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, 1997
                                       OR

[X] 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 11, 1998 of $17.5625  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
$180,331,891.

The number of shares outstanding of the Registrant's Common Stock was 10,513,932
at March 11, 1998.

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 1998 Annual Meeting of Shareholders.




                                       1
<PAGE>
                              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-receptor technologies 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 selectively
acquire product candidates, thereby reducing the costs and risks associated with
basic research and drug discovery.  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 valid and enforceable. See "Patents
and  Proprietary  Rights"  below.  The  Company  then  sponsors  and directs any
additional   preclinical   studies  and  clinical  testing  needed  for  product
registration  and  marketing  approval.  These  late-stage  product  development
activities are  outsourced to independent  clinical  research  organizations  to
maximize efficiency and minimize internal overhead. Historically the Company has
licensed the  manufacturing  and marketing  rights to the product to a corporate
partner in exchange for licensing  fees and royalty  payments on future  product
sales. A portion of 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.  See  "Government  Regulation of
Pharmaceuticals" below.

Using this  royalty-based  business model,  which is relatively  uncommon in the
pharmaceutical  industry,  the  Company  has had two out of four NDAs  approved,
commercialized  two drugs,  and has other compounds  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.

Substantially all of the Company's royalty income in the three year period ended
December 31, 1997  resulted  from sales of ADENOCARD and ADENOSCAN in the United
States by Fujisawa-USA, Inc. ("Fujisawa"), the Company's corporate partner.

Statements contained in Item 1 of this report which are not historical facts are
forward  looking  statements  under the safe  harbor  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Although  the Company  believes the
expectations  reflected  in such  forward  looking  statements  are  based  upon
reasonable  assumptions,  it can give no assurance that its expectations will be
attained.  Forward looking statements involve known and unknown risks that could


                                       2
<PAGE>
                              Medco Research, Inc.

cause the Company's actual results to differ  materially from expected  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 activities involving  pharmaceutical  products; the unpredictability
of the duration and results of regulatory review of New Drug  Applications;  the
possible impairment of, or inability to obtain, intellectual property rights and
the cost of obtaining such rights from third parties;  intense competition;  the
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 from time to time in the Company's SEC filings.

STRATEGIC PLAN

Whereas large pharmaceutical  companies often diversify 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
focuses  primarily on the role of adenosine and its receptors in  cardiovascular
disease.   The   Company's   expertise  in   adenosine   drug   development   is
well-recognized in the medical community.

To further concentrate its portfolio of products and development  programs,  the
Company is engaged in efforts to divest products unrelated to adenosine. In 1997
the Company  returned the rights to Tc99m  GLUCARATE and Adenosine  Triphosphate
(ATP) to their  respective  licensors.  NDAs for  VIASCINT(TM) and BIDIL(R) were
filed on April 25, 1996 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.  On July
31,  1997 the FDA  issued a letter  stating  that the NDA for  VIASCINT  was not
approvable.  Accordingly,  in 1998 the  Company  may  relinquish  its  rights to
VIASCINT and BIDIL depending on the results of its outlicensing efforts.

PORTFOLIO

ADENOCARD(R) - a sterile  formulation of adenosine for injection - indicated for
     the  treatment of  abnormally  rapid  heartbeats  originating  in the upper
     chambers  of  the  heart,   referred  to  as  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"),  a multinational  pharmaceutical  company
     headquartered  in France,  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,   referred  to  as
     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. During 1997 Sanofi received approval for the drug in 14 additional
     member countries of the European  Community through the mutual  recognition
     procedure.

ADENOSINE  FOR   CARDIOPROTECTION   (formerly  designated  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. At the 1997
     70th  Scientific  Sessions  of the  American  Heart  Association,  positive


                                       3
<PAGE>
                              Medco Research, Inc.

     clinical results of a Phase II multicenter trial were reported,  supporting
     the Company's belief, although no assurance can be given, that the drug may
     prove to be an effective  cardioprotective  agent  during acute  myocardial
     infarction. Fujisawa is the Company's partner for this product.

ADENOSINE ANALOGS - chemical  derivatives  of adenosine,  or adenosine  analogs,
     have  been  developed  by  chemists  to  selectively  effect  a  particular
     adenosine   receptor   subtype.   These   compounds   are  referred  to  as
     second-generation technology. By means of options agreements and a research
     agreement,  the  Company  has  rights  to a number  of  adenosine  analogs,
     including A2a-, and A3- agonists as well as A1-, and A3-  antagonists.  The
     lead A2a-agonist,  designated MRE-0470, is under development as a potential
     follow-on  to  the  Company's  currently  marketed  product  ADENOSCAN.  No
     assurance can be given that any of the Company's analogs will result in the
     filing  or   approval   of  any  NDA.   See   "Government   Regulation   of
     Pharmaceuticals" below.

ADENOSINE  ALLOSTERIC  MODULATORS - a new series of  adenosine-based  compounds,
     designated  ADENOSINE  ALLOSTERIC  MODULATORS,  with a novel  mechanism  of
     action were  discovered and synthesized in 1997. The compounds are referred
     to as  third-generation  technology.  No assurance can be given that any of
     these compounds will result in the filing or approval of any NDA. As of the
     end of 1997,  the Company  had filed  patent  applications  on more than 20
     ADENOSINE ALLOSTERIC MODULATORS. No assurance can be given that any patents
     will be issued  or, if  issued,  that they  will  provide  any  competitive
     protection to the Company. See "Patents and Proprietary Rights" below.

PRODUCT AND COMPOUND 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.

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  Austria,  Australia,  Belgium,
Bulgaria,  Chile, the Czech Republic,  Denmark,  the Dominican Republic,  Egypt,
Finland, France, French Polynesia,  Germany, Greece, Guatemala,  Hungary, India,
Indonesia, Ireland, Italy, Jordan, Kuwait, Latvia, Libya, Luxembourg,  Malaysia,
the Netherlands, New Zealand, Norway, the Philippines,  Poland, Portugal, Qatar,
Saudi  Arabia,   Singapore,   Slovakia,   South  Africa,   South  Korea,  Spain,
Switzerland, Taiwan, Thailand, Ukraine, the United Arab Emirates and Uruguay.

Product  License:  In March 1985,  the  University  of Virginia  Alumni  Patents
Foundation  ("UVAPF")  granted to the Company an exclusive license to exploit in
the  United  States  and  Canada  the  use of  adenosine  for the  treatment  of


                                       4
<PAGE>
                              Medco Research, Inc.


supraventricular  tachycardia  that is caused by  re-entry in the A-V node or an
accessory pathway of the human heart. (In November 1986, UVAPF 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.

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. The Company granted 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.  The Company  granted  Sanofi 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
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  additional  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 is  currently  being sought from the health
authorities in each of the member countries.  ADENOSCAN is currently marketed in
the United States, Canada, the United Kingdom, Australia, Ireland, and Germany.

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


                                       5
<PAGE>
                              Medco Research, Inc.


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.

