition,  in the U.S.  the
product  received three years of exclusivity from the date of NDA approval under
the Hatch-Waxman Act. See "ADENOCARD - Product License" above.

Competition:  Intravenous  dipyridamole,  manufactured  and  marketed  by DuPont
Radiopharmaceuticals  under the brand  name IV  Persantine(R)  is the  principal
competitor and has been available in the U.S.  since 1990. IV  Persantine(R)  is
generically  manufactured and marketed by Wyeth Ayerst. In addition, other drugs
and  procedures  currently  available  or under  development  may be  useful  in
determining  the presence or severity of coronary artery disease and may compete
directly with ADENOSCAN.

Manufacturing and Marketing:

Agreement with  Fujisawa.  In December  1988,  the Company  granted  Fujisawa an
exclusive  license in the United  States  and Canada to  manufacture  and market
ADENOSCAN.  As amended in May 1995 by an agreement  settling a litigation  among
the parties  and Abbott  Laboratories,  Inc.  related to the  manufacturing  and
marketing rights to this drug,  Fujisawa agreed to pay the Company  royalties of
29% of  ADENOSCAN  net sales in the United  States and Canada for the first five
years  after  the  commencement  of  commercial  sales  in  each  territory  and
thereafter  royalties  of 25% of net sales  until June 10,  2007,  at which time
Fujisawa would have a paid-up license within such  territories.  (The Company is
obligated to pay to Abbott  royalties  of 2% of the net sales of  ADENOSCAN  for
five years following FDA marketing clearance,  up to a maximum of $5.35 million.
See Note 6 to the Financial Statements included in Item 8 below.)

Fujisawa  also agreed to pay  royalties  to the Company in respect of periods of
more than  thirty  days in which it is unable to  fulfill  ADENOSCAN  orders for
reasons other than force majeure and other specified  events,  such royalties to
be at the then  prevailing  rate based on the average  daily sales of  ADENOSCAN
during the preceding 12 months.  Fujisawa  also agreed  generally to maintain an
inventory   of  at  least  six  months  of   ADENOSCAN   finished   product  and
work-in-process,  to be stored at multiple locations and to use its best efforts
to identify and provide data to the Company to qualify with the FDA an alternate
supplier  of the  adenosine  raw  material  necessary  for  the  manufacture  of
ADENOSCAN.  In October 1996,  based on data provided by Fujisawa to the Company,
Fujisawa's Melrose Park, Illinois plant was qualified by the FDA as an alternate
ADENOSCAN manufacturing facility.

Agreement with Sanofi.  In June 1992,  the Company  granted Sanofi the exclusive
rights to  manufacture  and  market  ADENOSCAN  worldwide  except in the  United
States, Canada, Japan, Korea and Taiwan. In June 1995, Sanofi received marketing
approval  for  ADENOSCAN  in the United  Kingdom  and in February  1997,  Sanofi


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registered  ADENOSCAN in 14 member countries of the European  Community  through
the mutual recognition procedure.  The final administrative  procedure involving
the granting of a National Marketing License authorizing the sale of the product
will be sought  from the health  authorities  in each of the  member  countries.
Sanofi  pays the  Company a  royalty  of 6 to 8  percent,  based on the level of
annual  sales,  for the  longer  of ten  years or the  period  of any  marketing
exclusivity for ADENOSCAN in each country of the territory.

Agreement with Suntory.  In February 1994, the Company signed a development  and
marketing  agreement with Suntory Limited for cardiovascular  uses of adenosine.
Suntory currently is pursuing the use of adenosine for pharmacologic  stress for
use with thallium  perfusion  imaging to detect  coronary  artery  disease.  The
Japanese  equivalent of an NDA has not been filed for any product covered by the
agreement.  The Company  received a $1 million  license fee plus a $300,000  fee
when the FDA granted marketing clearance for ADENOSCAN.

                    ADENOSINE FOR CARDIOPROTECTION (MEDR-640)

The  Product.  Each year in the U.S.  over one  million  patients  suffer  acute
myocardial infarction and, despite the benefits of early reperfusion,  permanent
injury and disability is not uncommon. In addition, over 300,000 patients a year
undergo  CABG  surgery  and,   despite   standard   cardioprotective   measures,
significant  cardiac  support is often required  during the early  postoperative
period.  MEDR-640 is the internal  denomination  of a development  program for a
sterile  formulation  of adenosine  (3mg/ml) as an adjunct to early  reperfusion
with  thrombolytic  therapy or emergency  angioplasty  in the treatment of acute
myocardial  infarction  and  as an  additive  to  standard  cardioplegia  during
open-heart surgery.

Development Background: Substantial preclinical data, and limited human testing,
suggest  that  adenosine  may be  further  beneficial  in these  acute  ischemic
settings.  The  results of a  single-center  pilot  investigation  suggest  that
adenosine, as an adjunct to emergency angioplasty,  may further limit the damage
associated with acute myocardial infarction. This was suggested by significantly
reduced injury  measured six weeks after the procedure  compared to measurements
made at the time of hospital  discharge.  The  preliminary  results from another
single-center  pilot study  suggest that  adenosine,  as an additive to standard
cold-blood  cardioplegia,  may also limit the amount of cardiac support required
during the early postoperative period following CABG surgery. This was suggested
by statistically  significant  reductions in the cumulative  amount of inotropes
(i.e., dopamine and dobutamine) and vasodilators (i.e.,  nitroglycerin) required
in the 24-hour period following surgery.  These preliminary findings support the
ongoing Phase II multicenter  trials,  including a  placebo-controlled  trial in
CABG surgery  (so-called  AB-02 trial),  two related  placebo-controlled  trials
using  thrombolytic  therapy in acute myocardial  infarction  (so-called AMISTAD
trial), and a placebo-controlled  trial using emergency (primary) angioplasty in
acute myocardial infarction (so-called ALIVE trial).

Regulatory  Status:  The  original IND for Phase I studies was filed in November
1988. The Company is now conducting  multicenter Phase II clinical trials in the
U.S., Canada and Argentina under this IND submitted to the FDA in November 1988.

Product License:  The Company has a patent  application  pending in the U.S. and
abroad  for  the  use of  adenosine  to  prevent  further  injury  during  acute
myocardial infarction,  and the Company is the sublicensee of Fujisawa, which is
the exclusive licensee,  of a U.S. patent issued in 1989. See "Manufacturing and
Marketing" below.

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Competition: A wide variety of agents currently available or under investigation
may be useful in these  acute  ischemic  settings,  including  antiplatelet  and
anticoagulant agents, cardiosuppressants,  perfluorochemicals, anti-free radical
scavengers,  and adenosine analogs or modulators which may compete directly with
MEDR-640.

Manufacturing  and  Marketing:  MEDR-640  was  included  in the  Company's  1988
exclusive license agreement with Fujisawa relating to ADENOSCAN. Pursuant to the
May 1995 agreement with Fujisawa  settling the litigation over the manufacturing
and marketing of ADENOSCAN, all references to MEDR-640 in such license agreement
were  eliminated,  and in May 1996,  the parties  entered  into an  agreement to
jointly develop adenosine-based  products having indications as cardioprotective
agents,  such as MEDR-640.  Under that agreement Fujisawa granted to the Company
an  exclusive  sublicense  under  a U.S.  patent  under  which  Fujisawa  is the
exclusive licensee. Fujisawa has exclusive manufacturing and marketing rights in
the U.S., Canada, Mexico and other territories, and it agreed to pay the Company
25% of net sales within the  territories.  The companies share equally all costs
of development and any royalties due to third parties.

                                  VIASCINT(TM)

The    Product:    VIASCINT   is   a    radiopharmaceutical    formulation    of
I123-iodophenylpentadecanoic acid under development to determine the presence of
"hibernating",   or  reversibly  injured,   heart  muscle  and  thereby  predict
improvement in cardiac  function  following  coronary artery bypass graft (CABG)
surgery,  and to assist  physicians  in the selection of patients most likely to
benefit from such procedure.

Development  Background:  Although  numerous  procedures and various factors are
considered in the evaluation of patients for CABG surgery, the only FDA approved
product  for  cardiac  metabolic  imaging  and tissue  viability  assessment  is
F18-fluorodeoxyglucose  (FDG)  for use in  conjunction  with  positron  emission
tomography  (PET).  However,  this  procedure is very  expensive  and not widely
available.  Like FDG,  VIASCINT  is a  radioactive  metabolite  and may  provide
similar  information with gamma cameras,  which are generally  available at most
large hospitals.  The results of the Company's Phase III clinical trials support
its belief that  VIASCINT  provides  the means to predict,  with high  accuracy,
which   patients   will  have   improvement   in  cardiac   function   following
revascularization.

Regulatory  Status:  The Company completed Phase III clinical trials in the U.S.
under an IND  submitted  to the FDA in June 1992.  The  Company  filed an NDA in
April 1996. The Company  currently has no rights or  registration  plans outside
the U.S.

Competition:  A wide  variety of agents and  procedures  currently  available or
under  investigation  may be useful in assisting  physicians in the selection of
patients for CABG surgery and may compete directly with VIASCINT.  However, only
PET FDG is currently FDA approved for use in detecting  reversibly injured heart
muscle that may improve subsequent to CABG surgery.

Product  License;  Manufacturing  and  Marketing:  In April  1992,  the  Company
obtained from Nordion International Inc. ("Nordion"), a Canadian manufacturer of
radiopharmaceuticals,  the right to develop  and market  VIASCINT  in the United
States.  Under the  agreement  Nordion will supply the Company with VIASCINT for
United States clinical trials and will share a portion of the Company's  initial
development expenses.  Should the results of these initial studies be favorable,
the Company will  continue the  development  program in pursuit of FDA marketing


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clearance.  The Company  paid  Nordion an annual fee of $25,000  (begun in April
1993) through April 1996, when it filed the VIASCINT NDA. Upon FDA approval,  if
obtained,  Nordion  will  retain  exclusive  manufacturing  rights in the United
States.  The Company and Nordion  will share  equally in the profits of VIASCINT
sold in the United States by the Company, and the Company will receive a royalty
equal to 25% of net sales of VIASCINT sold in the United States by another party
to which it may  sublicense  the  marketing  rights.  The  Company  is seeking a
corporate partner to market this product.

VIASCINT  is  not  protected  by  a  U.S.  patent.  However,  the  manufacturing
(radiolabeling)   technologies  are  trade  secrets  under  license  to  Nordion
International.  In addition,  the Company has applied to the FDA for Orphan Drug
designation and  anticipates  five years of exclusivity  under the  Hatch-Waxman
Act.

                                 Tc99m-GLUCARATE

The Product:  It is estimated  that,  among the five million  annual  visits for
chest pain of possible cardiac origin, nearly two million patients have ECGs and
cardiac enzymes which indicate no acute myocardial  injury, yet provide no clear
alternative  diagnosis.  These patients are variably  managed with the tentative
diagnosis  of  "rule-out"  myocardial  infarction,  yet  they  are  not  clearly
candidates for early reperfusion therapy or early discharge.  Tc99m-GLUCARATE, a
radiopharmaceutical  kit containing  lyophilized  glucaric acid (a  carbohydrate
derivative)  for   reconstitution   and  radiolabeling  with  technetium99m  for
injection,  is under  development  for the early and  rapid  diagnosis  of acute
myocardial infarction, and it may provide useful diagnostic information in these
patients  with  nondiagnostic  electrocardiograms  (ECGs) and  negative  cardiac
enzyme tests.

Development Background:  Tc99m-GLUCARATE in animal studies has been shown not to
cross  intact  cellular  membranes,  and it is  rapidly  cleared  from the blood
through the kidney. However, in the presence of irreversibly damaged (infarcted)
cells,  Tc99m-GLUCARATE  crosses  the  cellular  membrane  and binds  tightly to
nuclear  residues.  This type of uptake  produces  images of the infarcted areas
that appear as "hot-spots" by standard nuclear imaging techniques.

Regulatory  Status:  The product has undergone limited  preclinical and clinical
testing overseas and some formulation development work. An IND to commence human
testing in the U.S. is targeted for filing in mid 1997.

Competition:  Tc99m -pyrophosphate (FDA approved) and In111-antimyosin  antibody
(FDA approved) are nuclear  imaging agents used to detect  infarcted  myocardium
and both would compete directly with Tc99m-GLUCARATE. In addition, other in vivo
or in vitro tests are available and would compete directly with Tc99m-GLUCARATE.

Product License;  Manufacturing  and Marketing:  On January 5, 1996, the Company
received from Molecular Targeting Technology, Inc. an exclusive sublicense under
a U.S.  patent  issued in August  1990  covering  the use of  technetium-labeled
GLUCARATE  for  organ  infarct  imaging  (the  Molecular  Targeting   Technology
principals  are  the  inventors,  and  the  patent  is  jointly  owned,  through
assignment,  by Centocor,  Inc. and The Massachusetts General Hospital;  similar
patents  for the same  technology  were  approved  in Europe in May  1995).  The
Company  obtained  the  exclusive  right  to  develop,  manufacture  and  market
Tc99m-GLUCARATE  in the United States,  Japan and other  countries of the world,
except  in Asia.  The  Company  agreed to pay  opportunity  fees  totaling  $1.9
million,  including  an  initial  payment  of  $200,000  upon  execution  of the
agreement and staged payments according to specific development milestones.  The
Company will also pay a royalty of either 6% of net sales of the product if sold


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by the Company or 25% of the  Company's  revenues  from product  sales made by a
commercial  partner.  The  sublicensor has provided all preclinical and clinical
data  conducted  in the  U.S.  and  abroad  and  transferred  all  manufacturing
technology,  including clinical trial material for Phase I and Phase II clinical
trials.  The Company  will be  responsible  for all aspects of  development  and
commercialization of the final product, with rights to sublicense.

                                    BIDIL(R)

The Product:  Among the estimated 3.5 million patients suffering from congestive
heart failure (CHF) in the U.S., a substantial  portion are not  candidates  for
first-line therapy with angiotensin-converting  enzyme (ACE) inhibitors and, for
such patients,  the Agency for Health Care Policy and Research (AHCPR) and other
medical  organizations  recommend  combination  oral treatment with  hydralazine
hydrochloride and isosorbide dinitrate,  two generically available vasodilators.
BIDIL is a fixed-dose,  combination  tablet for oral  administration  containing
these two vasodilators,  under development by the Company to improve survival in
patients with CHF who are inappropriate for treatment with ACE inhibitors. BIDIL
would  offer  a  convenient  formulation  that  may  reduce  noncompliance  with
prescribed  treatment - the leading cause of hospital  readmissions  in patients
with CHF.