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.   Intravenous
dipyridamole is generically  manufactured and marketed by Lederle.  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.  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
for the first five years  after the  commencement  of  commercial  sales in each
territory, i.e., until July 2000 for U.S. sales, and thereafter royalties of 25%
of net sales until June 10, 2007,  at which time  Fujisawa  would have a paid-up
license.

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,  Fujisawa's  Melrose  Park,  Illinois  plant  was
qualified by the FDA as an  alternate  manufacturing  facility for  ADENOSCAN in
30ml. vials.

Agreement  with  Sanofi.  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  registered
ADENOSCAN in 14 additional  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
is being  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. The Company signed a development and marketing agreement
with Suntory Limited for cardiovascular  uses of adenosine in Japan. During 1997
Suntory  initiated  a  Phase  III  trial  to  pursue  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
upon signing, a $300,000 fee in 1995 when the FDA granted marketing clearance in
the U.S. for ADENOSCAN and a payment of $400,000 following Suntory's  initiation
of a Phase III trial in Japan in 1997.



                                       6
<PAGE>
                              Medco Research, Inc.


                         ADENOSINE FOR CARDIOPROTECTION

The Product:  The Company's  development  program with 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 now is referred
to as "ADENOSINE FOR CARDIOPROTECTION" (formerly designated MEDR-640). 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 are
not uncommon. In addition,  over 300,000 patients a year undergo coronary artery
bypass graft (CABG) surgery and,  despite  standard  cardioprotective  measures,
significant  cardiac  support is often required  during the early  postoperative
period.

Development  Background:  Substantial preclinical data and limited human testing
suggest, although no assurance can be given, that adenosine may be beneficial in
these  acute  ischemic   settings.   The  results  of  a   single-center   pilot
investigation (i.e.,  significantly  reduced injury measured six weeks after the
procedure  compared to  measurements  made at the time of  hospital  discharge),
suggest  that  adenosine,  as an adjunct to emergency  angioplasty,  may further
limit the damage  associated with acute myocardial  infarction.  The preliminary
results from another single-center pilot study (i.e.,  statistically significant
reductions  in  the  cumulative   amount  of  inotropes  such  as  dopamine  and
dobutamine,  and  vasodilators  such as  nitroglycerin,  required in the 24-hour
period following  surgery),  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.  These preliminary
findings  supported  the  initiation  of  three  Phase  II  multicenter  trials,
including a placebo-controlled  trial in CABG surgery (so-called AB-02 trial), a
placebo-controlled   trial  using  emergency  (primary)   angioplasty  in  acute
myocardial  infarction  (so-called ALIVE trial), and a placebo-controlled  trial
using  thrombolytic  therapy in acute myocardial  infarction  (so-called AMISTAD
trial). Patient enrollment for the AB-02 trial was completed during 1997 and the
results of the study  should be  available  by mid 1998.  Due to  difficulty  in
recruiting  patients in a timely  manner,  the ALIVE trial has been  terminated.
Patient  enrollment  for the AMISTAD  trial was completed in July and results of
the study  were  presented  by Dr.  Kenneth  Mahaffey,  Duke  Clinical  Research
Institute,  at the 70th Scientific Sessions of the American Heart Association on
November 10, 1997.

The AMISTAD trial  revealed that patients with anterior MI who were treated with
adenosine  plus  thrombolysis  experienced  median  final  infarct size of 15.0%
(n=39) as compared to 45.5% (n=38) for patients treated with thrombolysis alone.
For patients with  non-anterior  MI,  infarct size was similar (11.5% (n=72) vs.
11.5% (n=72)) regardless of the addition of adenosine.  Statistical  analysis of
the primary  endpoint was carried out for the  intent-to-treat  population using
protocol-specified methods and predetermined variables. As expected, MI location
was the most  significant  variable  related to the final  infarct  size,  since
anterior MI is typically much larger than non-anterior MI. But more importantly,
for those  patients with anterior MI, i.e.,  those at greatest  risk, the use of
adenosine resulted in significantly smaller final infarct size (p=0.014).

In a subset of patients,  cardiac  images were  obtained at the time of hospital
admission  as well as at time of  discharge  in order to  measure  the amount of
heart muscle at risk of  irreversible  injury prior to  treatment.  For patients
with  anterior MI, the amount of myocardium at risk was similar in the adenosine
and non-adenosine groups, 49.5% (n=12) vs. 51.0% (n=9),  respectively.  However,
the amount of heart muscle  "saved",  as a percentage of myocardium at risk, was
greater with adenosine plus thrombolysis (62.3%) vs. thrombolysis alone (15.0%).



                                       7
<PAGE>
                              Medco Research, Inc.


Overall, at any time during hospitalization,  cardiogenic shock (5.0% vs. 3.4%),
congestive  heart  failure  (10.1%  vs.  6.8%),   death  (8.4%  vs.  5.1%),  and
reinfarction (5.0% vs. 2.6%) were more common in the adenosine group compared to
placebo.  These  differences were less apparent in the anterior MI subgroup and,
overall,  these  event  rates  were  far too low to draw any  conclusions  about
clinical risk or benefit.

The study  results  (i.e.,  myocardial  infarct  size,  as  measured  by nuclear
imaging, is reduced by treatment with adenosine),  are consistent with the basic
literature  describing  the  cardioprotective  effects of  adenosine in multiple
animal models from various  laboratories  around the world.  Subsequent clinical
trials are  necessary  in order to establish  the  clinical  benefit and overall
safety  profile of  adenosine  in this  setting.  The  Company is  currently  in
discussions  with the FDA; its  commercial  partner,  Fujisawa;  and other third
parties to determine the next development steps,  including the possibility of a
Phase III clinical program.

Regulatory  Status:  The  original IND for Phase I studies was filed in November
1988. The Company has conducted  three  multicenter  Phase II clinical trials in
the U.S., Canada and Argentina under this IND.

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.  (No assurance can be
given that any pending application will result in any issued patent, or that any
issued  patent  will  provide  any  competitive  protection  to the  Company  or
Fujisawa.) See "Patent and Proprietary  Rights" below.  See  "Manufacturing  and
Marketing" below.

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,  free  radical
scavengers, and adenosine analogs or modulators, which may compete directly with
ADENOSINE FOR CARDIOPROTECTION.

Manufacturing and Marketing:  ADENOSINE FOR CARDIOPROTECTION 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 ADENOSINE FOR
CARDIOPROTECTION in such license agreement were eliminated, and in May 1996, the
parties   entered   into  an  agreement  to  jointly   develop   ADENOSINE   FOR
CARDIOPROTECTION.  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. Either the Company or
Fujisawa may  terminate  the  agreement  and proceed alone providing it pays the
other party, in twenty-four equal monthly installments, 100% of the money
invested by the other party in the cardioprotective product, treated as an
advance royalty, and an 8% royalty. If both parties decide to terminate the
agreement  then the parties  shall share  equally in the expenses and proceeds
derived  from  the  sale of the rights to such  cardioprotective product to a
third party.

                                ADENOSINE ANALOGS

The  Compounds:  Chemical  derivatives,  or  analogs,  of  adenosine  have  been
developed  in an effort to improve the  therapeutic  utility of  adenosine.  The
actions of adenosine are controlled or mediated through  receptors,  or specific
recognition sites, on the surface of cells. Four adenosine receptor subtypes are
known to exist  (A1-,  A2a-,  A2b-,  and  A3-)  and  each is  responsible  for a
different  function.   Intravenous  adenosine,  or  first-generation  technology


                                       8
<PAGE>
                              Medco Research, Inc.


(commercially available as ADENOCARD or ADENOSCAN),  is a non-selective agonist,
i.e.,   it   stimulates   all   receptor   subtypes.   Adenosine   analogs,   or
second-generation  technology,  theoretically  may be selective,  i.e.,  may act
through a specific  receptor subtype.  In addition,  certain analogs may exhibit
activity by oral administration.

Development  Background:  Theoretical rationale and preclinical data support the
investigation of several  A2a-agonists for a variety of applications  including:
diagnosis of coronary artery disease,  promotion of wound healing,  treatment of
coronary artery disease,  prevention of restenosis,  and treatment of congestive
heart  failure.  The  Company's  lead  A2a-receptor  agonist,  MRE-0470,  should
theoretically   produce   coronary   vasodilation   (via   stimulation   of  the
A2a-receptor)  while not producing  transient heart block and  arrhythmias  (the
effects of A1-receptor stimulation). Hence, the compound may hold potential as a
second-generation  pharmacologic stressor.  With respect to MRE-0470,  necessary
animal  toxicology and  pharmacoloy  studies are underway.  In addition to these
A2a-agonists,   a  lead   A1-antagonist  has  been  selected  for  pre  clinical
development  (refer to Biomedica  Foscama in "Product  License"  below),  and an
A3-agonist  has been  identified  (refer to  University  of Ferrara in  "Product
License" below).

Regulatory Status:  Work is in progress to file an IND.

Competition:  ADENOCARD, ADENOSCAN, generic dipyridamole

Product License: The Company has an exclusive worldwide license to multiple U.S.
patents and foreign  counterparts  held by Discovery  Therapeutics,  Inc.  (DTI)
related to  A2a-agonists.  The Company has an exclusive  option through  January
1999 to acquire New York University's  worldwide rights for the use of adenosine
A2a-receptor  agonists for the  promotion of wound  healing.  The Company has an
option  agreement  with the  University of  Massachusetts  to acquire  exclusive
rights to its patents  issued and  pending  worldwide  for the use of  adenosine
A2a-receptor  agonists  for the  promotion  of  positive  inotrophic  effects in
compromised myocardium.  The Company also has an option agreement with Biomedica
Foscama to acquire  exclusive rights to its library of adenosine  A1-antagonists
patents  issued and pending  worldwide.  The Company has  expanded  its research
agreement  with the  University of Ferrara to include  agonists and  antagonists
which exert their  actions at the  adenosine  A1- and A3- receptor  subtypes.  A
Provisional  Patent Application has been filed with the United States Patent and
Trademark  office on a lead  A3-agonist.  (No  assurance  can be given  that any
pending  application will result in any issued patent, or that any issued patent
will provide any competitive protection to the Company or Fujisawa.)

                         ADENOSINE ALLOSTERIC MODULATORS

The Compounds:  ADENOSINE ALLOSTERIC  MODULATORS affect the action of endogenous
adenosine in the form of  enhancement or inhibition by binding at sites distinct
from, but  functionally  linked to, the primary  recognition site of a receptor.
Binding  site  studies  and  functional  assays  have shown  that the  enhancers
"amplify" the effects of adenosine.  Research is underway to establish the exact
molecular  mechanisms  of this  class of  compounds.  Allosteric  enhancers  may
increase  the  actual   number  of  adenosine   receptors  in  the  "active"  or
high-affinity state. Accordingly, although no assurance can be given, allosteric
enhancers  may be  therapeutically  useful when internal  adenosine  signals are
weak.

Development  Background:  This  new  series  of  compounds  was  discovered  and
synthesized in the laboratories of Professor  Giovanni Baraldi at the University
of Ferrara,  Italy as part of a basic research  collaboration  agreement between


                                       9
<PAGE>
                              Medco Research, Inc.


the Company and the  University  of Ferrara.  The  agreement  grants the Company
exclusive  ownership  of all  intellectual  properties  relating  to  allosteric
modulators derived from the collaboration.

Product License:  The Company has filed patent applications with the U.S. Patent
and Trademark Office and intends to file companion applications overseas for the
first series of compounds  synthesized and tested by Dr. Baraldi and colleagues.
(No  assurance  can be given that any  pending  application  will  result in any
issued patent, or that any issued patent will provide any competitive protection
to the Company or Fujisawa.)

Regulatory  Status: The subject compounds are in the  research/discovery  stage,
and the Company therefore has no need to commence regulatory work.

Competition:  The Company has no  knowledge of the  existence of any  additional
adenosine allosteric inhibitors.

                    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,  and
regulatory approval can never be predicted nor assured.

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


                                       10
<PAGE>
                              Medco Research, Inc.


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
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


                                       11
<PAGE>
                              Medco Research, Inc.


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,  ADENOSCAN and  ADENOSINE  FOR  CARDIOPROTECTION
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,
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.



                                       12
<PAGE>
                              Medco Research, Inc.


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.

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 and
ADENOSINE  FOR  CARDIOPROTECTION.  This third party also has an issued  Canadian
patent which appears to have priority  over the  Company's  Canadian  patent for
ADENOSCAN.  The third party  already has told the Company and  Fujisawa  that it
would like to enter into a license  agreement  covering its pending claims,  and
negotiations  are on-going.  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.

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.

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  $6,902,092,  $5,839,278,  and
$8,535,187   during  the  years  ended   December  31,  1997,   1996  and  1995,
respectively.





                                       13
<PAGE>
                              Medco Research, Inc.

EMPLOYEES

As of March 11, 1998 the Company  employed  twenty-three  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  extended this lease through November 30, 1998
with the  Company's  sole  discretion  to extend for an additional 30 days until
December  31,  1998.  The Company has entered into a letter of intent to lease a
facility  no later  than  December  31,  1998  which  will be  adequate  for the
Company's present and future operations.

ITEM 3.  LEGAL PROCEEDINGS

The Company  prevailed in the liability claims pending against it as reported in
its 1996 Form 10-K:  In November  1997,  the  American  Arbitration  Association
denied, in its entirety,  the damage claims of Dr. Eliezer Rapaport;  and in May
1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed
the dismissal of the class action  litigation  alleging the Company had violated
federal securities laws. Both decisions are final and binding on the parties.