Development  Background:  Two previous  landmark  studies,  the so-called V-HeFT
trials,  established  the safety and  efficacy  of  hydralazine  and  isosorbide
dinitrate in the  treatment of CHF. In  particular,  survival was  significantly
improved  compared to placebo,  although the ACE  inhibitor  enalapril  was more
effective in this regard than the vasodilator combination.  Although the Company
believes that data from these trials provide the clinical and statistical  basis
to pursue a survival claim in the intended population the FDA Advisory Committee
found that the  treatment  group in the first V-HeFT did not show  statistically
significant improvement over placebo in the primary endpoints, mortality, at two
years and mortality for the overall study period,  and it voted not to recommend
approval.

Regulatory  Status:  In March 1993,  the Company  submitted to the FDA an IND to
commence human bioequivalency studies in the U.S. Phase III clinical testing has
been completed.  At Company expense, a commercial source of raw bulk hydralazine
and isosorbide dinitrate has been found and used in the preparation of the BIDIL
combination product. The Company filed an NDA in July 1996. On February 27, 1997
the Cardio-Renal Advisory Committee ("Committee") of the FDA voted 9 to 3 not to
recommend  approval of BIDIL for  treatment of  congestive  heart  failure.  The
Company currently has not received a written response from the Committee and the
FDA regarding their specific  concerns for BIDIL.  The Company's plans for BIDIL
will  depend  upon such  response  and whether a  reasonable  investment  by the
Company will enable the Company to address and satisfy such concerns. BIDIL will
qualify for three years of market exclusivity under the Hatch-Waxman Act.

Product License:  In November 1991, the Company  acquired  exclusive rights from
Jay N. Cohn,  M.D.,  to a United  States  patent issued to Dr. Cohn in September
1989,  covering a method of reducing  mortality  associated  with chronic CHF in
patients with  impaired  cardiac  function by  administering  a  combination  of
specified amounts of hydralazine and isosorbide dinitrate. Dr. Cohn, who was the
principal investigator of the V-HeFT trials and became a director of the Company
in 1996,  granted the Company an exclusive  license to  worldwide  rights to the
combination therapy for research, development, manufacture and sale of this drug
under the issued United  States  patent that he holds and any future  patents he
obtains.

The Company has agreed to pay Dr. Cohn a total nonrefundable  license fee (which
will be credited against any future royalties) of $200,000, of which $125,000 is
payable upon FDA approval of the Company's NDA for BIDIL.  In the event the drug
is commercialized, the Company will pay Dr. Cohn royalties equal to (i) 7.5% of


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                              Medco Research, Inc.


the  Company's  direct net sales or (ii) 30% of any  royalties  received  by the
Company  from  sublicensees.  In the event  that  annualized  net sales  surpass
$100,000,000,  the royalty amounts will increase to 9% and 40%, respectively, on
sales over  $100,000,000.  However,  upon expiration of Dr. Cohn's United States
patent for BIDIL, each of the foregoing royalty rates will be reduced by 50%.

Competition:  Hydralazine hydrochloride and isosorbide dinitrate are generically
available  and would  compete  directly  with BIDIL.  In addition,  other agents
approved or under development, such as calcium-channel blockers,  beta-blockers,
angiotensin-II  receptor blockers, and other vasodilators,  may compete directly
with BIDIL.

Manufacturing  and  Marketing:  In November 1993, the Company signed a licensing
agreement with Boehringer Mannheim  Pharmaceutical  Company ("BMPC") giving BMPC
rights to market  BIDIL in the U.S.,  Canada  and  Mexico  with a right of first
refusal for licenses outside these  territories.  BMPC agreed to pay the Company
royalties  as  follows:  (i)on net  sales of up to  $30,000,000,  a  royalty  of
twenty-five  percent  (25%)  of  such  net  sales;  (ii)on  net  sales  of  over
$30,000,000 and below $60,000,000, a royalty of twenty-two percent (22%) of such
net  sales;  and  (iii)on  net sales of over  $60,000,000,  a royalty  of twenty
percent (20%) of such net sales.

BMPC paid the Company a licensing fee of  $1,000,000  following the execution of
the  agreement  and  agreed to make the  following  additional  payments  to the
Company:  $500,000 within 30 days of successful completion of the bioequivalence
study;  $250,000  within  30 days of the  submission  to the FDA of an NDA;  and
$1,000,000  within 30 days of the  approval  of the NDA by the FDA. In the event
that within the time  parameters  established in the  Development  Plan a viable
formulation  of BIDIL  cannot  be  attained  or  bioequivalence  of BIDIL is not
achieved,  the Company is obligated to refund the  $1,000,000  fee paid upon the
execution  of the  Agreement or $500,000 of such fee, as the case may be, and in
either case the agreement shall terminate.

The Company and BMPC mutually  agreed  effective  April 1, 1996 to terminate the
November 1993 license in which the Company granted to BMPC marketing and back-up
manufacturing  rights to BIDIL. As a result of BMPC's strategic  marketing plans
for certain of its other  products,  it was no longer  interested in BIDIL.  The
Company  retained  $350,000 of BMPC's $1 million  license fee, which the Company
accounted for as income in the second quarter of 1996.

                         ADENOSINE TRIPHOSPHATE ("ATP")

The Product:  There is a need for more effective  treatment of solid tumors such
as non-small cell lung cancer, which is extremely aggressive,  and leads rapidly
to death.  ATP has  demonstrated  some ability to inhibit tumor growth in animal
studies,  and it may reduce  cachexia,  the  weight-loss  and  wasting  syndrome
associated with cancer.

Development Background:  Adenosine triphosphate is the primary  energy-releasing
molecule in the human body and is  composed  of  adenosine  and  phosphate.  The
anti-cancer effects of ATP previously have been reported in several experimental
animal tumors. A small number of patients with late stage colorectal cancer have
received  ATP  in  conjunction  with  a  currently  marketed  anti-cancer  drug,


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                              Medco Research, Inc.


5-fluorouracil.  In the two  trials  completed  under  the IND,  ATP has shown a
favorable safety profile, and some preliminary  indications of efficacy based on
quality  of  life  and  performance   indices,  but  it  has  not  produced  any
statistically significant tumor regression.

Regulatory  Status:  A Phase  I  dose-ranging  safety  study  and a  Phase  I/II
multicenter  study in  patients  with  non-small  cell  lung  cancer  have  been
completed  under an IND  approved by the FDA in May 1992.  ATP will  qualify for
five years of market exclusivity under the Hatch-Waxman Act.

Product License: In May 1991, the Company acquired from Eliezer Rapaport, Ph.D.,
the  exclusive  rights  to two  issued  United  States  patents  and one  patent
application  pending  in the United  States  covering  (i) the use of  adenosine
5-diphosphate  ("ADP") and adenosine  5-triphosphate  ("ATP") to arrest and kill
tumor cells  (United  States patent issued  November  1989);  (ii) the arrest of
growth of tumor cells due to an increase in blood and plasma  levels of ATP in a
host resulting from the  administration  to the host of adenosine  monophosphate
("AMP") or ATP and a  reduction  in weight  loss  caused by cancer  cachexia  by
administration  of AMP or ATP (United States patent issued  September 1991); and
(iii) the utilization of adenosine  nucleotides  and/or  adenosine and inorganic
phosphates  for  elevation of liver,  blood and blood plasma ATP  concentrations
(United States patent pending). A patent covering claims in (i) above has issued
in April  1988 in Europe  and in  February  1988 in Japan.  Patent  applications
covering claims in (ii) and (iii) above are pending in Europe and Japan.

In  consideration  for entering  into this  agreement,  the Company  granted Dr.
Rapaport and another scientist in May 1991 options to purchase a total of 21,200
shares of the  Company's  stock at $14.625  per share (the  market  price of the
stock at the time of the grant),  and agreed generally to pay Dr. Rapaport an 8%
royalty  based on net sales of ATP by the Company or its  affiliates  and 40% of
the net monetary  proceeds paid to the Company from any sublicensee based on net
sales,  but in no event will Dr. Rapaport  receive an amount less than 4% of the
sublicensee's  net sales  during  the period in which the  Company is  receiving
royalties from the sublicensee.  Unless sooner terminated under the terms of the
agreement,  the license will continue  until the later of the  expiration of Dr.
Rapaport's  patents  or of any  exclusive  marketing  period  provided  by  law.
However,  the Company may continue to market ATP in any country  without  making
royalty  payments to Dr.  Rapaport  after the  expiration of the patents in that
country or after five years  following the  commencement of sales in any country
not covered by Dr. Rapaport's patents.

Dr. Rapaport has alleged the Company  materially  breached the license agreement
and claims it therefore  has  terminated.  The Company  believes it has complied
with the terms of the license and is  vigorously  defending  itself.  See Item 3
below, Legal Proceedings.

Competition. There are numerous anti-cancer agents on the market and other drugs
are in development, which may be used to treat NSCL cancer.

Manufacturing and Marketing:  ATP is the Company's only adenosine-based  product
with a  non-cardiac  indication,  and until  the  initiation  of Dr.  Rapaport's
arbitration  the Company had been seeking to  sublicense a corporate  partner to
continue the development of this product, including the right to manufacture and
market it.


                                    12 of 48
<PAGE>
                              Medco Research, Inc.


                    GOVERNMENT REGULATION OF PHARMACEUTICALS


The Company is engaged in a business in which strict federal  regulation through
the FDA is a significant factor. Such regulations relate primarily to the safety
and  efficacy,  but  also  govern  manufacturing,   labeling,   advertising  and
marketing, of pharmaceutical products.

In order to test clinically and later market pharmaceutical  products, a company
must obtain marketing clearance from the FDA in the United States and comparable
governmental agencies in other countries.  The FDA requires substantial evidence
of the  safety  and  efficacy  of new drugs and the  approval  process  involves
several steps. Each of these steps can be time consuming and expensive.

The first step includes the period from the discovery of the compound, including
laboratory  and  animal  experimentation,  to the  filing  of an  IND.  The  IND
submission  must  contain data from the  preclinical  drug  research,  including
biochemistry,  animal  toxicological and pharmacological  studies, and any other
available  information  on the drug and must  also  outline  a plan of  clinical
investigation.  INDs must be sought for particular  formulations of a drug, such
as oral,  injectable and topical,  and these  formulations must be tested in the
treatment of human disease only in accordance with protocols (specific treatment
regimens) submitted in connection with the IND.

Once an IND has been allowed to become effective by the FDA,  clinical trials on
humans may be  undertaken  in  accordance  with the approved  protocols.  During
clinical  investigation,  the sponsor is required  to monitor  all  studies,  to
submit  progress  reports to the FDA at intervals not exceeding one year, and to
report promptly serious adverse reactions pertinent to the safety of the drug.

There are usually three phases in the clinical  development of a new drug. Phase
I concerns  the  testing of the drug in a small  number of healthy  subjects  to
determine  primarily  a number of safety  parameters  and to obtain  other basic
experience  with the drug in humans.  Phase II concerns  the testing of the drug
under well-controlled conditions in a larger population to obtain information on
the drug's safety and efficacy in patients for the claim or claims being made by
the  sponsor.  Phase III  concerns  the  testing  of the drug in a still  larger
patient  population  and  for a  longer  period  of time  under  well-controlled
conditions  to confirm  the safety and  efficacy  results  obtained in Phase II.
Phase III is usually  considered  the last phase in the clinical  testing of the
drug.

If  the   sponsor   elects   to   proceed   beyond   clinical   development   to
commercialization  of the drug,  it submits  to the FDA an NDA which  contains a
written  summary of all data  reflecting the total research  experience with the
drug and a section regarding its manufacture.  When the FDA has reviewed the NDA
and all additional information which it may have required to be submitted during
the review process, it decides whether, and under what labeling  conditions,  it
will  permit the  product to be  marketed.  The FDA may  require  post-marketing
testing and surveillance of adverse  reactions as a condition of its approval to
monitor the drug's effect during marketing.

Although health registration  requirements are generally more rigidly applied in
the United States than elsewhere, the regulatory pattern in the United States is
now being followed by most industrialized countries.

ORPHAN DRUG ACT

As the sponsor of an orphan drug for a particular indication,  the Company would
be  entitled  to  receive  seven  years  exclusive  marketing  rights  for  this
indication,  but only if it proceeds to sponsor the first NDA  approved  for the


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                              Medco Research, Inc.


drug for this indication.  Thus, unlike patent protection,  the designation of a
drug for a particular indication as an orphan drug would not, by itself, prevent
other  manufacturers  or sponsors from obtaining orphan drug status for the same
drug for the same indication if they obtained a prior NDA, or from obtaining FDA
approval prior to approval of the Company's NDA.

The Company also is entitled to certain  federal income tax credits with respect
to certain clinical expenses related to its orphan drugs.

As is the case with FDA approval generally,  the grant of orphan drug status for
one or more of the Company's  drugs would not prevent the FDA from approving the
same drug or drugs for a different  indication,  and medical  practitioners  may
prescribe  an  approved  drug for  non-indicated  (i.e.,  off-label)  uses.  The
marketing potential of the Company's orphan drugs could be adversely affected by
FDA approval of another company's NDA for the same drug for different uses.

The Company intends, where applicable, to obtain orphan drug designation for any
drugs  licensed  or acquired  by it in the  future.  There can be no  assurance,
therefore, that the scope of protection currently afforded by orphan drug status
or the federal  income tax  credits  currently  available  to sponsors of orphan
drugs will continue to be available in the future.


HATCH-WAXMAN ACT

The   Hatch-Waxman   Act  provides  for  limited   marketing   exclusivity   for
pharmaceutical  products which receive NDA approval from the FDA, independent of
any issued patents which may apply.  If a  pharmaceutical  product  receives NDA
approval,  and the FDA has not previously  approved any other product containing
the  same  active  ingredient,  including  any  salt  or  ester  of  the  active
ingredient,  then the Hatch-Waxman  Act does not permit any abbreviated  generic
NDA ("ANDA") to be  submitted by another  company for that drug product for five
years  from the date of NDA  approval.  If an NDA  approval  is  received  for a
pharmaceutical  product  containing an active  ingredient or salt or ester of an
active ingredient that has been previously  approved by the FDA, and if that NDA
approval was secured in part through the  submission  to the FDA of new clinical
investigations  other than  bioavailability  studies,  then the Hatch-Waxman Act
prohibits the FDA from making effective the approval of an ANDA for that product
by another  company for a period of three  years from the date of NDA  approval.
This limited exclusivity provision is automatically granted upon NDA approval as
applicable  and does not require  special  consideration.  Within the  Company's
current  portfolio  of  products,  VIASCINT  and ATP  qualify  for five years of
exclusivity,  and  ADENOSCAN,  MEDR-640,  and BIDIL  qualify  for three years of
exclusivity, under this provision.

PATENTS AND PROPRIETARY RIGHTS

Patents and other  proprietary  rights are extremely  important to the Company's
business.  However, the patent positions of biopharmaceutical  firms,  including
the Company, are uncertain and involve complex legal and factual questions which
can be difficult to resolve.

The Company's  general  policy is to license the right to  manufacture  and sell
pharmaceutical  products  the use of  which  for the  particular  indication  is
covered by an issued United States  patent which the  Company's  patent  counsel
believes is valid and  enforceable.  The Company  believes that licensing issued
patents represents the best step the Company can take to protect the technology,


                                    14 of 48
<PAGE>
                              Medco Research, Inc.


inventions,  and improvements that it considers  important to the development of
its business,  and the  Company's  financial  investment  therein.  However,  on
occasion the Company may acquire product opportunities without issued patents or
without patent applications  pending, such as, for example, when in Management's
opinion,  the invention  would expand the  Company's  adenosine  portfolio.  The
Company  also  relies upon trade  secrets,  know-how,  continuing  technological
innovations and subsequent  licensing  opportunities to develop and maintain its
competitive position.

The patent  application and issuance process may take several years and involves
considerable  expense,  and there is no assurance  that any patent sought by the
Company  or  its  licensors  will  issue.  The  coverage  claimed  in  a  patent
application   can  be   significantly   reduced   before  a  patent  is  issued.
Consequently,  neither the  applicant  nor the licensee  knows whether any claim
contained in a patent  application will be allowed and result in the issuance of
a patent  or, if any  patent  is  issued,  whether  it will  provide  meaningful
proprietary  protection or will be  circumvented  or  invalidated.  Since patent
applications  in the United  States are  maintained  in secrecy,  until  foreign
counterparts,  if any, are published,  and because publication of discoveries in
the scientific or patent  literature often lags behind actual  discoveries,  the
Company  cannot be  absolutely  certain  that it or any  licensor  was the first
inventor of the subject matter  covered by the patent  application or that it or
such  licensor  was the first to file a patent  application  therefor or that it
would obtain the freedom to practice the claimed inventions.  Moreover, priority
in filing a patent  application  for an invention can be overcome by a different
party who first practiced the invention.  Accordingly, the Company might have to
participate in extensive  proceedings  in U.S.  and/or foreign patent offices or
courts,  including  interference  proceedings  declared  by the U.S.  Patent and
Trademark  Office  ("Patent  Office"),   to  determine  priority  and/or  patent
validity.  Any such  proceeding  would be costly and  consuming of  Management's
time.  There can be no  assurance  either that the  Company's  owned or licensed
patents would be held valid or that the Company's products would not be found to
infringe  patents  owned by  others.  In the event of a  determination  that the
Company is  infringing  a third  party's  patent,  the Company  likely  would be
required to pay royalties,  which could be substantial,  to such third party. It
is even  possible  that the third party could refuse a license to the Company in
order to keep the Company's product off the market.

There can be no  assurance  that any  patent  rights  held by the  Company  will
provide any actual  competitive  advantage to the Company.  Competitors might be
able to  develop  similar  and  competitive  products  outside  the scope of the
Company's patents. For example, should third parties patent or otherwise develop
and receive  governmental  clearance to commercialize an adenosine product for a
use not covered by the Company's patents, physicians could use those third party
products in place of the  Company's  adenosine  products  even though such third
party  products  were not  approved by the FDA for the same  indications  as the
Company's products.  Any such off-label use of third party products could have a
material  adverse  effect on sales of the  Company's  products and the amount of
royalty revenues received by the Company.

From  time to time,  third  parties  may  claim  or the  Company  may  identify,
intellectual  property  rights not owned or licensed by the Company which may be
infringed by the Company.  To the extent that such  properties are in the public
domain,  in the first  instance the Company would seek the opinion of its patent
counsel to avoid claims of willful  infringement.  In  addition,  whether or not
such  properties  are in the  public  domain,  based  on its  evaluation  (after
consultation  with  patent  counsel)  of  applicable  considerations,  including
without   limitation  the  potential   duration,   expense  and  outcome  of  an
infringement proceeding, the validity or enforceability of such potential claims
and other  business  consideration,  the  Company  might  seek to  license  such
intellectual  properties in consideration of its payment of royalties.  Although


                                    15 of 48
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                              Medco Research, Inc.


the Company  believes that it should be able to obtain a license on commercially
reasonable  terms to any such patent,  there can be no assurance that it will be
able to obtain from third parties  patent  licenses on  commercially  reasonable
terms, if at all.

In the case of ADENOSCAN,  one such third party with  potential  claims has been
identified. In 1987 such third party filed broad patent applications relating to
uses of  adenosine.  The third party has told the Company that its  applications
make   certain   claims   which  may  be   relevant  to  the   development   and
commercialization  of the Company's  adenosine  products,  including  ADENOSCAN.
Although  the  Company  has  requested,  but  not  been  given,  a copy  of such
application and all of the related  correspondence with the Patent Office and is
seeking from such third party  specific  information  concerning  these  claims,
based on the  information  it has  received  from such third  party the  Company
believes its  ADENOSCAN  patent would have  priority  over any patent that might
issue to such third party. Nonetheless, based on such information as the Company
may receive in the future from such third party,  the Company will consider with
its  patent  counsel  whether  to seek a license  from such  third  party of the
pending  claims or those claims for which the Patent  Office may grant a patent.
The third party  already has told the Company that it would like to enter into a
license agreement with the Company covering its pending claims. This third party
also has an issued  Canadian  patent  which  appears to have  priority  over the
Company's Canadian patent for ADENOSCAN.  Although the royalty revenues from the
product's sales in Canada are not material to the Company,  the Company may seek
to obtain a Canadian patent license.  However,  there can be no assurance either
that any license can be negotiated with this third party on mutually acceptable,
or commercially  reasonable,  terms or that the owner of this patent application
will  not seek to  enforce  against  the  Company's  products,  or  against  its
development activities, any patent that may issue.

It is the Company's policy to require its employees,  consultants and parties to
collaborative   agreements  to  execute  confidentiality   agreements  upon  the
commencement  of  employment  or  consulting  relationships  or the  exchange of
information prior to a collaboration with the Company.  These agreements provide
that all confidential  information  developed or made known during the course of
relationship  with the Company is to be kept  confidential  and not disclosed to
third parties except in specific  circumstances.  In the case of employees,  the
agreements  provide that all  inventions  resulting  from work performed for the
Company, utilizing property of the Company or relating to the Company's business
and conceived or completed by the  individual  during  employment,  shall be the
exclusive  property of the Company to the extent  permitted by  applicable  law.
There  can  be  no  assurance,  however,  that  these  agreements  will  provide
meaningful protection of the Company's trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information.  To the extent that
key  employees,  consultants  or third parties apply  technological  information
independently  developed by them or by others to any of the proposed projects of
the  Company,   disputes  may  arise  as  to  the  proprietary  rights  to  such
information, and such disputes may not be resolved in favor of the Company.

The Company also relies upon trade secret  protection for its  confidential  and
proprietary  information.  There  can  be no  assurance  that  others  will  not
independently  develop  substantially   equivalent  proprietary  technology  and
techniques or otherwise  gain access to the Company's  trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.

The Company has registered various trademarks in the Patent Office and has other
trademarks which have acquired both national and international recognition.  The
Company  has  trademark  registrations  or pending  applications  in a number of
foreign countries.

                                    16 of 48
<PAGE>
                              Medco Research, Inc.


PRODUCT AND CLINICAL STUDIES LIABILITY

Administration  of any drug to humans  involves  the risk of  allergic  or other
adverse  reactions  in certain  individuals.  Accordingly,  it is possible  that
claims might be  successfully  asserted  against the Company for liability  with
respect  to  injuries  that  may  arise  from the  administration  or use of its
products  during  clinical  trials or  following  marketing.  However,  no claim
involving a material  liability has ever been brought  against the Company.  The
Company presently carries, and contractually  requires its marketing partners to
carry,  what it believes to be adequate product and clinical  studies  liability
insurance coverage.

RESEARCH AND DEVELOPMENT

The Company  expended for research and  development  $5,839,278,  $8,535,187 and
$5,844,014   during  the  years  ended   December  31,  1996,   1995  and  1994,
respectively.

EMPLOYEES

As of March 7, 1997 the  Company  employed  twenty-six  persons  on a  full-time
basis. None of the Company's employees are represented by a labor union, and the
Company  considers its employee  relations to be good.  The Company will need to
hire additional scientific and support personnel as it expands its operations.

ITEM 2.  PROPERTIES

The Company leases approximately 11,900 square feet of office space, in Research
Triangle  Park,  North  Carolina,  for its corporate  offices under a lease that
expires in July 1998.  The Company  believes  that this facility is adequate for
its present operations.

ITEM 3.  LEGAL PROCEEDINGS

There are no material legal  proceedings  pending  against the Company except as
discussed below:

Class Action Litigation

In September  and October  1993,  the Company,  and certain of its past and then
directors  and  officers  along with Kemper  Securities  Group,  Inc. and Vector
Securities International, Inc., were named in two class action lawsuits filed in
the United States District Court, Northern District of Illinois.  These actions,
which were  consolidated in February 1994, allege that the Company and the other
defendants  violated  Section 10(b) of the  Securities  Exchange Act of 1934 and
Rule 10(b)(5) promulgated  thereunder and made negligent  misrepresentations  in
connection  with  the  Company's  January  1992  secondary  stock  offering  and
otherwise  during the period November 19, 1990 through April 28, 1993. They seek
unspecified compensatory, punitive and exemplary damages. In September 1994, the
District  Court granted the  Company's  motion to dismiss on the ground that the
action was time barred. Plaintiffs appealed, and in 1995 the United States Court
of  Appeals  for the 7th  Circuit  held that the  lower  Court's  dismissal  was
premature and reversed the granting of the motion to dismiss.

In November  1995,  the Company  answered the complaints and denied the material
allegations thereof and asserted  affirmative  defenses,  including among others
that the Company did not commit  securities fraud, that the Company did not make


                                    17 of 48
<PAGE>
                              Medco Research, Inc.


any untrue representations,  that the Company made adequate disclosure about the
ADENOSCAN  NDA and that the  complaints  were not filed  timely by reason of the
applicable statute of limitations.

On February 20, 1996,  defendants  moved for summary  judgment on the basis that
Plaintiffs'  claims  are  barred  by the  statute  of  limitations  and,  in the
alternative,  assuming plaintiffs'  allegations are true, any misrepresentations
by  defendants  caused no losses to the  plaintiffs.  On May 9, 1996 the  United
States  District  Court,  Northern  District  of  Illinois,  granted the summary
judgment  motion of the Company and the other  defendants.  The Court  concluded
that the plaintiffs'  federal securities fraud claims were barred by the statute
of limitations.  Plaintiffs  have appealed,  and on February 20, 1997 the appeal
was argued  before the United  States Court of Appeals for the 7th Circuit.  The
parties are awaiting the Court's decision.

Arbitration of ATP License Agreement

In November 1996, Dr. Eliezer Rapaport,  the licensor of the Company's potential
adenosine  triphosphate  ("ATP")  drug,  commenced  an  arbitration  before  the
American Arbitration  Association of his claim that the Company had breached its
May 20,  1991  license  agreement  by  failing to devote  reasonable  efforts in
preparing and filing  within three years of FDA approval of its  Investigational
New Drug  application,  that is, by May 8, 1995, a New Drug Application  ("NDA")
for the use of ATP in the  treatment  of at  least  one  type of  human  cancer.
(Arbitration  is the  binding  dispute  resolution  method  provided  for in the
agreement.) The licensor is seeking the return of all licensed ATP patent rights
for the Company's  alleged breach of contract and failure to return such rights.
He also is seeking an unspecified  amount of punitive damages and $44 million in
compensatory  damages. He has computed such compensatory damages on the basis of
"total  worldwide  billings of an  approved  ATP  medication  for  treatment  of
cancer...".

In  discussions  with  Dr.  Rapaport  held as  early as May  1995,  the  Company
continuously maintained, and it currently believes, that it has not breached the
agreement.  Data  from the  Company's  Phase II  clinical  trials  indicate  ATP
demonstrated  no tumor  response,  as defined in the protocol,  in patients with
non-small  cell lung  cancer,  and the  Company so advised  its  licensor.  (The
Company  believes  that  such  responses  are  the  benchmark  accepted  in  the
pharmaceutical  industry  for  filing  an  NDA  for a  cancer  treatment  drug.)
Therefore,  the Company  believes such damage claim,  which is based on ATP as a
cancer treatment,  is not only extremely speculative but also is unfounded.  The
Company  believes Dr.  Rapaport has incurred no damages from the Company's  drug
development  activities.  The Company is vigorously defending itself against the
allegations of Dr.  Rapaport,  which the Company believes are without any merit.
The parties are engaged in document  discovery,  and the abitration is scheduled
to commence in May 1997.

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

None.

                                     PART II

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

The Company's  Common Stock is traded on the American  Stock  Exchange under the
symbol MRE. The following  table sets forth the high and low sales prices of the
Company's  Common Stock on the American  Stock  Exchange  during the  applicable
periods.




                                    18 of 48
<PAGE>
                              Medco Research, Inc.


                      Quarter Ended                  High            Low
                      -------------                  ----            ---

Calendar 1996:

                    March 31, 1996                  $12 1/8         $ 9
                    June 30,1996                     11 1/2           8 7/8
                    September 30, 1996               10 1/4           8
                    December 31, 1996                11 5/8           8 3/4


Calendar 1995:

                    March 31, 1995                  $14 5/8        $11 1/8
                    June 30, 1995                    15 5/8         11 7/8
                    September 30, 1995               15 1/8         11 3/4
                    December 31, 1995                12 3/4          9 1/2

The Company had 299 owners of record and in excess of 4,878 beneficial owners of
its Common  Stock as of March 7, 1997,  based upon  information  provided by the
Company's transfer agent.