There are no material legal proceedings pending against the Company. However, on
October 3, 1997,  Richard  A.  Wilson,  Debra A.  Angello,  and Paul S.  Angello
("Plaintiffs")  filed a  complaint  against  Fujisawa,  USA,  Inc. in the United
States  District  Court,  District of Oregon,  alleging that  Fujisawa's sale of
ADENOSCAN in the United States induces,  or contributes to, the  infringement of
plaintiffs' U.S. Patent No.  4,824,660 ("the `660 patent"),  entitled "Method of
Determining  the  Viability of Tissue in an  Organism."  which the Patent Office
issued on April 25, 1989.  According  to  plaintiffs,  the `660 patent  claims a
specific  technique for more reliably  locating  viable or nonviable  regions of
heart tissue,  namely using an adenosine  triphosphate  repleting  agent such as
ribose or adenosine as an adjunct to radioactive  isotope  (e.g.,  thallium-201)
myocardial  perfusion  scintigraphy,  where regions of heart tissue in which the
scan images show no  radioactivity  indicate  the  presence of  nonviable  heart
tissue. In its Answer and Counterclaim, Fujisawa denied that it infringed any of
the claims of the `660  patent and  alleged  that the `660  patent was  invalid.
Fujisawa further alleged that  plaintiffs'  claims of patent  infringement  were
barred by the doctrines of laches and estoppel.  In its  Counterclaim,  Fujisawa
requested a declaratory judgment that it did not infringe the claims of the `660
patent and that such patent is invalid.

This  action is in the  pre-discovery  motion  stage.  Fujisawa  has advised the
Company that Fujisawa  intends to vigorously  defend this action and believes it
has no merit. Under the terms of its ADENOSCAN  exclusive license agreement with
Fujisawa,  the Company will reimburse  Fujisawa for 50% of the cost of defending
this action.

The Company  also  believes  the action has no merit.  The Company has long been
aware of the `660 patent,  and as part of its normal  operating  procedures  the
Company  has  received  the  written   opinions  of  separate patent  counsel
that  the manufacture  and  sale of  ADENOSCAN  for use in  myocardial  imaging
does  not infringe any valid claim of the `660 patent.  The Company  disclosed
its receipt of its patent counsel non-infringement opinion in its 1993 Form 10-K
Report.

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

None.


                                       14
<PAGE>
                              Medco Research, Inc.

                                     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.

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

Calendar 1997:

                    March 31, 1997                        $13 3/8       $7 3/4
                    June 30, 1997                           9 13/16      7 3/4
                    September 30, 1997                     14            9 5/8
                    December 31, 1997                      17 1/8       12 3/4


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

The Company had 237 owners of record and in excess of 4,911 beneficial owners of
its Common Stock as of March 11, 1998,  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 ended
December 31, 1997,  1996,  1995, 1994 and 1993 has been derived from the audited
financial  statements of the Company and should be read in conjunction  with the
consolidated  financial  statements and the notes thereto,  and other  financial
information included elsewhere in this report.





                                       15
<PAGE>
                              Medco Research, Inc.


Summary Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
<S> <C>

OPERATIONS                                                 Years Ended December 31,
                               ----------------------------------------------------------------------------------
                                        1997             1996            1995             1994            1993
Revenue                            $22,782,306      $15,824,073     $13,007,734      $10,688,619      $9,345,256
Costs and Expenses                  12,569,177       11,502,428      16,540,176       15,103,087      12,903,575
Net Income (Loss)                   10,213,128        4,321,645      (3,532,442)      (4,414,468)     (3,558,319)
Basic Earnings (Loss) per
  Common Share                           $0.97            $0.40          $(0.32)          $(0.40)         $(0.32)
Diluted Earnings (Loss) per 
  Common Share                           $0.96            $0.40          $(0.32)          $(0.40)         $(0.32)
Weighted Average Shares
  Outstanding                       10,545,533       10,917,920      11,023,921       11,144,938      11,182,376
Weighted Average Shares
  Outstanding Assuming
  Dilution                          10,620,785       10,938,357      11,023,921       11,144,938      11,182,376
Cash Dividends Declared
  per Common Share                           -                -               -                -               -



Summary Consolidated Balance Sheet Data:
<CAPTION>

                                                                 December 31,
                               ----------------------------------------------------------------------------------
                                        1997             1996            1995             1994            1993
Working Capital                    $20,158,833      $18,372,970     $27,734,612      $24,883,199     $13,089,253
Total Assets                        49,612,714       42,628,404      43,121,656       44,680,299      49,298,432
Stockholders' Equity                44,656,284       36,499,005      35,099,683       38,901,572      45,577,377
Accumulated (Deficit)               (1,180,819)     (11,393,947)    (15,715,592)     (12,183,150)     (7,768,682)
Net Book Value
  Per Share                               4.25             3.40            3.19             3.53            4.07
</TABLE>


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


OVERVIEW

For calendar 1997,  adenosine royalties  (ADENOCARD and ADENOSCAN) increased 49%
and  operating  expenses  increased  5%  which  resulted  in  a  net  income  of
$10,213,128 for 1997, or $0.97 basic earnings per share, compared to $4,321,645,
or $0.40 basic  earnings  per share,  for 1996.  Earnings per share on a diluted
basis for 1997 and 1996 were $0.96 and $0.40,  respectively.  Two-thirds  of all
royalty  income in the two-year  period ended  December 31, 1997  resulted  from
Fujisawa sales of ADENOSCAN in the United States.

In  February  1997,  Sanofi  successfully  registered  ADENOSCAN  in  14  member
countries of the European Community through the mutual recognition procedure. In
March 1997,  the Company formed a basic  research  collaboration  with Professor
Giovanni Baraldi, Department of Pharmaceutical Chemistry, University of Ferrara,
Italy,  to  discover  novel  adenosine-receptor  compounds.  In June  1997,  the
Company's  development  and commercial  partner for adenosine in Japan,  Suntory
Limited,  announced plans to initiate Phase III clinical trials of ADENOSCAN for
use with  thallium  perfusion  imaging  to detect  coronary  artery  disease  in
patients unable to exercise  adequately.  Also in June, the Company  obtained an
option from NYU to exclusively  license  worldwide  rights for the  development,
manufacturing,  use and sale of adenosine  A2a-receptor agonists in the field of
wound  healing.  In August 1997,  the Company and Discovery  Therapeutics,  Inc.


                                       16
<PAGE>
                              Medco Research, Inc.


entered  into  an  alliance   dedicated  to  the  discovery,   development   and
commercialization  of compounds  that  stimulate  the A2a subfamily of adenosine
receptors ("A2a-agonists"). In October 1997, the Company announced the discovery
of ADENOSINE ALLOSTERIC MODULATORS. In November 1997, the Company's results from
the AMISTAD multi-center trial (Acute Myocardial  Infarction Study of Adenosine)
and the use of  adenosine  combined  with  heparin in the  treatment  of chronic
stable  angina were  reported at the 70th  Scientific  Sessions of the  American
Heart Association in Orlando, Florida. In December 1997, the Company obtained an
option from Biomedica  Foscama to  exclusively  license its library of adenosine
A1-antagonists.


RESULTS OF OPERATIONS

The  accompanying   consolidated   financial  statements  and  certain  selected
financial  data have been  presented for the calendar  years ended  December 31,
1997, 1996 and 1995. The Company's  presentation of the Consolidated  Statements
of  Operations  reflect  gross margin  related to royalty  revenues  followed by
operating expenses and other income (expense).


Calendar Year 1997 Compared to Calendar Year 1996

Royalty Revenues.  The Company's 1997 royalty revenue increased from $13,453,958
to   $20,000,366,   an   increase   of   49%,   primarily   due   to   continued
quarter-to-quarter  increases  in unit  sales  of  ADENOSCAN  by  Fujisawa,  the
Company's North American licensee. Fujisawa is responsible for substantially all
of the royalty revenue of the Company.

Gross Margin.  The Company's 1997 gross margin from adenosine revenues increased
from  $10,880,081 to $17,015,292,  an increase of 56% due to the continued shift
in the product sales mix to ADENOSCAN and continued quarter-to-quarter increases
in unit sales of  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,  increased  from
$2,573,877 to $2,985,074, an increase of 16%.

Operating  Expenses.  Total  operating  expenses  increased  from  $8,841,551 to
$9,295,693,  an increase of 5% due to an  increase in research  and  development
expenditures for ADENOSINE FOR CARDIOPROTECTION and ADENOSINE ANALOGS.

Research and  development  costs  increased from  $5,839,278 to  $6,902,092,  an
increase of 18%.  Research and development  expenditures were higher during 1997
primarily  due to nearing the  completion of the  Company's  three  multi-center
Phase II trials associated with ADENOSINE FOR  CARDIOPROTECTION and pursuing the
filing  of an IND  for  MRE-0470,  an  adenosine  A2a-receptor  agonist  for the
diagnosis of coronary artery disease.

General and administrative  expenses decreased from $3,002,273 to $2,393,601,  a
decrease  of 20%.  This  reduction  is  primarily  the  result of lower  overall
spending in 1997 and one-time employee related charges incurred in 1996.



                                       17
<PAGE>
                              Medco Research, Inc.


Other Income.  Interest  income  increased  from  $2,020,115 to  $2,099,550,  an
increase  of 4%.  Investment  income  was  higher in 1997  mainly  due to higher
investment  balances.  Other income  increased  from  $350,000 to  $682,389,  an
increase  of 95%.  This  increase  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.

Basic  Earnings Per Share.  Basic  earnings per share  increased  from $0.40 per
share in 1996 to $0.97  per  share in 1997 on  weighted  average  common  shares
outstanding of 10,917,920 and 10,545,533,  respectively.  The basic earnings per
share  reflects  net  income of  $4,321,645  and  $10,213,128  in 1996 and 1997,
respectively.

Calendar Year 1996 Compared to Calendar Year 1995

Royalty  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 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 of 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.  Expenditures  in  1996  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.  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


                                       18
<PAGE>
                              Medco Research, Inc.


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.

Basic Earnings (Loss) Per Share.  Basic  earnings/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  outstanding of 11,023,921 and  10,917,920,  respectively.
The basic  earnings/loss  per share reflects a net loss of $3,532,442 and income
of $4,321,645 in 1995 and 1996, respectively.


FINANCIAL CONDITION

As of  December  31,  1997,  the  Company  had  total  cash and  investments  of
$40,529,469 comprised of $2,726,486 of cash and cash equivalents and $37,802,983
of  investments  in U.S.  Treasury  Notes,  debt  securities of various  federal
governmental agencies and high quality corporate debt securities.  The Company's
working capital as of December 31, 1997 was $20,158,833  compared to $18,372,970
as of December 31, 1996.

Included in  liabilities at December 31, 1997 is an accrued  liability  (current
and  non-current  portion)  of  $1.5  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.

The Company recognized a full valuation allowance for its deferred tax asset due
to the  uncertainty  surrounding  timing  of  partnering  arrangements  and  the
uncertainty  surrounding the ultimate cost of the research,  clinical trials and
other  development of  pharmaceutical  products that potentially could adversely
affect  future  operations  and  profit  levels.  See  Note 9 to  the  Company's
Financial Statements included in Item 8 below.

ADENOSCAN  is  currently  marketed  in the  United  States,  Canada,  the United
Kingdom, Australia, Ireland, and Germany. ADENOCARD is currently marketed in the
United States and Canada, the United Kingdom plus Austria,  Australia,  Belgium,
Bulgaria,  Chile, the Czech Republic,  Denmark,  the Dominican Republic,  Egypt,
Finland, France, French Polynesia,  Germany, Greece, Guatemala,  Hungary, India,
Indonesia, Ireland, Italy, Jordan, Kuwait, Latvia, Libya, Luxembourg,  Malaysia,
the Netherlands, New Zealand, Norway, the Philippines,  Poland, Portugal, Qatar,
Saudi  Arabia,   Singapore,   Slovakia,   South  Africa,   South  Korea,  Spain,
Switzerland, Taiwan, Thailand, Ukraine, the United Arab Emirates and Uruguay.

The Company will not generate  royalties from the sale of its products until its
licensees receive marketing  clearance from the FDA or 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  Standards No. 128 ("SFAS
No.  128"),  "Earnings  per Share,"  which applies to all entities with publicly
held common stock or potential  common stock.  SFAS No. 128 requires the Company
to change its method of computing, presenting, and disclosing earnings per share
information.  This Statement  replaces the  presentation of primary earnings per
share (EPS) with a  presentation  of basic EPS.  SFAS No. 128 also requires dual


                                       19
<PAGE>
                              Medco Research, Inc.


presentation  of basic and diluted EPS on the face of the income  statement  for
all entities with complex capital  structures and requires a  reconciliation  of
the numerator and  denominator of the basic EPS computation to the numerator and
denominator  of the  diluted  EPS  computation.  The  Company  has  adopted  the
Statement and accordingly,  restated all prior-period  data presented to conform
with the provisions of SFAS No. 128. See Note 1, under the caption "Earnings Per
Share", to the Company's 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.

IMPACT OF YEAR 2000

The Company has assessed the impact Year 2000 could have on its  operations  and
does not  anticipate  that the Year 2000 will  materially  impact the  Company's
information  systems,  business  and  ability to  operate  in a  well-controlled
environment.

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 under the safe harbor  provisions of the Private  Securities
Litigation  Reform Act of 1995.  Although the Company  believes the expectations
reflected  in  such  forward   looking   statements   are  based  on  reasonable
assumptions,  it can give no assurance that its  expectations  will be attained.
Forward looking  statements involve known and unknown risks that could cause the
Company's  actual results to differ  materially from expected  results.  Factors
that  could  cause  actual  results  to  differ  materially  from the  Company's
expectations  include,  among  others,  the  high  cost and  uncertainty  of the
research,   clinical   trials  and  other   development   activities   involving
pharmaceutical  products;  the  unpredictability  of the duration and results of
regulatory  review of New Drug  Applications;  the  possible  impairment  of, or
inability to obtain, intellectual property rights and the cost of obtaining such
rights from third parties;  intense  competition;  the 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 from time to time in the Company's  Securities and Exchange  Commission
filings.




                                       20
<PAGE>
                              Medco Research, Inc.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following  consolidated  financial  statements of Medco  Research,  Inc. are
included in this report:

Page     22       Report of Independent Accountants

Page     23       Independent Auditors' Report

Page     24       Consolidated Balance Sheets--December 31, 1997 and 1996

Page     25       Consolidated  Statements of  Operations--Years  Ended December
                  31, 1997, 1996 and 1995

Page     26       Consolidated  Statements of Stockholders'  Equity--Years Ended
                  December 31, 1997, 1996 and 1995

Page     27       Consolidated  Statements of Cash  Flows--Years  Ended December
                  31, 1997, 1996 and 1995

Page     29       Notes to Consolidated Financial Statements



                                       21
<PAGE>
                              Medco Research, Inc.