DIVIDENDS

The Company has not paid any cash  dividends  since its  inception and presently
anticipates  that all earnings,  if any, will be retained for development of the
Company's  business  and that no cash  dividends  on its  Common  Stock  will be
declared in the foreseeable future. Any future cash dividends will be subject to
the discretion of the Company's  Board of Directors and will depend upon,  among
other things,  future  earnings,  the  operating and financial  condition of the
Company, its capital requirements and general business conditions.



ITEM 6.  SELECTED FINANCIAL DATA

The following selected  consolidated  financial data for the five years has been
derived  from the audited  financial  statements  of the  Company.  The selected
consolidated financial data for the years ended December 31, 1996, 1995 and 1994
should be read in conjunction with the consolidated financial statements and the
notes  thereto,  and other  financial  information  included  elsewhere  in this
report.



Summary Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
<S> <C>
                                                                                                    Year Ended
OPERATIONS                                         Years Ended December 31,                         August 31,
                               ------------------------------------------------------------------ ---------------
                                    1996             1995             1994            1993             1992
Revenue                            $15,824,073     $ 13,007,734     $10,688,619       $9,345,256       $6,078,711
Costs and Expenses                  11,502,428       16,540,176      15,103,087       12,903,575        5,683,208
Net Income (Loss)                    4,321,645       (3,532,442)     (4,414,468)      (3,558,319)         395,503
Net Income (Loss) per
  Common Share                             .40             (.32)           (.40)            (.32)             .04
Weighted Average Number
  of Shares Outstanding             10,917,920       11,023,921      11,144,938       11,182,376       10,655,039
Cash Dividends Declared
  per Common Share                           -                -               -                -                -





                                    19 of 48
<PAGE>
                              Medco Research, Inc.


Summary Consolidated Balance Sheet Data:
<CAPTION>

                                                         December 31,                                August 31,
                               ------------------------------------------------------------------ -----------------
                                    1996             1995             1994            1993             1992
Working Capital                    $18,372,970      $27,734,612     $24,883,199      $13,089,253      $21,791,436
Total Assets                        42,628,404       43,121,656      44,680,299       49,298,432       49,663,388
Stockholders' Equity                36,499,005       35,099,683      38,901,572       45,577,377       48,643,948
Accumulated (Deficit)              (11,393,947)     (15,715,592)    (12,183,150)      (7,768,682)      (4,231,126)
Net Tangible Book Value
  Per Share                               3.40             3.19            3.53             4.07             4.37
</TABLE>

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

OVERVIEW

For calendar 1996,  adenosine royalties  (ADENOCARD and ADENOSCAN) increased 38%
and  operating  expenses  decreased  29%  which  resulted  in a  net  income  of
$4,321,645  for 1996, or $0.40 per share,  compared to a net loss of $3,532,442,
or $0.32 per share, for 1995.

In January  1996,  the Company  acquired  Tc99m-GLUCARATE,  a nuclear "hot spot"
imaging agent for the early and rapid diagnosis of acute myocardial  infarction.
In April 1996,  the Company filed a New Drug  Application  for its novel imaging
agent VIASCINT  (I123-iodophenylpentadecanoic  acid) with the U.S. Food and Drug
Administration.  In May 1996, the Company signed a Joint  Development  Agreement
with Fujisawa to continue the development of adenosine as a cardioprotectant  in
the  settings of  coronary  artery  bypass  graft  surgery and acute  myocardial
infarction. In July 1996, the Company filed a New Drug Application for BIDIL, an
oral  combination  formulation  of  hydralazine   hydrochloride  and  isosorbide
dinitrate, with the U.S. Food and Drug Administration. The Company announced the
hiring of two senior executives,  Glenn C. Andrews,  as Vice President,  Finance
and Administration,  and Chief Financial Officer,  and Don Kirksey,  Ph.D., Vice
President of Licensing and Business Development, who combined have over 25 years
of  experience  in  the  pharmaceutical  industry.  On  February  27,  1997  the
Cardio-Renal  Advisory  Committee  ("Committee")  of the FDA voted 9 to 3 not to
recommend  approval of BIDIL for  treatment of  congestive  heart  failure.  The
Company currently has not received a written response from the Committee and the
FDA regarding their specific  concerns for BIDIL.  The Company's plans for BIDIL
will depend upon the response  from the  Committee  and the FDA and whether it's
surmountable at a reasonable investment by the Company.

RESULTS OF OPERATIONS

The  accompanying   consolidated   financial  statements  and  certain  selected
financial  data have been  presented for the calendar  years ended  December 31,
1996,  1995 and 1994. The Company changed its  presentation of the  Consolidated
Statements of Operations  to reflect  gross margin  related to royalty  revenues
followed by operating expenses and other income (expense).

Calendar Year 1996 Compared to Calendar Year 1995

Net Revenues.  The Company's 1996 royalty  revenue  increased from $9,770,124 to
$13,453,958,  an increase of 38%, due to quarter-to-quarter  increases since its


                                    20 of 48
<PAGE>
                              Medco Research, Inc.


July 31, 1995 launch in unit sales of ADENOSCAN by Fujisawa, the Company's North
American licensee.  Fujisawa is responsible for substantially all of the royalty
revenue to the Company.

Gross Margin.  The Company's 1996 gross margin from adenosine revenues increased
from $5,814,573 to $10,880,081, an increase of 87% due to the continued shift in
the  product  sales mix to  ADENOSCAN,  a drug for which  the  Company  owns the
underlying  patent and therefore pays no third party royalty.  Royalty  expense,
which is payable to the University of Virginia  Alumni Patents  Foundation  from
whom the Company acquired exclusive rights to ADENOCARD, and represents one-half
of royalty  revenue earned by the Company from ADENOCARD  sales,  decreased from
$3,955,551 to $2,573,877, a decrease of 35%.

Operating  Expenses.  Total  operating  expenses  decreased from  $12,484,625 to
$8,841,551,  a decrease of 29% due to a  substantial  decrease  in research  and
development  expenditures  for VIASCINT and BIDIL and a significant  decrease in
general and administrative expenditures for legal services.

Research and  development  costs  decreased  from  $8,535,187 to  $5,839,278,  a
decrease of 32%, and returned to  historical  levels.  Research and  development
expenditures  were higher during 1995  principally due to the Company's  pivotal
trial work  associated  with  VIASCINT  and BIDIL,  for which NDAs were filed in
1996. 1996 expenditures  reflect activities  associated with a product portfolio
in earlier stages of development,  including joint  development with Fujisawa of
adenosine for cardioprotection.

General and administrative  expenses decreased from $3,949,438 to $3,002,273,  a
decrease of 24%.  This  improvement  in general and  administrative  expenses is
mainly  attributed  to lower legal  expenses  during 1996 related to the pending
class action litigation.

Other Income (Expense). Interest income decreased from $2,237,610 to $2,020,115,
a decrease  of 10%.  Investment  income was lower in 1996 mainly due to slightly
higher yields and higher  investment  balances in 1995.  Other income  decreased
from  $1,000,000  to $350,000,  a decrease of 65%.  This  decrease is related to
non-royalty  receipts  under  licensing  agreements,  such  as  license  fees or
milestone payments,  and the timing in which these receipts can be recognized as
revenues.  Such receipts are not  recognized as revenues prior to the completion
of the related  milestones  and must be refunded  in part or  completely  if the
related milestones are not met.

Net Income (Loss) Per Share. Income/loss per share improved from a loss of $0.32
per  share in 1995 to income  of $0.40  per  share in 1996 on  weighted  average
common  shares  and common  share  equivalents  outstanding  of  11,023,921  and
10,917,920,  respectively.  The  income/loss  per share reflects a net operating
loss of $3,532,442 and income of $4,321,645 in 1995 and 1996, respectively.

Calendar Year 1995 Compared to Calendar Year 1994

Net Revenues.  The Company's 1995 royalty  revenue  increased from $8,460,180 to
$9,770,124,  an increase of 16%, primarily due to a 34% increase,  for the first
six month period compared to the year earlier period, in unit sales of ADENOCARD
related to  increased  demand  for the vial  formulation  and the July 31,  1995
launch of  ADENOSCAN,  which more than offset the decrease in  ADENOCARD  sales.
Although the Company had increased  royalty revenue from Sanofi's  foreign sales
of ADENOCOR and ADENOSCAN,  Fujisawa is responsible for substantially all of the
royalty revenue to the Company.




                                    21 of 48
<PAGE>
                              Medco Research, Inc.


Gross Margin.  The Company's 1995 gross margin from adenosine revenues increased
from $4,230,092 to $5,814,573,  an increase of 37% due to a decline in ADENOCARD
sales, a change in the product sales mix, and a  corresponding  reduction in the
associated  royalty  expense.  Royalty  expense  represents  one-half of royalty
revenue  earned  by the  Company  from  ADENOCARD  sales and is  payable  to the
University of Virginia Alumni Patents  Foundation from whom the Company acquired
exclusive  rights to ADENOCARD.  It decreased from  $4,230,088 to $3,955,551,  a
decrease of 7%.

Operating  Expenses.  Total  operating  expenses  increased from  $10,872,999 to
$12,484,625,  an increase of 15%, due to a substantial  increase in research and
development costs.

Research and  development  costs  increased from  $5,844,014 to  $8,535,187,  an
increase of 46%. This  increase  largely  reflected the  completion of a pivotal
bioequivalence study and manufacturing scale-up for BIDIL, the completion of two
pivotal Phase III clinical trials and data analysis for VIASCINT,  and the entry
into three multicenter Phase II clinical trials for MEDR-640.

General and  administrative  expenses  decreased  from  $4,064,707 to $3,949,438
primarily due to a substantial  decrease in legal  expenses  offset  somewhat by
increases in investor relations and accounting services expenses.

Other Income  (Expense).  The Company  substantially  satisfied  preclinical and
toxicology  accomplishments  related to  adenosine  and  accordingly  recognized
$1,000,000  in  revenue  from  the  licensee.  Interest  income  increased  from
$2,235,127 to $2,237,610.

Net Loss Per  Share.  Loss per share  decreased  from $0.40 per share in 1994 to
$0.32 per share in 1995 on  weighted  average  common  shares and  common  share
equivalents outstanding of 11,144,938 and 11,023,921, respectively. The loss per
share  reflects a net operating  loss of $4,414,468  and  $3,532,442 in 1994 and
1995, respectively.

FINANCIAL CONDITION

As of  December  31,  1996,  the  Company  had  total  cash and  investments  of
$35,124,848 comprised of $9,106,695 of cash and cash equivalents and $26,018,153
of investments in U.S.  Treasury  Notes and debt  securities of various  federal
governmental agencies. The Company's working capital as of December 31, 1996 was
$18,372,970,  compared to  $27,734,612  as of December 31, 1995. The decrease in
working  capital was primarily due to a shift from current  investments  held to
maturity to non-current investments held to maturity in 1996.

Included in  liabilities at December 31, 1996 is an accrued  liability  (current
and  non-current  portion)  of  $2.5  million  relating  to the  balance  of the
Company's  guaranteed royalty obligation to Abbott Laboratories  pursuant to the
terms of the Company's  settlement of a litigation relating to the manufacturing
and  marketing  rights  to  ADENOSCAN.  See  Note 6 to the  Company's  Financial
Statements included in Item 8 below.  Included in assets at December 31, 1996 is
a deferred asset (current and non-current  portion) of $1.7 million  relating to
royalties to be received by the Company from Fujisawa and paid by the Company to
Abbott.  Of the 29% of ADENOSCAN  net sales  received as royalty  revenue by the
Company,  4% will be applied to the deferred asset and 25% will be recognized as
royalty  revenue.  At such time,  if any,  during the first five years after the
approval of the ADENOSCAN NDA that the deferred  asset is fully  recovered,  the
Company thereafter will recognize royalty revenue of 29% through the end of the


                                    22 of 48
<PAGE>
                              Medco Research, Inc.


five year period.  The Company will write-off any portion of this deferred asset
at such time,  if any,  in which it becomes  probable  that the  incremental  4%
royalty revenue will be  insufficient  to recover the remaining  balance of this
deferred asset.

ADENOSCAN  is  currently  marketed in the United  States,  Canada and the United
Kingdom.  ADENOCARD is currently  marketed in the United States and Canada,  the
United Kingdom plus Ireland,  Switzerland,  Quatar, Australia,  Greece, Austria,
Kuwait,  Belgium,  Saudi  Arabia and  Germany.  The  Company  will not  generate
royalties  from the sale of its products until its licensees  receive  marketing
clearance from the FDA and appropriate governmental agencies in other countries.
The Company cannot predict the timing of any potential  marketing  clearance nor
can  assurances  be given that the FDA or such  agencies will approve any of the
Company's  products.   For  the  short  term  the  Company  expects  to  receive
substantially  all of its royalty  revenues from sales of its  products,  in the
U.S. by Fujisawa.

The FASB has issued  Statement of Financial  Accounting  Standard No. 123 ("SFAS
123"),   "Accounting  for  Stock-Based   Compensation,"  which  applies  to  all
transactions  in which an entity  acquires  goods and services by issuing equity
instruments or by incurring  liabilities  where the payment amounts are based on
the entity's  common stock price,  except for  employee  stock  ownership  plans
(ESOPs).  The Statement covers  transactions with employees and nonemployees and
is applicable to both public and nonpublic entities.  A new method of accounting
for stock-based  compensation  arrangements is established by the Statement. The
new method is a fair value based method  rather than the  intrinsic  value based
method  that is  contained  in APB Opinion No. 25  (Opinion  25).  However,  the
Statement  does not require an entity to adopt the new fair value  based  method
for  purposes  of  preparing  its basic  financial  statements  for  stock-based
compensation   arrangements  with  employees.   The  Company  has  reviewed  the
provisions  of SFAS 123 and will not  adopt  the new fair  value  based  method;
rather, it will continue to use the Opinion 25 method.  However, the Company has
provided  disclosure of pro forma  effects on net income  regarding the new fair
value based method.  See Note 8 of the Financial  Statements  included in Item 8
below.