                        REPORT OF INDEPENDENT ACCOUNTANTS


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

We have audited the accompanying  consolidated  balance sheet of Medco Research,
Inc.  and  subsidiary  as of December  31,  1997,  and the related  consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended.  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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Medco Research,
Inc.  and  subsidiary  as of December 31, 1997 and the  consolidated  results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.






                                                COOPERS & LYBRAND L.L.P.

Raleigh, North Carolina
January 22, 1998





                                       22
<PAGE>
                              Medco Research, Inc.


                          INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying  consolidated  balance sheet of Medco Research,
Inc.  and  subsidiary  as of December  31,  1996,  and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
years in the  two-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 the results of their  operations and
their cash flows for each of the years in the two-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.



                                          KPMG PEAT MARWICK LLP





Raleigh, North Carolina
January 28, 1997



                                       23
<PAGE>
                              Medco Research, Inc.



<TABLE>


                                                   Medco Research, Inc.

                                               Consolidated Balance Sheets
<CAPTION>
<S> <C>
                                                                                                      December 31,
                                                                                       ----------------------------------------
                                                                                               1997                  1996
                                                                                       ----------------------------------------
Assets
Current assets:
   Cash and cash equivalents                                                                $  2,726,486        $  9,106,695
   Investments held to maturity (Note 2)                                                      14,272,791           6,439,219
   Accounts and notes receivable:
     Royalties                                                                                 6,003,629           3,794,264
     Other                                                                                       244,486           2,227,361
   Accrued interest income                                                                       563,294             376,864
   Prepaid expenses and other                                                                    503,568             292,892
                                                                                       ----------------------------------------
Total current assets                                                                          24,314,254          22,237,295
Investments held to maturity (Note 2)                                                         23,530,192          19,578,934
Deferred asset (Note 6)                                                                                -             124,212
Property and equipment, at cost, net of accumulated depreciation (Note 3)                        243,996             307,521
Patent,  trademark and distribution  rights, at cost, net of accumulated  amortization
   of $277,406 (1997) and $62,268 (1996) (Note 5)                                              1,524,272             380,442
                                                                                       ----------------------------------------
Total assets                                                                                 $49,612,714         $42,628,404
                                                                                       ========================================
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable and accrued expenses                                                    $  2,378,933        $  2,308,857
   Accrued royalties (Note 5)                                                                  1,300,650           1,179,557
   Accrued compensation                                                                          475,838             375,911
                                                                                       ----------------------------------------
Total current liabilities                                                                      4,155,421           3,864,325
   Deferred revenue (Note 7)                                                                           -             548,202
   Deferred royalty payment (Note 6)                                                             451,009           1,716,872
   Other long-term liabilities                                                                   350,000                   -
Stockholders' equity (Note 8):
   Common stock, no par value,  authorized  40,000,000 shares;  shares issued of
     11,182,832  and  11,155,832 at December 31, 1997,  and 1996,  respectively;
     shares
     outstanding   of  10,513,932  and  10,740,032  at  December  31,  1997  and  1996,       52,513,135          52,216,010
     respectively
   Accumulated deficit                                                                        (1,180,819)        (11,393,947)
   Cost of stock held in  treasury,  668,900 and 415,800  shares at December  31, 1997
     and 1996, respectively                                                                   (6,676,032)         (4,323,058)
                                                                                       ----------------------------------------
Total stockholders' equity                                                                    44,656,284          36,499,005
                                                                                       ----------------------------------------
Commitments and contingencies (Notes 5, 6  and 11)
                                                                                       ----------------------------------------
Total liabilities and stockholders' equity                                                   $49,612,714         $42,628,404
                                                                                       ========================================

         See accompanying notes to consolidated financial statements.





                                       24
<PAGE>
                              Medco Research, Inc.





                                          Consolidated Statements of Operations
<CAPTION>

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


          Royalty revenue (Note 5)                                       $20,000,366       $13,453,958      $9,770,124
          Royalty expense (Note 5)                                         2,985,074         2,573,877       3,955,551
                                                                   ------------------------------------------------------
            Gross margin                                                  17,015,292        10,880,081       5,814,573
                                                                   ------------------------------------------------------

         Operating expenses:
            Research and development costs                                 6,902,092         5,839,278       8,535,187
            General and administrative expenses                            2,393,601         3,002,273       3,949,438
                                                                   ------------------------------------------------------
                                                                           9,295,693         8,841,551      12,484,625
                                                                   ------------------------------------------------------
            Operating income (loss)                                        7,719,599         2,038,530      (6,670,052)
                                                                   ------------------------------------------------------

         Other income:
            Interest income                                                2,099,550         2,020,115       2,237,610
            Other income (Note 7)                                            682,389           350,000       1,000,000
                                                                   ------------------------------------------------------
                                                                           2,781,939         2,370,115       3,237,610
                                                                   ------------------------------------------------------

         Income (loss) before income taxes                                10,501,538         4,408,645      (3,432,442)

         Provision for income taxes (Note 9)                                 288,410            87,000         100,000
                                                                   ------------------------------------------------------

         Net income (loss)                                               $10,213,128       $ 4,321,645     $(3,532,442)
                                                                   ======================================================

         Basic earnings (loss) per share                                       $0.97             $0.40          $(0.32)
                                                                   ======================================================

         Diluted earnings (loss) per share                                     $0.96             $0.40          $(0.32)
                                                                   ======================================================

         Weighted average shares outstanding                              10,545,533        10,917,920      11,023,921
                                                                   ======================================================

         Weighted average shares outstanding
           assuming dilution                                              10,620,785        10,938,357      11,023,921
                                                                   ======================================================



                  See accompanying notes to consolidated financial statements.





                                       25
<PAGE>
                              Medco Research, Inc.





                                  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 December
   31, 1994               11,020,947    $51,376,034     $(291,312)     $(12,183,150)       $         -        $38,901,572
   Stock options             148,585        953,757             -                 -                  -            953,757
     exercised
   Stock held in            (142,100)             -             -                 -         (1,534,707)        (1,534,707)
     treasury
   Compensation
     expense
     related to                    -         44,568             -                 -                  -             44,568
     stock options
   Stock
     repurchased             (13,700)      (158,349)            -                 -                  -           (158,349)
     and retired
   Change in the
     value of
     available for                 -              -       425,284                 -                  -            425,284
     sale
     investment
     securities
   Net loss                        -              -             -        (3,532,442)                 -         (3,532,442)
                       ---------------------------------------------------------------------------------------------------
Balance at
   December 31,           11,013,732     52,216,010       133,972       (15,715,592)        (1,534,707)        35,099,683
   1995
   Stock held in            (273,700)             -             -                 -         (2,788,351)        (2,788,351)
     treasury
   Change in the
     value of
     available for                  -             -      (133,972)                -                   -          (133,972)
     sale
     investment
     securities
    Net income                     -              -             -         4,321,645                  -          4,321,645
                       ---------------------------------------------------------------------------------------------------
Balance at
   December 31,            10,740,032    52,216,010             -       (11,393,947)        (4,323,058)        36,499,005
   1996
   Stock options              27,000        297,125             -                 -                  -            297,125
     exercised
   Purchase of
     stock held in          (253,100)             -             -                 -         (2,352,974)        (2,352,974)
     treasury
   Net income                      -              -             -        10,213,128                  -         10,213,128
                       ===================================================================================================
Balance at
   December 31,           10,513,932    $52,513,135     $       -       $(1,180,819)       $(6,676,032)       $44,656,284
   1997
                       ===================================================================================================


See accompanying notes to consolidated financial statements.





                                       26
<PAGE>
                              Medco Research, Inc.





                                                   Medco Research, Inc.

                                          Consolidated Statements of Cash Flows
<CAPTION>


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

Operating activities
Net income (loss)                                                     $10,213,128          $4,321,645        $(3,532,442)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
     Depreciation of property and equipment                               101,965             143,934            127,213
     Amortization of patent, trademark and distribution
       rights                                                             573,817              51,403              9,085
     Gain on investments held to maturity                                       -                   -                (45)
     Gain on investments available for sale                                     -             (49,258)            (7,302)
     Net amortization of investment discount                             (101,869)           (260,912)          (686,023)
     Loss on property and equipment                                        10,852                   -                  -
     Loss on disposal of patents                                           14,759                   -                  -
     Settlement payment from Fujisawa                                           -                   -          2,000,000
     Settlement payment to Abbott                                               -                   -         (2,000,000)
     Compensation expense related to stock options                              -                   -             44,568
     Changes in operating assets and liabilities:
         Accounts receivable                                             (226,490)         (2,286,735)           241,480
         Accrued interest income                                         (186,430)           (124,644)           152,893
         Prepaid expenses and other                                       109,876              34,427             12,558
         Deferred asset                                                   124,212           1,727,703            298,085
         Accounts payable and accrued expenses                            199,451            (126,659)           626,806
         Accrued royalties                                                121,093            (129,764)          (934,784)
         Deferred  revenue                                               (548,202)           (751,798)          (650,000)
         Deferred royalty payment                                      (1,265,863)           (884,353)          (148,775)
                                                                -----------------------------------------------------------
Net cash provided by (used in) operating activities                     9,140,299           1,664,989         (4,446,683)
                                                                -----------------------------------------------------------







                                   (Continued)




                                       27
<PAGE>
                              Medco Research, Inc.





                                    Consolidated Statements of Cash Flows (continued)
<CAPTION>

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

Investing activities
Purchase of securities held to maturity                               (20,161,540)        (45,631,850)       (23,963,079)
Purchase of securities available for sale                                       -             (76,012)          (366,275)
Maturity of securities held to maturity                                 8,478,579          46,450,367         28,171,395
Principal repayments on securities held to maturity                             -                   -          1,424,924
Proceeds from sale of securities available for sale                             -           5,655,967          3,312,378
Purchases of property and equipment                                       (51,298)           (121,786)          (141,423)
Proceeds from sale of property and equipment                                2,006                   -                  -
Purchases of patent, trademark and distribution rights                 (1,732,406)           (351,403)                 -
                                                                 ---------------------------------------------------------------
Net cash provided by (used in) investing activities                   (13,464,659)          5,925,283          8,437,920
                                                                 ---------------------------------------------------------------

Financing activities
Purchase of stock for retirement                                                -                   -           (158,349)
Net proceeds from exercise of stock options                               297,125                   -            953,757
Purchase of stock held in treasury                                     (2,352,974)         (2,788,351)        (1,534,707)
                                                                 ---------------------------------------------------------------
Net cash used in financing activities                                  (2,055,849)         (2,788,351)          (739,299)
                                                                 ---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                       (6,380,209)          4,801,921          3,251,938
Cash and cash equivalents at beginning of year                          9,106,695           4,304,774          1,052,836
                                                                 ---------------------------------------------------------------
Cash and cash equivalents at end of year                              $ 2,726,486         $ 9,106,695        $ 4,304,774
                                                                 ===============================================================


                                      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.
</TABLE>





                                       28
<PAGE>
                              Medco Research, Inc.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1996 and 1995

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's  business approach has been to carefully  evaluate and selectively
acquire product candidates, thereby reducing the costs and risks associated with
basic research and drug discovery.  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 any  additional pre clinical  studies and clinical  testing
needed for product registration and marketing approval. These late-stage product
development   activities  are  outsourced  to  independent   clinical   research
organizations   to  maximize   efficiency   and  minimize   internal   overhead.
Historically the Company has licensed the  manufacturing and marketing rights to
the product to a corporate  partner in exchange for  licensing  fees and royalty
payments on future product sales. A portion of 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.

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 No. 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


                                       29
<PAGE>
                              Medco Research, Inc.


market prices of comparable instruments. SFAS No. 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 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.

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's  investments  are
accounted  for  in  accordance   with  SFAS  No.115,   "Accounting  for  Certain
Investments  in Debt  and  Equity  Securities".  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's
investments are accounted for as held-to-maturity  securities as of December 31,
1997 and 1996.  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
product.

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.





                                       30
<PAGE>
                              Medco Research, Inc.

1.       Summary of Significant Accounting Policies (continued)

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.

The  Company   invests  its  excess  cash  primarily  in  U.S.   Government  and
high-quality  corporate debt  securities and  commercial  paper.  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 as 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

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS No. 123"),  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,  "Accounting  for Stock Issued to  Employees",
and provide pro forma net income and pro forma  earnings  per share  disclosures
for employee  stock option  grants 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.




                                       31
<PAGE>
                              Medco Research, Inc.

1.       Summary of Significant Accounting Policies (continued)

Earnings Per Share

The Company adopted Statement of Financial  Accounting  Standards No. 128 ("SFAS
No. 128"), "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires the
Company to change its method of computing,  presenting and  disclosing  earnings
per share  information.  The  Company is now  required  to report both basic and
diluted  earnings  per share.  Basic  earnings  per share is computed  using the
weighted average number of common shares  outstanding  during a period.  Diluted
earnings  per share is  computed  using the  weighted  average  number of common
shares  and  dilutive  common  share   equivalents,   primarily  stock  options,
outstanding  during a period.  Upon  adoption,  all prior  period  data has been
restated to conform to the provisions of SFAS No. 128.