IMPACT OF INFLATION

Although  it is  difficult  to  predict  the  impact of  inflation  on costs and
revenues of the Company in connection with the Company's  products,  the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products when marketed.

CAUTIONARY STATEMENT

The Company operates in a highly competitive  environment that involves a number
of  risks,  some of which  are  beyond  the  Company's  control.  The  following
statement highlights some of these risks.

Statements  contained  in  Management's  Discussion  and  Analysis of  Financial
Conditions  and  Results  of  Operations  which  are not  historical  facts  are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results  to  differ  materially  include,   among  others,  the  high  cost  and
uncertainty  of  the  research,   clinical  trials  and  other   development  of
pharmaceutical products; the unpredictability of the duration and results of the
U.S. Food and Drug  Administration's  review of New Drug Applications and/or the
review of other regulatory  agencies  worldwide;  the possible impairment of, or
inability to obtain,  intellectual  property rights;  intense  competition;  the


                                    23 of 48
<PAGE>
                              Medco Research, Inc.


uncertainty  of  obtaining,  and the Company's  dependence  on, third parties to
manufacture and sell its products;  results of pending or future  litigation and
other risk factors detailed in the Company's  Securities and Exchange Commission
filings.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following  consolidated  financial  statements of Medco  Research,  Inc. are
included in this report:
<TABLE>
<S> <C>
Page 25           Independent Auditors' Report

Page 26           Consolidated Balance Sheets--December 31, 1996 and 1995

Page 27           Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994

Page 28           Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995
                  and 1994

Page 29           Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994

Page 31           Notes to Consolidated Financial Statements
</TABLE>



                                    24 of 48
<PAGE>
                              Medco Research, Inc.



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Medco Research, Inc.:

We have audited the accompanying  consolidated balance sheets of Medco Research,
Inc.  and  subsidiary  as of  December  31,  1996  and  1995,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the years in the  three-year  period  ended  December  31,  1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements 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 financial position of Medco Research, Inc.
and  subsidiary  as of  December  31,  1996 and 1995,  and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.

As discussed in Note 11 to the consolidated financial statements, the Company is
party to certain claims and  litigation.  The ultimate  outcome of these matters
cannot  presently be determined.  Accordingly,  no provisions for liability,  if
any, that may result from the resolution of such matters have been recognized in
the accompanying consolidated financial statements.

As discussed in Note 1, the Company  adopted  Statement of Financial  Accounting
Standard  No.  115  "Accounting  for  Certain  Investments  in Debt  and  Equity
Securities", on January 1, 1994.







                                          KPMG PEAT MARWICK LLP



Raleigh, North Carolina
January 28, 1997



                                    25 of 48
<PAGE>
                              Medco Research, Inc.


<TABLE>

                                               Consolidated Balance Sheets
<CAPTION>
<S> <C>
                                                                                                     December 31,
                                                                               ---------------------------------------------
                                                                                             1996                  1995
                                                                               ---------------------------------------------
Assets
Current assets:
   Cash and cash equivalents                                                               $9,106,695            $4,304,774
   Investments (Note 2)
     Securities available for sale                                                                  -             5,664,669
     Securities held to maturity                                                            6,439,219            17,571,488
   Accounts and notes receivable:
     Royalties                                                                              3,794,264             2,203,663
     Other                                                                                  2,227,361             1,531,227
   Accrued interest income                                                                    376,864               252,220
   Prepaid expenses                                                                           292,892               327,319
                                                                               ---------------------------------------------
Total current assets                                                                       22,237,295            31,855,360
Investments held to maturity (Note 2)                                                      19,578,934             9,004,270
Deferred asset (Note 6)                                                                       124,212             1,851,915
Property and equipment, at cost, net of accumulated 
  depreciation (Note 3)                                                                       307,521               329,669
Patent,  trademark and distribution  rights, at cost, 
  net of accumulated  amortization of $62,268 (1996)
  and $60,865 (1995) (Note 5)                                                                 380,442                80,442
                                                                               ---------------------------------------------
Total assets                                                                              $42,628,404           $43,121,656
                                                                               =============================================
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable and accrued expenses                                                    2,684,768            $2,811,427
   Accrued royalties (Note 5)                                                               1,179,557             1,309,321
                                                                               ---------------------------------------------
Total current liabilities                                                                   3,864,325             4,120,748
   Deferred revenue (Note 7)                                                                  548,202             1,300,000
   Deferred royalty payment (Note 6)                                                        1,716,872             2,601,225
Stockholders' equity (Note 8):
   Common stock, no par value,  authorized  40,000,000 shares;
    shares issued of 11,155,832 at December 31, 1996, and 1995;
    shares outstanding of 10,740,032 and 11,013,732 at 
    December 31, 1996 and 1995, respectively                                               52,216,010            52,216,010
   Unrealized gain (loss) on investment securities available 
    for sale (Note 2)                                                                               -               133,972
   Accumulated deficit                                                                    (11,393,947)          (15,715,592)
   Cost of stock held in  treasury,  415,800 and 142,100  
    shares at December  31, 1996 and 1995, respectively                                    (4,323,058)           (1,534,707)
                                                                               ---------------------------------------------
Total stockholders' equity                                                                 36,499,005            35,099,683
                                                                               ---------------------------------------------
Commitments and contingencies (Notes 5, 6  and 11)
                                                                               ---------------------------------------------
Total liabilities and stockholders' equity                                                $42,628,404           $43,121,656
                                                                               =============================================
         See accompanying notes to consolidated financial statements.
</TABLE>





                                    26 of 48
<PAGE>
                              Medco Research, Inc.

<TABLE>


                                          Consolidated Statements of Operations
<CAPTION>
<S> <C>
                                                                                  Years Ended December 31,
                                                                   ------------------------------------------------------
                                                                         1996               1995              1994
                                                                   ------------------------------------------------------

         Net Revenues:
            Royalty revenue (Note 5)                                     $13,453,958        $9,770,124       $8,460,180
            Royalty expense (Note 5)                                       2,573,877         3,955,551        4,230,088
                                                                   ------------------------------------------------------
            Gross Margin                                                  10,880,081         5,814,573        4,230,092
                                                                   ------------------------------------------------------

         Operating Expenses:
            Research and development costs                                 5,839,278         8,535,187        5,844,014
            General and administrative expenses                            3,002,273         3,949,438        4,064,707
            Write down of investment security (Note 2)                             -                 -          964,278
                                                                   ------------------------------------------------------
                                                                           8,841,551        12,484,625       10,872,999
                                                                   ------------------------------------------------------

         Other Income (Expense)
            Interest income                                                2,020,115         2,237,610        2,235,127
            Other income (expense) (Note 7)                                  350,000         1,000,000           (6,688)
                                                                   ------------------------------------------------------
                                                                           2,370,115         3,237,610        2,228,439
                                                                   ------------------------------------------------------

         Income (loss) before income taxes                                 4,408,645        (3,432,442)      (4,414,468)

         Provision for income taxes (Note 9)                                  87,000           100,000                -
                                                                   ------------------------------------------------------

         Net income (loss)                                                 4,321,645        (3,532,442)      (4,414,468)
                                                                   ======================================================

         Net income (loss) per share                                           $0.40            $(0.32)          $(0.40)
                                                                   ======================================================

         Weighted  average  number of  common  shares  and  common
            share equivalents outstanding                                  10,917,920       11,023,921       11,144,938
                                                                   ======================================================
</TABLE>

                  See accompanying notes to consolidated financial statements.





                                    27 of 48
<PAGE>
                              Medco Research, Inc.

<TABLE>
<S> <C>


                                  Consolidated Statements of Stockholders' Equity
<CAPTION>

                              Common stock
                        ---------------------------
                                                     Unrealized
                                                   gain (loss) on
                                                     investment
                                                     securities
                         Number of                  available for     Accumulated     Cost of stock held
                           shares      Amount           sale            deficit          in treasury            Total
                        ----------------------------------------------------------------------------------------------------

   Balance at             11,184,672    $53,346,059   $          -      $(7,768,682)    $              -        $45,577,377
     December 31,                                      
     1993
   Stock options
     exercised                85,000        486,563              -                -                    -            486,563
   Stock
     repurchased
     and retired in
     connection
     with exercise
     of stock
     options                 (29,931)     (356,563)               -                -                   -          (356,563)
   Compensation
     expense
     related to     
     stock options                 -       390,512               -                -                   -            390,512
   Stock
     repurchased
     and retired            (218,794)   (2,490,537)              -                -                   -         (2,490,537)
   Unrealized
     (loss) on
     investment
     securities
     available for
     sale                          -              -      (291,312)               -                    -            (291,312)
   Net loss                        -              -                     (4,414,468)                   -          (4,414,468)
                        ----------------------------------------------------------------------------------------------------
Balance at December
   31, 1994               11,020,947    $51,376,034     $(291,312)     $(12,183,150)                   -        $38,901,572
   Stock options
     exercised               148,585        953,757             -                 -                    -            953,757
   Stock held in 
     treasury               (142,100)            -              -                 -           (1,534,707)        (1,534,707)
   Compensation
     expense
     related to  
     stock options                 -        44,568              -                 -                   -             44,568
   Stock
     repurchased  
     and retired             (13,700)     (158,349)             -                 -                   -           (158,349)
   Change in the
     value of
     available for
     sale
     investment
     securities                    -             -        425,284                 -                   -            425,284
   Net loss                        -              -             -        (3,532,442)                  -         (3,532,442)
                       -----------------------------------------------------------------------------------------------------
Balance at
   December 31,    
   1995                   11,013,732    $52,216,010      $133,972      $(15,715,592)         $(1,534,707)       $35,099,683
   Stock held in
     treasury               (273,700)             -             -                 -           (2,788,351)        (2,788,351)
   Change in the
     value of
     available for
     sale
     investment
     securities                    -              -      (133,972)                 -                   -           (133,972)
Net income                         -              -             -          4,321,645                   -          4,321,645
                       =====================================================================================================
Balance at
   December 31,
   1996                   10,740,032    $52,216,010 $           -       $(11,393,947)        $(4,323,058)       $36,499,005
                       =====================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                    28 of 48
<PAGE>
                              Medco Research, Inc.

<TABLE>



                                          Consolidated Statements of Cash Flows
<CAPTION>
<S> <C>


                                                                                 Years Ended December 31,
                                                                -----------------------------------------------------------
                                                                          1996                1995                1994
                                                                -----------------------------------------------------------

Operating activities
Net income (loss)                                                        $4,321,645         $(3,532,442)       $(4,414,468)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
     Depreciation of property and equipment                                 143,934             127,213             94,935
     Amortization of patent, trademark and distribution
       rights                                                                51,403               9,085              9,636
     Loss (gain) on investments held to maturity                                  -                 (45)            60,095
     Gain on investments available for sale                                 (49,258)             (7,302)                 -
     Write down of investment security                                            -                   -            964,278
     Net amortization of investment discount                               (260,912)           (686,023)          (182,603)
     Loss on property and equipment                                               -                   -             19,672
     Settlement payment from Fujisawa                                             -           2,000,000                  -
     Settlement payment to Abbott                                                 -          (2,000,000)                 -
     Compensation expense related to stock options                                -              44,568            390,512
     Changes in operating assets and liabilities:
         Accounts receivable                                             (2,286,735)            241,480           (290,587)
         Accrued interest income                                           (124,644)            152,893             36,270
         Prepaid expenses                                                    34,427              12,558           (112,728)
         Deferred asset                                                   1,727,703             298,085                  -
         Accounts payable and accrued expenses                             (126,659)            626,806            777,528
         Accrued royalty expense                                           (129,764)           (934,784)           330,144
         Deferred  revenue                                                 (751,798)           (650,000)           950,000
         Deferred royalty payment                                          (884,353)           (148,775)                 -
                                                                -----------------------------------------------------------
Net cash provided by (used in) operating activities                       1,664,989          (4,446,683)        (1,367,316)
                                                                -----------------------------------------------------------
</TABLE>




                                    29 of 48
<PAGE>
                              Medco Research, Inc.

<TABLE>


                                    Consolidated Statements of Cash Flows (continued)
<CAPTION>
<S> <C>
                                                                                    Years Ended December 31,
                                                                 ---------------------------------------------------------------
                                                                        1996                  1995                  1994
                                                                 ---------------------------------------------------------------

Investing activities
Purchase of securities held to maturity                                 $(45,631,850)         $(99,932,331)       $(39,738,961)
Purchase of securities available for sale                                    (76,012)             (366,275)         (5,306,031)
Maturity of securities held to maturity                                   46,450,367           104,140,647          36,000,000
Principal repayments on securities held to maturity                                -             1,424,924           1,292,547
Proceeds from sale of securities available for sale                        5,655,967             3,312,378                   -
Purchases of property and equipment                                         (121,786)             (141,423)           (123,619)
Proceeds from sale of property and equipment                                       -                     -                 760
Purchases of patent, trademark and distribution rights                      (351,403)                    -                   -
                                                                 ---------------------------------------------------------------
Net cash provided by (used in) investing activities                        5,925,283             8,437,920          (7,875,304)
                                                                 ---------------------------------------------------------------

Financing activities
Purchase of stock for retirement                                       $           -          $   (158,349)        $(2,490,537)
Net proceeds from exercise of stock options                                        -               953,757             130,000
Purchase of stock held in treasury                                        (2,788,351)           (1,534,707)                  -
                                                                 ---------------------------------------------------------------
Net cash used in financing activities                                     (2,788,351)             (739,299)         (2,360,537)
                                                                 ---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                           4,801,921             3,251,938         (11,603,157)
Cash and cash equivalents at beginning of year                             4,304,774             1,052,836          12,655,993
                                                                 --------------------------------------------------------------
Cash and cash equivalents at end of year                                 $ 9,106,695           $ 4,304,774         $ 1,052,836
                                                                 ===============================================================
</TABLE>


             Supplemental schedule of Non-cash Financing Activities
See  Note 8 for a  discussion  of  stock  option  exercises  involving  non-cash
transactions.

See accompanying notes to consolidated financial statements.





                                    30 of 48
<PAGE>
                              Medco Research, Inc.



                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

1.       Summary of Significant Accounting Policies

Company Operations

Medco Research, Inc. is an emerging pharmaceutical company engaged in the global
commercialization of cardiovascular medicines and adenosine-based products.

The  Company   in-licenses  late  stage  compounds  from  researchers  or  other
pharmaceutical  companies and takes these products through clinical development.
The process includes the design and implementation of clinical trials as well as
data submission and  coordination  with regulatory  agencies to obtain marketing
approval.  The Company then  out-licenses  these  compounds  to  companies  with
appropriate  facilities and sales teams to  manufacture  and market the licensed
products.

Principles of Consolidation and Basis of Preparation

The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned   subsidiary.   All  significant   intercompany  balances  and
transactions  have been eliminated.  The preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.

Fair Value of Financial Instruments

Statement of Financial Accounting Standard No. 107,  "Disclosures about the Fair
Value of Financial Instruments" (SFAS 107) requires the disclosure of fair value
information  about  financial  instruments,  whether  or not  recognized  on the
balance sheet, for which it is practicable to estimate the value. In cases where
quoted market prices are not readily available,  fair values are based on quoted
market prices of comparable  instruments.  SFAS 107 excludes  certain  financial
instruments from its disclosure  requirements.  Accordingly,  the aggregate fair
value amounts are not intended to represent the underlying value of the Company.
The carrying amount of cash and  equivalents,  accounts  receivable and payable,
and accrued  royalties  approximates fair value because of the short maturity of
those  instruments.  The net  aggregate  fair value based on a net present value
calculation of the deferred asset and deferred  royalty payment is approximately
$100,000  which  the  Company  considers  to be  immaterial.  The fair  value of
investments was based primarily on quoted market prices. If quoted market prices
are not  readily  available,  fair values are based on quoted  market  prices of
comparable instruments.





                                    31 of 48
<PAGE>
                              Medco Research, Inc.

1.       Summary of Significant Accounting Policies (continued)

Investments

The Company's  investments  include  primarily  investments  in marketable  debt
securities  which are  recorded at cost,  net of  amortization  of premiums  and
discounts.  All premiums and/or  discounts are amortized over the remaining term
of the related  security  using the  straight-line  method which does not differ
significantly  from the  level-yield  method.  The Company  adopted SFAS No.115,
"Accounting for Certain Investments in Debt and Equity Securities" at January 1,
1994.  This statement  addresses the accounting and reporting for investments in
equity  securities  that  have  readily  determinable  fair  values  and for all
investments  in debt  securities.  These  investments  are  classified  in three
categories  and are  accounted  for as  follows:  (1) debt  securities  that the
Company  has the  positive  intent  and the  ability  to  hold to  maturity  are
classified  as  held-to-maturity  and  reported  at cost;  (2)  debt and  equity
securities that are bought and held  principally for the purpose of selling them
in the near term are  classified  as trading  securities  and  reported  at fair
value,  with  unrealized  gains and losses  included in  earnings;  (3) debt and
equity  securities  not  classified  as either  held-to-maturity  securities  or
trading securities are classified as available-for-sale  securities and reported
at fair value,  with  unrealized  gains and losses  excluded  from  earnings and
reported  as a separate  component  of equity.  The  Company  has no  securities
classified  as trading  securities.  Unrealized  gains or losses on  investments
available-for-sale are reported as a separate component of stockholders' equity.
The classification of investments is determined on the date of acquisition.  The
Company  reviews  its  investment  portfolio  as  deemed  necessary  and,  where
appropriate,    adjusts   individual   investments   for    other-than-temporary
impairments.

Property and Equipment

Property and equipment are stated at cost.  Depreciation  is computed  using the
straight-line method over five years.

Trademark and Distribution Rights

The cost of acquiring  trademark and  distribution  rights is amortized  over 15
years using the straight-line method. Periodically, these costs are reviewed and
adjusted  based on the estimated  future  financial  benefits of the  underlying
drug.

Patent Costs

The Company capitalizes certain costs,  principally  acquisition costs, incurred
in connection with the  application  for and  procurement of patents.  Costs are
capitalized  on a case by case basis  relating  to those  territories  where the
Company anticipates  receiving  significant future benefits from the patent, and
are  amortized  over  the life of the  patent  beginning  at the date of  grant.
Periodically,  these costs are reviewed and the  amortization  adjusted based on
the estimated future benefits remaining.

Concentration of Credit Risk

Statement  of Financial  Accounting  Standard  No. 105  requires  disclosure  of
information  about  financial  instruments  with   off-balance-sheet   risk  and
financial  instruments with concentrations of credit risk. Financial instruments
which subject the Company to concentrations  of credit risk consist  principally
of accounts receivable and investments.

                                    32 of 48
<PAGE>
                              Medco Research, Inc.


The Company  invests  its excess  cash  primarily  in U.S.  Government  and high
quality corporate debt securities (included in investments) and commercial paper
(cash  equivalents).  The commercial  paper securities are highly liquid and the
governmental  securities  typically  mature within one to three years  (although
there is an  established  secondary  market  for sales at any given  time).  The
majority of the accounts  receivable  balance  relates to one customer (See Note
5).  Based  on  the  nature  of  the  financial  instruments  and/or  historical
realization  of these  financial  instruments,  management  believes  they  bear
minimal risk.

Deferred Revenue

Revenues  derived  from license  agreements  are recorded as earned based on the
performance requirements of the related contract.

Research and Development

All research and development costs are expensed in the year incurred.

Income Taxes

The Company  accounts  for income  taxes under the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

Stock-Based Compensation

SFAS No. 123,  "Accounting for Stock-Based  Compensation",  permits  entities to
recognize as expense over the vesting  period the fair value of all  stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma  earnings per share  disclosures  for employee stock option
grants made in 1995 and future years as if the fair value based  method  defined
in SFAS No. 123 had been  applied.  The Company has elected to continue to apply
the  provisions  of APB  Opinion  No. 25 and  provide  the pro forma  disclosure
provisions of SFAS No. 123.

Earnings Per Share

Earnings  per share is  computed  using the  weighted  average  number of common
shares and dilutive common share equivalents (stock options)  outstanding during
the period.

                                    33 of 48
<PAGE>
                              Medco Research, Inc.


2.       Investments

The  aggregate  values of  investment  securities  at December 31, 1996 and 1995
along with  unrealized  gains and losses  determined on an  individual  security
basis are as follows:

<TABLE>
<CAPTION>
<S> <C>

                                                                     GROSS                  GROSS
                                                                  UNREALIZED             UNREALIZED              MARKET
                                                 COST                GAINS                 LOSSES                VALUE
                                           ----------------- ---------------------- ---------------------- -------------------
1996 Held to maturity
U.S. Government                                 $18,505,359                      -              $(58,309)         $18,447,050
Corporate Obligations                             7,512,794                      -               (24,900)           7,487,894
                                           ================= ====================== ====================== ===================
Total securities held to maturity               $26,018,153                      -              $(83,209)         $25,934,944
                                           ================= ====================== ====================== ===================

1995 Held to maturity
U.S. Government                                 $26,575,758                $31,977                     -          $26,607,735
                                           ================= ====================== ====================== ===================

1995 Available for sale
PIMCO                                             5,530,697                133,972                     -            5,664,669
                                           ================= ====================== ====================== ===================
</TABLE>

Net  realized  gains in 1996 were  $49,258  as a result of the sale of the Pimco
Fund.  Net  realized  gains in 1995  were  $7,302 as a result of the sale of the
Preferred  Dividend Fund.  Realized losses in 1994 were $60,095 due to the early
call of a  held-to-maturity  investment  by the  issuer and  $964,278  due to an
other-than-temporary impairment on a non-derivative investment.

The following  represents the contractual  maturities of investments  held as of
December 31, 1996.



                     Less than 1 year                      $  6,439,219
                     1 to 5 years                          $ 19,578,934
                                                           ============
                     Total                                 $ 26,018,153
                                                           ============



3.       Property and Equipment

                                              1996             1995
                                      -----------------------------------
Property and equipment                       $785,269          $663,482
Accumulated depreciation                     (477,748)         (333,813)
                                      -----------------------------------
                                             $307,521          $329,669
                                      ===================================





                                    34 of 48
<PAGE>
                              Medco Research, Inc.



4.       Leases

The Company  leases office space under an operating  lease which expires in July
1998. Lease expense approximated $206,100,  $203,700 and $203,700, in 1996, 1995
and 1994.

Future minimum lease payments under this lease agreement are:

                  Year ending December 31,


                          1997                        $210,817
                          1998                         122,976
                                                       -------
                                                      $333,793
                                                      ========

5.       Patent, Trademark and Distribution Rights

The Company is engaged in the development of new  prescription  drugs in pursuit
of obtaining  governmental  marketing  approvals in the United  States and other
countries.  The Company acquires from third parties  exclusive rights to develop
and market  various  drugs,  including  related  patents and  trademarks  (where
applicable),  and  develops  drugs  and seeks  patents  and  trademarks  for its
products  on a  proprietary  basis.  The costs of  acquiring  rights  from third
parties and major costs associated with the perfection and protection of patents
and  trademarks  are  capitalized  by the  Company.  Agreements  under which the
Company acquires such rights from third parties generally require the Company to
finance  the costs of  clinical  trials and the filing of New Drug  Applications
("NDAs")  with the United  States Food and Drug  Administration  ("FDA") and, in
some instances,  comparable applications with appropriate regulatory agencies in
other countries. The Company is also typically required to pay royalties to such
third parties based on sales of the applicable  approved drugs. The Company also
may be obligated to pay to third parties advance royalties or license fees, some
of which may be based on the attainment of specified milestones.

Under present agreements with third parties,  the Company has obligations to pay
a maximum of $375,000 in nonrefundable  advances and $1,550,000 in nonrefundable
payments  generally upon the completion of development  milestones and the FDA's
approvals of the applicable NDAs.

In October 1989,  the Company  received FDA approval to market  ADENOCARD in the
United  States.  The Company  entered into  agreements  with  Fujisawa USA, Inc.
(Fujisawa) for the  manufacture  and marketing of ADENOCARD in the United States
and Canada and is receiving and will receive  royalties from Fujisawa based on a
percentage  of  ADENOCARD  net  sales.  The  Company  has also  entered  into an
agreement with Sanofi Pharma (France) (Sanofi) for the manufacture and marketing
of  ADENOCARD  in all  countries  other than the United  States and  Canada.  In
September  1991,  Sanofi  received  marketing  approval  (under  the trade  name
ADENOCOR) in the United Kingdom and, in May 1992,  received  marketing  approval
(under the trade name  KRENOSIN) in  Switzerland.  The Company is receiving  and
will  receive  royalties  from Sanofi  based on a  percentage  of  ADENOCOR  and
KRENOSIN sales. One half of all royalties received from ADENOCARD,  ADENOCOR and
KRENOSIN sales are payable by the Company to the  University of Virginia  Alumni
Patents   Foundation  from  whom  the  Company  acquired  rights  to  ADENOCARD.
Substantially  all royalty  income and  expenses  in the two-year  period  ended
December  31, 1995  resulted  from  Fujisawa  sales of  ADENOCARD  in the United
States.

                                    35 of 48
<PAGE>
                              Medco Research, Inc.


In 1988,  the Company  entered into a  Development  and License  Agreement  (the
"Agreement")  with  Fujisawa  that provides for Fujisawa to fund one-half of the
development  costs (as incurred) of  ADENOSCAN,  and other  products.  Under the
agreement,  Fujisawa will have manufacturing and marketing rights to these drugs
in the United  States  and Canada  upon the  Company's  receipt of the  required
regulatory approvals, and will pay the Company royalties based on sales of these
drugs.  Royalties  received by the Company from sales of these drugs  outside of
the United States and Canada will be shared equally with Fujisawa.  In May 1995,
the FDA granted marketing clearance for ADENOSCAN in the United States. Pursuant
to the May  1995  agreement  with  Fujisawa  settling  the  litigation  over the
manufacturing  and  marketing of ADENOSCAN,  all  references to MEDR-640 in such
license  agreement were eliminated,  and in May 1996 the parties entered into an
agreement to jointly  develop  adenosine-based  products  having  indications as
cardioprotective agents, such as MEDR-640. Under that agreement Fujisawa granted
to the Company an exclusive  sublicense under a U.S. patent under which Fujisawa
is the exclusive  licensee.  Fujisawa has exclusive  manufacturing and marketing
rights in the U.S., Canada,  Mexico and other territories,  and it agreed to pay
the Company 25% of net sales within the territories. The companies share equally
all costs of development  and any royalties due to third parties.  In June 1995,
Sanofi  received  marketing  approval for ADENOSCAN in the United Kingdom and in
February  1997,  Sanofi  registered  ADENOSCAN  in 14  member  countries  of the
European  Community  through  the  mutual  recognition   procedure.   The  final
administrative  procedure involving the granting of a National Marketing License
authorizing  the sale of the product will be sought from the health  authorities
in each of the member countries.

6.       Deferred Asset and Royalty Payment

In May 1995, the litigation  pending between  Fujisawa USA, Inc.  (Fujisawa) and
the Company,  regarding the rights to  manufacture  and market  ADENOSCAN in the
United States and Canada,  was settled and the Company and Abbott  Laboratories,
Inc. (Abbott) terminated their manufacturing and marketing  agreements regarding
the  ADENOSCAN  drug and settled  Medco's  outstanding  obligations  thereunder.
Pursuant to the settlement agreement with Fujisawa,  the December 21, 1988 Joint
Development and License  Agreement between the parties remains in full force and
effect except as expressly amended and Fujisawa remains the Company's  exclusive
licensee to  manufacture  and market  ADENOSCAN in the United States and Canada.
Fujisawa  agreed to pay the  Company  within  fifteen  days after FDA  marketing
clearance of ADENOSCAN the sum of $2 million,  representing certain research and
development  expenses incurred by the Company,  and to pay the Company royalties
of 29 percent  of  ADENOSCAN  net sales in the United  States and Canada for the
first five years after the  commencement of commercial  sales in each territory.
Thereafter  Fujisawa would pay the Company  royalties of 25% of sales until June
10,  2007 at which  time  Fujisawa  would  have a paid-up  license  within  such
territories.

Fujisawa  also agreed to pay  royalties  to the Company in respect of periods of
more than  thirty  days in which it is unable to  fulfill  ADENOSCAN  orders for
reasons other than force majeure and other specified  events,  such royalties to
be at the then  prevailing  rate based on the average  daily sales of  ADENOSCAN
during the preceding  twelve months.  Fujisawa also agreed generally to maintain
an  inventory  of  at  least  six  months  of  ADENOSCAN  finished  product  and
work-in-process,  to be stored at  multiple  locations,  to provide  the Company
within one year with data necessary to qualify Fujisawa's Melrose Park, Illinois
plant  as an  alternate  ADENOSCAN  manufacturing  facility  and to use its best
efforts to identify  and provide  data to the Company to qualify with the FDA an
alternate  supplier of the adenosine raw material  necessary for the manufacture
of ADENOSCAN.  The parties also agreed as soon as  practicable  to enter into an
agreement to jointly  develop  adenosine-based  products  having  indications as
cardioprotective  agents, such as MEDR-640,  and for that purpose Fujisawa would
grant to the Company an exclusive  sublicense  under U.S. patent 4,880,783 under
which  Fujisawa  is  the  exclusive  licensee.  Fujisawa  would  have  exclusive


                                    36 of 48
<PAGE>
                              Medco Research, Inc.


manufacturing  and  marketing  rights  in the  U.S.,  Canada,  Mexico  and other
territories  to be  agreed  upon and it would pay the  Company  25% of net sales
within  the  territories.  The  companies  would  share  equally  all  costs  of
development and any royalties due to third parties.

The  Company  agreed to pay  Abbott a  royalty  of two  percent  of net sales of
ADENOSCAN for the first five years of commercial sales, up to a maximum of $5.35
million, of which $2 million was payable within fifteen days after FDA marketing
clearance of ADENOSCAN as an advance royalty  payment and the remainder  payable
based upon actual  sales of  ADENOSCAN.  The Company  also agreed that if at the
conclusion of the five-year period Abbott had not received an aggregate of $5.35
million,   including  the  $2  million  advance,  Medco  would  pay  Abbott  any
deficiency. Abbott relinquished all claims to royalty payments in excess of that
amount. Finally, the Company agreed to pay Abbott $330,560 for the reimbursement
of research and  development  and other  expenses  incurred in  connection  with
ADENOSCAN. The Company expensed $330,560 in the first quarter of 1995.

Included in  liabilities at December 31, 1996 is an accrued  liability  (current
and  non-current  portion)  of  $2.5  million  relating  to the  balance  of the
Company's  guaranteed  royalty  obligation  to  Abbott.  Included  in  assets at
December 31, 1996 is a deferred asset (current and non-current  portion) of $1.7
million  relating to royalties  to be received by the Company from  Fujisawa and
paid by the Company to Abbott. The Company receives a 29% royalty from ADENOSCAN
net  sales of which 4% will be  applied  to the  deferred  asset and 25% will be
recognized as royalty revenue. At such time, if any, during the first five years
that  the  deferred  asset is  fully  recovered,  the  Company  thereafter  will
recognize  royalty revenue of 29% through the end of the five-year  period.  The
Company will write off any portion of this deferred  asset at such time, if any,
in which it becomes  probable that the  incremental  4% royalty  revenue will be
insufficient to recover the remaining balance of this deferred asset.

7.       Deferred Revenue

Receipts related to various licensing  agreements are not recognized as revenues
prior to the  completion of the related  milestones and must be refunded in part
or  completely  if the  related  milestones  are not met.  In 1994,  the Company
entered into a Development and License  Agreement related to one of the drugs in
development which provided a gross licensing fee of $1,000,000  ($900,000 net of
foreign  taxes  paid) based upon the  satisfactory  preclinical  and  toxicology
accomplishments.  During 1995, the Company  substantially  satisfied preclinical
and toxicology  accomplishments  related to adenosine and accordingly recognized
$1,000,000  in revenue  from the  licensee  and  received  from the  licensee an
additional $300,000 licensing fee upon the NDA approval of ADENOSCAN.

During  1993,  the  Company   received   $1,000,000  from  Boehringer   Mannheim
Pharmaceutical  Company  ("BMPC")  upon the execution of a marketing and back-up
manufacturing  licensing  agreement  related  to  BIDIL.  The  Company  and BMPC
mutually  agreed  effective April 1, 1996 to terminate the November 1993 license
in which the Company granted to BMPC marketing and back-up  manufacturing rights
to BIDIL. The Company retained  $350,000 of BMPC's $1 million license fee, which
the Company accounted for as income in the second quarter of 1996.

8.       Employee Benefits Plans


The Company sponsors an IRS-approved  401(K)  retirement plan.  Employees become
eligible to participate in the plan beginning on the enrollment  date coinciding
with or  following  90 days of  employment.  Enrollment  periods  are limited to


                                    37 of 48
<PAGE>
                              Medco Research, Inc.


January 1, April 1, July 1  and  October 1 of each year.  The 401(K) plan allows
employees  to  contribute  a portion of their  pre-tax  earnings  into their own
retirement  account.  Eligible  employees may  contribute  between 2% and 15% of
their annual income up to the annual limits  established by the IRS yearly.  The
Board of Directors  authorized the Company, for those years in which it achieves
the performance goals established in advance by the Compensation  Committee,  to
match 50% of each employee's  annual plan  contribution up to a maximum of 2% of
the salary of such employee,  such Company contributions to vest over four years
at the end of each year. In 1996 the Company  approximately  accrued $22,000 for
the  match of 50% of each  employee's  1996  annual  plan  contribution  up to a
maximum of 2% of the salary of such  employee  based on  achievement  of Company
performance  goals to be paid in 1997 and vest  over four  years,  at the end of
each year.

The Company  currently has two stock option plans in  operation,  the 1983 Stock
Option  plan and the 1989  Stock  Option  and Stock  Appreciation  Rights  Plan.
Options  to  purchase  up  to  1,200,000  shares  and  up to  1,500,000  shares,
respectively,  of the  Company's  common  stock  may  be  granted  to  officers,
directors,  employees of the Company and to other persons who provide  important
services to the Company. Under the Plans, both incentive and non-qualified stock
options,  as well as stock  appreciation  rights  under  the 1989  Plan,  can be
granted.  No incentive  stock  options are  currently  outstanding  and no stock
appreciation rights have been granted. Non-qualified stock options generally can
be exercised  one year after the date of grant.  The  exercise  price may not be
less than 100% of the fair market value of the common stock on the date of grant
(110% with respect to incentive  stock options  granted to optionees who are 10%
or more  stockholders  of the Company).  Option holders may, with the consent of
the  Compensation  Committee of the Board of Directors,  pay for the exercise of
the  options  in whole or in part by  tendering  shares of  common  stock of the
Company, in lieu of cash.

During the years ended December 31, 1995 and 1994,  options  covering 25,000 and
75,000  shares with an aggregate  market  value of $259,375  and  $893,750  were
exercised by the  tendering  of 16,415 and 29,931  shares with a market value of
$170,306 and $356,563,  respectively, and minimal cash payments. During the year
ended December 31, 1996, there were no options exercised.

Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                          Weighted                        Weighted                       Weighted
                                                           Average                        Average                         Average
                                                          Exercise                        Exercise                       Exercise
                                             1996           Price           1995           Price            1994           Price
                                       ---------------------------------------------------------------------------------------------
Outstanding at beginning of year                610,732      $15              781,870        $15              975,200       $14
Granted                                         461,000       10              241,000         13              104,920        14
Exercised                                             -        -             (165,000)         7              (85,000)        5
Expired or canceled                            (289,750)      17             (247,138)        17             (213,250)       14
                                       =============================================================================================
Outstanding at end of year                      781,982       11              610,732         15              781,870        15
                                       =============================================================================================

Available for grant at end of year              285,531      N/A              456,781       N/A               434,228       N/A
Exercisable at end of year                      281,257      N/A              341,170       N/A               530,160       N/A
Weighted average fair value of
options granted                                3.92          N/A             5.32           N/A               5.71          N/A
Price range of options                     $8.63-$17.13      N/A         $10.63-$26.69      N/A            $6.81-$26.69     N/A
Price range of options exercised              N/A            N/A            $6.81           N/A            $5.69-$6.00      N/A
</TABLE>


                                    38 of 48
<PAGE>
                              Medco Research, Inc.


Options  outstanding  and  exercisable as of December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
                                      Options Outstanding                                     Options Exercisable
                      -----------------------------------------------------          ------------------------------------

                                            Weighted                                                      Weighted
                                            Average           Weighted                                     Average
 Range of Exercise         Number          Remaining          Average                    Number          Exercisable
       Prices           Outstanding     Contractual Life   Exercise Price              Exercisable          Price
--------------------- ----------------- ----------------- -----------------          ---------------- -------------------

$8 to 14                       695,655        8.8 years          $11                          194,930         $13
                                             
$15 to 18                       86,327        4.8                 16                           86,327          16
                      -----------------                                              ----------------
$8 to 18                       781,982        8.4                 11                          281,257          14
                      =================                                              ================
</TABLE>

The Company  reviewed  the  provisions  of SFAS No.123 and did not adopt the new
fair  value  based  method for the  options  granted to  employees;  rather,  it
continued  to use the  Opinion 25 method.  However  the  Company is  required to
disclose the pro forma effects on net income  regarding the new fair value based
method.  The fair value of each option  grant is  estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for  grants  in 1996 and  1995,  respectively:  dividend  yield  zero;  expected
volatility of 35%;  risk-free interest rate of 5%; and expected life of 5 years.
Had  compensation  cost for the Company's  stock-based  compensation  plans,  as
described above, been determined  consistent with SFAS No.123, the Company's net
income and earnings  per share would have been reduced to the pro forma  amounts
indicated below. The compensation costs disclosed here may not be representative
of the effects of pro forma net income in future years.
<TABLE>
<CAPTION>
<S> <C>

                                                                 1996                   1995
                                                         ---------------------- ---------------------
Net income (loss)                 As reported                       $4,321,645          $(3,532,442)
                                  Pro forma                          2,806,507           (4,472,574)

Primary earnings                  As reported                            $0.40               $(0.32)
per share                         Pro forma                              $0.26               $(0.40)

Fully diluted earnings            As reported                            $0.40               $(0.32)
per share                         Pro forma                              $0.26               $(0.40)
</TABLE>

9.       Income Taxes

The components of income tax expense consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
                                                                  Years Ended December 31,
                                                  ---------------------------------------------------------
                                                        1996                1995               1994
                                                  ------------------ ------------------- ------------------
        Current expense:
          Federal                                          $ 87,000       $           -       $          -
          State                                                   -                   -                  -
          Foreign taxes                                           -             100,000
                                                  ------------------ ------------------- ------------------
                                                           $ 87,000            $100,000        $         -
                                                  ------------------ ------------------- ------------------
        Deferred expense (benefit):
          Federal                                                 -                   -                  -
          State                                                   -                   -                  -
                                                  ------------------ ------------------- ------------------
                                                                  -                   -                  -
                                                  ------------------ ------------------- ------------------

          Total                                            $ 87,000            $100,000         $        -
                                                  ================== =================== ==================
</TABLE>

                                    39 of 48
<PAGE>
                              Medco Research, Inc.


The  components of net deferred tax assets and the net deferred tax  liabilities
as of December 31, 1996 and December 31, 1995 are as follows:

<TABLE>
<CAPTION>
<S> <C>
                                                                          Years Ended December 31,
                                                                   ------------------- ------------------
                                                                          1996               1995
                                                                   ------------------- ------------------
      Deferred tax assets:
        Tax loss carryforwards                                           $  6,813,000       $  8,484,000
        Capital losses                                                        456,000            456,000
        Tax credit carryforwards                                            1,305,000          1,297,000
        Compensation accruals                                                  49,000             96,000
        Reserves and accruals                                                       -              1,000
        Deferred revenue                                                      524,000            567,000
                                                                   ------------------- ------------------
          Total gross deferred tax assets                                   9,147,000         10,901,000
        Valuation allowance                                                (9,131,000)       (10,856,000)
                                                                   ------------------- ------------------
          Net deferred tax assets                                       $      16,000     $       45,000
                                                                   ------------------- ------------------
        Deferred tax liabilities:
          Depreciation and amortization                                         4,000             14,000
          Prepaid expenses                                                     12,000             31,000
                                                                   ------------------- ------------------
          Total gross deferred tax liabilities                                 16,000             45,000
        Net deferred tax asset                                      $               -                  $
                                                                                                       -
                                                                   =================== ==================
</TABLE>

The  actual  income  tax  expense  for  1996,  1995  and 1994  differs  from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the earnings  before  income taxes and  cumulative  effect of a change in
accounting principle) as follows:
<TABLE>
<CAPTION>
<S> <C>
                                          December 31, 1996              December 31, 1995              December 31, 1994
                                   -------------------------------- ----------------------------- -------------------------------
                                        Amount             %             Amount           %            Amount            %
                                   ------------------ ------------- ----------------- ----------- ----------------- -------------
Computed "expected" tax expense
(benefit)                            $1,498,940          34.0%      $(1,167,030)      (34.0)%      $(1,501,000)        (34.0)%
Change in valuation allowance        (1,725,000)        (39.1)        2,706,000        78.8          2,823,000          63.9
Tax credits                               8,000           0.2          (488,664)      (14.2)          (280,000)         (6.4)
State tax (benefit)                     325,934           7.4          (430,245)      (12.5)          (122,000)         (2.8)
Write down of marketable
securities                              (29,469)         (0.7)         (315,111)       (9.2)          (965,000)        (21.9)
Stock options                                 -             -          (278,779)       (8.1)                 -             -
Foreign taxes                                 -             -            66,000         1.9                  -             -
Other                                     8,595           0.2             7,829         0.2             45,000           1.2
                                   ================== ============= ================= =========== ================= =============
 Current provision                  $    87,000           2.0%     $    100,000         2.9%   $             -             -%
                                   ================== ============= ================= =========== ================= =============
</TABLE>

At December  31,  1996,  the Company has net  operating  loss  carryforwards  of
approximately  $18,300,000.  The net  operating  loss  carryforwards  expire  in
various  amounts  from 2004  through  2010.  Additionally,  the  Company has net
operating loss  carryforwards of approximately  $11,300,000 for state income tax
purposes which expire between 1997 and 2000.

                                    40 of 48
<PAGE>
                              Medco Research, Inc.


The Tax  Reform  Act of 1986  contains  provisions  which  limit the  ability to
utilize net operating loss,  capital loss, and various tax credit  carryforwards
in the  case of  certain  events  including  significant  changes  in  ownership
interests.  If the Company's tax carryforwards are limited,  and the Company has
taxable  income  which  exceeds  the  permissible   yearly  net  operating  loss
carryforward, the Company would incur a federal income tax liability even though
these loss carryforwards would be available in future years.

At  December  31,  1996,  the Company had  available  approximately  $1,218,200,
$83,000 and $3,800 of research and development  credit,  alternative minimum tax
credit and investment credit,  respectively.  Except for the alternative minimum
tax credit, these credits expire in varying amounts from 1998 through 2010.

Capital loss carryforwards of $191,250 will expire during 1997, unless utilized.
Of the total remaining capital loss carryforward, $47,000 and $926,800 will also
expire during 1999 and 2000, respectively.

10.      Related Party Transactions

Fees of approximately  $750,  $10,000 and $18,000 in 1996, 1995 and 1994 as well
as related travel expenses,  were paid to an individual  director for consulting
on a number of projects related to Company operations,  business development and
strategic  planning.  Fees of $144,000,  $144,000 and $56,000 in 1996,  1995 and
1994 as well as related travel expenses were paid to an individual  director for
consulting with the Company on matters such as  acquisitions,  financial  public
relations and pending litigation.

11.      Contingencies

Class Action Litigation

In September  and October  1993,  the Company,  and certain of its past and then
directors  and  officers  along with Kemper  Securities  Group,  Inc. and Vector
Securities International, Inc., were named in two class action lawsuits filed in
the United States District Court, Northern District of Illinois.  These actions,
which were  consolidated in February 1994, allege that the Company and the other
defendants  violated  Section 10(b) of the  Securities  Exchange Act of 1934 and
Rule 10(b)(5) promulgated  thereunder and made negligent  misrepresentations  in
connection  with  the  Company's  January  1992  secondary  stock  offering  and
otherwise  during the period November 19, 1990 through April 28, 1993. They seek
unspecified compensatory, punitive and exemplary damages. In September 1994, the
District  Court granted the  Company's  motion to dismiss on the ground that the
action was time barred. Plaintiffs appealed, and in 1995 the United States Court
of  Appeals  for the 7th  Circuit  held that the  lower  Court's  dismissal  was
premature and reversed the granting of the motion to dismiss.

In November  1995,  the Company  answered the complaints and denied the material
allegations thereof and asserted  affirmative  defenses,  including among others
that the Company did not commit  securities fraud, that the Company did not make
any untrue representations,  that the Company made adequate disclosure about the
ADENOSCAN  NDA and that the  complaints  were not filed  timely by reason of the
applicable statute of limitations.

On February 20, 1996,  defendants  moved for summary  judgment on the basis that
Plaintiffs'  claims  are  barred  by the  statute  of  limitations  and,  in the
alternative,  assuming plaintiffs'  allegations are true, any misrepresentations
by  defendants  caused no losses to the  plaintiffs.  On May 9, 1996 the  United


                                    41 of 48
<PAGE>
                              Medco Research, Inc.


States  District  Court,  Northern  District  of  Illinois,  granted the summary
judgment  motion of the Company and the other  defendants.  The Court  concluded
that the plaintiffs'  federal securities fraud claims were barred by the statute
of limitations.  Plaintiffs  have appealed,  and on February 20, 1997 the appeal
was argued  before the United  States Court of Appeals for the 7th Circuit.  The
parties are awaiting the Court's decision.

Arbitration of License Agreement

In November 1996, Dr. Eliezer Rapaport,  the licensor of the Company's potential
adenosine  triphosphate  ("ATP") drug,  commenced an arbitration by the American
Arbitration  Association  of his claim that the Company had breached its May 20,
1991 license agreement by failing to devote reasonable  efforts in preparing and
filing  within  three  years of FDA  approval  of its  Investigational  New Drug
application, that is, by May 8, 1995, a New Drug Application ("NDA") for the use
of ATP in the  treatment of at least one type of human cancer.  (Arbitration  is
the binding  dispute  resolution  method  provided  for in the  agreement.)  The
licensor  is  seeking  the  return of all  licensed  ATP  patent  rights for the
Company's  alleged breach of contract and failure to return such rights. He also
is  seeking  an  unspecified  amount of  punitive  damages  and $44  million  in
compensatory  damages. He has computed such compensatory damages on the basis of
"total  worldwide  billings of an  approved  ATP  medication  for  treatment  of
cancer...".

In  discussions  with  Dr.  Rapaport  held as  early as May  1995,  the  Company
continuously maintained, and it currently believes, that it has not breached the
agreement.  Data  from the  Company's  Phase II  clinical  trials  indicate  ATP
demonstrated  no tumor  response,  as defined in the protocol,  in patients with
non-small  cell lung  cancer,  and the  Company so advised  its  licensor.  (The
Company  believes  that  such  responses  are  the  benchmark  accepted  in  the
pharmaceutical  industry  for  filing  an  NDA  for a  cancer  treatment  drug.)
Therefore,  the Company  believes such damage claim,  which is based on ATP as a
cancer treatment,  is not only extremely speculative but also is unfounded.  The
Company  believes Dr.  Rapaport has incurred no damages from the Company's  drug
development activities.  The Company intends to vigorously defend itself against
the  allegations  of Dr.  Rapaport,  which the Company  believes are without any
merit.  The parties are engaged in document  discovery,  and the  arbitration is
scheduled to commence May 1997.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

All of the  information  required  by this Item is  contained  in the  Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
captions "Election of Directors," "Board of Directors" and "Executive  Officers"
and is incorporated herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION

All of the  information  required  by this Item is  contained  in the  Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Executive Compensation" and is incorporated herein by this reference.

                                    42 of 48
<PAGE>
                              Medco Research, Inc.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

All of the  information  required  by this Item is  contained  in the  Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Security  Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All of the  information  required  by this Item is  contained  in the  Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Certain Transactions" and is incorporated herein by this reference.

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

(a)      LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following  consolidated  financial  statements of Medco  Research,  Inc. are
included in Item 8:
<TABLE>
<S> <C>
         Independent Auditors' Report

         Consolidated Balance Sheets--December 31, 1996 and 1995

         Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994

         Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995
         and 1994

         Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994

         Notes to Consolidated Financial Statements
</TABLE>

All  schedules  for  which  provision  is  made  in  the  applicable  accounting
regulation of the  Securities  Exchange  Commission  are not required  under the
related instructions or are inapplicable, and therefore have been omitted.

(b)   No reports on Form 8-K were filed for the quarter ended December 31, 1996.

(c)   Exhibits
<TABLE>
<S> <C>
3.1     Articles of Incorporation of the Registrant for the State of California, as
        amended to date.(6)

3.2     Bylaws  of the  Registrant  for the  State of  California,  as  amended  to
        date.(5)

3.3     Articles of Incorporation of the Registrant for the State of Delaware.(8)

3.4     Bylaws of the Registrant for the State of Delaware.(8)

10.1    1983 Stock Option Plan, as amended to date.(1)



                                       43 of 48
<PAGE>
                                 Medco Research, Inc.


10.2    Form of Indemnity  Agreement  by and between  Registrant  and  Registrant's
        directors and officers.(5)

10.3    Agreement dated March 16, 1988 by and among Registrant, Pharmatec, Inc. and
        the University of Florida Research Foundation, Inc.(1)

10.4    Development  and License  Agreement  dated December 21, 1988 by and between
        Registrant and LyphoMed, Inc.(2)

10.5    Letter  Agreement  dated  March 3, 1989 by and between  Registrant  and the
        University of Virginia Alumni Patents Foundation.(3)

10.6    First Amendment  dated March 17, 1989 to Development and License  Agreement
        dated November 7, 1985 by and between Registrant and LyphoMed, Inc.(3)

10.7    1989  Stock  Option  and Stock  Appreciation  Rights  Plan,  as  amended to
        date.(4)

10.8    Employment  Agreement  dated January 8, 1992 by and between  Registrant and
        Archie W. Prestayko. (6)

10.9    Second  Amendment to Lease dated February 18, 1992 relative to Registrant's
        facilities at 8455 Beverly Boulevard, Los Angeles, California. (6)

10.10   License  Agreement  dated  April 21,  1992 by and  between  Registrant  and
        Nordion International Inc. (6)

10.11   Employment  Agreement  dated  June 9, 1992 by and  between  Registrant  and
        Donald B. Siegel. (6)

10.12   Employment  Agreement dated June 9, 1992 by and between  Registrant and Sam
        L. Teichman.(6)

10.13   Third  Amendment  to Lease dated August 10, 1992  relative to  Registrant's
        facilities located at 8455 Beverly Boulevard, Los Angeles, California.(6)

10.14   Consulting  Agreement  dated  September 15, 1992 by and between  Registrant
        and William M. Bartlett.(6)

10.15   Employment  Agreement dated October 16, 1992 by and between  Registrant and
        Roger D. Blevins.(7)

10.16   Employment  Agreement  dated January 8, 1993 by and between  Registrant and
        Archie W. Prestayko.(7)

10.17   Lease   Agreement   effective  June  25,  1993  relative  to   Registrant's
        facilities  at 85 T.W.  Alexander  Drive,  Research  Triangle  Park,  North
        Carolina.(7)

10.18   Consulting  Agreement  dated  July 1, 1993 by and  between  Registrant  and
        Richard C. Williams.(7)



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10.19   Employment  Agreement dated October 16, 1993 by and between  Registrant and
        Roger D. Blevins.(7)

10.20   Employment  Agreement dated February 24, 1994 by and between Registrant and
        Archie W. Prestayko.(7)

10.21   Consulting  Agreement dated December 1, 1994 by and between  Registrant and
        Richard C. Williams. (8)

10.22   Medco Research and Fujisawa,  USA Mutual Release and Settlement  Agreement,
        dated May 22, 1995. (9)

10.23   Amendment to  Consulting  Agreement  dated  December 1, 1994 by and between
        Registrant and Richard C. Williams. (10)

10.24   Employment  Agreement  dated  September 26, 1996 by and between  Registrant
        and Roger D. Blevins.

10.25   Amendment to  Consulting  Agreement  dated  December 1, 1994 by and between
        Richard C. Williams.

11      Computation of Net Income (Loss) per Common Share.
</TABLE>

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

(1) The  referenced  exhibits are  incorporated  herein by reference to Exhibits
10.1 and 10.6 to the Registrant's Form 10-K for the fiscal year ended August 31,
1988 filed with the Securities and Exchange Commission on November 29, 1988.

(2) The referenced exhibit is incorporated  herein by reference to Exhibit 10.02
to the  Registrant's  Form 8-K dated December 21, 1988 filed with the Securities
and Exchange Commission.

(3) The  referenced  exhibits are  incorporated  herein by reference to Exhibits
10.01 and 10.02 to the Registrant's  Form 8-K dated March 3, 1989 filed with the
Securities and Exchange Commission.

(4) The referenced exhibit is incorporated  herein by reference to Exhibit 10.20
to the  Registrant's  Form 10-K for this fiscal year ended August 31, 1989 filed
with the Securities and Exchange Commission on November 29, 1989.

(5) The referenced exhibits are incorporated herein by reference to Exhibits 3.2
and 10.4 to the Registrant's Form 10-K for the fiscal year ended August 31, 1990
filed with the Securities and Exchange Commission on December 14, 1990.

(6) The  referenced  exhibits are  incorporated  herein by reference to Exhibits
10.18,  10.19,  10.20,  10.21,  10.22, 10.23, and 10.24 to the Registrant's Form
10-K for the fiscal  year ended  August 31, 1992 filed with the  Securities  and
Exchange Commission on November 27, 1992.



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<PAGE>
                              Medco Research, Inc.


(7) The  referenced  exhibits are  incorporated  herein by reference to Exhibits
10.23,  10.24 10.25,  10.26,  10.27, and 10.28 to the Registrant's Form 10-K for
the  Transition  period of  September  1, 1992  through  December  31,  1992 and
calendar  year ended  December 31, 1993 filed with the  Securities  and Exchange
Commission on March 28, 1994.

(8) The referenced  exhibit is incorporated  herein by reference to Exhibit 3.3,
3.4,  and  10.21 to the  Registrant's  Form  10-K for the  calendar  year  ended
December 31, 1994 filed with the Securities and Exchange Commission on March 29,
1996.

(9) The referenced exhibit is incorporated  herein by reference to Exhibit 10.01
to the  Registrant's  Form 10Q for the period ended June 30, 1995 filed with the
Securities and Exchange Commission on August 11, 1995.

(10) The referenced exhibit is incorporated herein by reference to Exhibit 10.23
to the  Registrant's  Form 10-K for the  calendar  year ended  December 31, 1995
filed with the Securities and Exchange Commission on March 29, 1996.





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<PAGE>
                              Medco Research, Inc.


                                   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.

                               MEDCO RESEARCH, INC.


                               By:      /s/ Roger D. Blevins
                                  ----------------------------------
                               Roger D. Blevins, Pharm. D.,
                               President and
                               Chief Operating Officer

                               Date:    March 28, 1997


                               By:      /s/ Glenn C. Andrews
                                  ----------------------------------
                               Glenn C. Andrews
                               Chief Financial Officer

                               Date:    March 28, 1997


                               By:      /s/ Adam C. Derbyshire
                                  ----------------------------------
                               Adam C. Derbyshire
                               Corporate Controller

                               Date:    March 28, 1997

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


By:      /s/ Richard C. Williams                       Date:    March 28, 1997
         -----------------------------------                   --------------
         Richard C. Williams,
         Chairman of the Board


By:      /s/ William M. Bartlett                       Date:    March 28, 1997
         -----------------------------------                    --------------
         William M. Bartlett, Director



By:      /s/ Eugene L. Step                            Date:    March 28, 1997
         -----------------------------------                    --------------
         Eugene L. Step, Director


By:      /s/ Albert D. Angel                           Date:    March 28, 1997
         -----------------------------------                    --------------
         Albert D. Angel, Director




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<PAGE>
                              Medco Research, Inc.


By:      /s/ Jay N. Cohn, M.D.                         Date:    March 28, 1997
         -----------------------------------                    --------------
         Jay N. Cohn, M.D., Director


By:      /s/ Marvin S. Hausman, M.D.                   Date:    March 28, 1997
         -----------------------------------                    --------------
         Marvin S. Hausman, M.D., Director



By:      /s/ Mark B. Hirsch                            Date:    March 28, 1997
         -----------------------------------                    --------------
         Mark B. Hirsch, Director


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