The net income  (loss) used for both basic and  dilutive  earnings per share for
each of the years ended  December 31,  1997,  1996,  and 1995 was the same.  The
following is a  reconciliation  of the weighted  average number of common shares
and common share equivalents used to determine diluted earnings (loss) per share
for each of the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                      ------------------------------------------------
                                                           1997             1996            1995
                                                      ---------------- --------------- ---------------
<S> <C>
     Basic-weighted average shares outstanding           10,545,533      10,917,920       11,023,921

     Net effect of dilutive stock options
     based on treasury stock method
     using average market price                              75,252          20,437                -
                                                      -------------- --------------- -----------------

     Weighted average shares assuming
     dilution                                            10,620,785      10,938,357       11,023,921
                                                      ============== =============== =================
</TABLE>


Adoption of New Accounting Pronouncements

The Company  will adopt  Statement  of Financial  Accounting  Standards  No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") for its fiscal year ending  December 31,  1998.  SFAS No. 131 requires the
Company to report  selected  information  about  operating  segments  in interim
financial  reports issued to  shareholders.  It also  establishes  standards for
related  disclosures  about products and services,  geographic  areas, and major
customers.  Preliminary  analysis of this pronouncement by the Company indicates
that the pronouncement will not have a material impact on the Company.

The Company  will adopt  Statement  of Financial  Accounting  Standards  No. 130
"Reporting  Comprehensive  Income"  ("SFAS No.  130") for its fiscal year ending
December  31,  1998.  SFAS No.  130  requires  the  Company to display an amount


                                       32
<PAGE>
                              Medco Research, Inc.


representing  the total  comprehensive  income  for the  period  in a  financial
statement  which  is  displayed  with  the same  prominence  as other  financial
statements.  Upon adoption,  all prior period data presented will be restated to
conform  to the  provisions  of  SFAS  No.  130.  Preliminary  analysis  of this
pronouncement by the Company  indicates that the  pronouncement  will not have a
material impact on the Company.


2.       Investments

The  aggregate  values of  investment  securities  at December 31, 1997 and 1996
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
                                           ----------------- ---------------------- ---------------------- -------------------
1997 Held to maturity
U.S. Government                                 $26,003,402                $40,248         $            -         $26,043,650
Corporate Obligations                            11,799,581                      -               (84,645)          11,714,936
                                           ================= ====================== ====================== ===================
Total securities held to maturity               $37,802,983                $40,248              $(84,645)         $37,758,586
                                           ================= ====================== ====================== ===================

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

There were no realized  gains or losses in 1997. 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.

The following  represents the contractual  maturities of investments  held as of
December 31, 1997.



               Less than 1 year                            $14,272,791
               1 to 5 years                                 23,530,192
                                                           ===========
               Total                                       $37,802,983
                                                           ===========



3.       Property and Equipment

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

Property and equipment                          $717,675          $785,269
Accumulated depreciation                        (473,679)         (477,748)
                                         ===================================
                                                $243,996          $307,521
                                         ===================================




                                       33
<PAGE>
                              Medco Research, Inc.

4.       Leases

The Company  leases office space under an operating  lease which expires in July
1998. Lease expense approximated $210,800,  $206,100, and $203,700 in 1997, 1996
and 1995,  respectively.  The Company  extended this lease through  November 30,
1998 with the  Company's  sole  discretion  to extend for an  additional 30 days
until  December  31,  1998.  Future  minimum  lease  payments  under  this lease
agreement  and  its  extension  through  December  31,  1998  are  approximately
$220,000.


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 as of
December 31, 1997 to pay $550,000 in nonrefundable payments which are payable in
quarterly  installments of $50,000 through July 1, 2000. The Company may also be
required to pay a maximum of $6,500,000 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


                                       34
<PAGE>
                              Medco Research, Inc.


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 period ended December 31,
1995 resulted from Fujisawa sales of ADENOCARD in the United States.


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. In May
1996, the parties entered into an agreement to jointly  develop  adenosine-based
products having indications as  cardioprotective  agents.  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  29% of net sales for the first
five  years and 25%  thereafter  within the  territories.  The  companies  share
equally  all  costs of  development  and any  royalties  due to  third  parties.
Two-thirds of all royalty income in the two-year  period ended December 31, 1997
resulted from Fujisawa  sales of 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.


In 1997 the Company entered into a Development and  Commercialization  Agreement
(the  "Agreement")  with Discovery  Therapeutics,  Inc. ("DTI") dedicated to the
discovery, development and commercialization of compounds that stimulate the A2a
subfamily  of  adenosine  receptors  ("A2a-agonists").  Under  the  terms of the
Agreement,  DTI granted to the Company an exclusive  worldwide  license to DTI's
current intellectual property related to A2a-agonists. The Company has exclusive
worldwide  rights to market and sell  developed  compounds,  either  directly or
through sublicense.  In exchange for these rights, the Company agreed to pay DTI
certain licensing fees,  development milestones and royalties on future sales of
A2a-agonists.

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


                                       35
<PAGE>
                              Medco Research, Inc.


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
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  for years  ended  December  31,  1997 and 1996 was an
accrued  liability  (current  and  non-current  portion) of  approximately  $1.5
million and $2.5 million, respectively, relating to the balance of the Company's
guaranteed royalty obligation to Abbott. Included in assets at December 31, 1996
was 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 received a 29% royalty from ADENOSCAN net sales of which
4% was applied to the deferred asset and 25% was recognized as royalty  revenue.
At such time  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. As of December 31, 1997 the deferred asset was
fully  recovered and the Company will recognize  royalty  revenue of 29% through
July 2000.

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
received  from  Suntory  Limited  ("Suntory"),  the  Company's  development  and
marketing  partner for  adenosine  in Japan,  a $1,000,000  licensing  fee which
became   non-refundable   upon   satisfactory   pre  clinical   and   toxicology
accomplishments.  During 1995, the Company substantially  satisfied pre clinical
and toxicology  accomplishments and accordingly  recognized  $1,000,000 as other
income and received an additional  $300,000  licensing fee upon the NDA approval
of ADENOSCAN which became  non-refundable upon Suntory's initiation of Phase III
clinical trials.  During 1997, the Company recognized the $300,000 licensing fee
as income and also  received and  recognized a $400,000  payment as other income
following Suntory's  announcement of the initiation of Phase III clinical trials
of ADENOSCAN in Japan.


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


                                       36
<PAGE>
                              Medco Research, Inc.


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.

During third  quarter 1996,  the Company  deferred  $248,202 of royalty  revenue
associated  with the  purchase of a  multi-month  supply of ADENOSCAN by a major
radiopharmacy  as a result of  back-end  loaded  incentives.  During  1997,  the
Company  recognized  the  $248,202  of deferred  revenue as royalty  revenue for
back-end loaded incentives which were recognized during 1997.

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
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, and such Company contributions to vest equally over
the first four years of  service.  Following  the fourth  year of  service,  all
matching  contributions  are fully vested. In 1997 and 1996, the Company accrued
approximately  $28,000 and $22,000,  respectively,  for the match of 50% of each
employee's  annual plan contribution up to a maximum of 2% of the salary of such
employee based on achievement of Company  performance goals. The Company did not
have a 401(K) match plan for fiscal year 1995;  therefore,  no match was made in
1995.

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 year ended December 31, 1995,  options covering 25,000 shares with an
aggregate  market value of $259,375  were  exercised by the  tendering of 16,415
shares with a market  value of $170,306 and minimal  cash  payments.  During the
year ended  December 31, 1997,  27,000  shares were  exercised.  During the year
ended December 31, 1996 there were no options exercised.




                                       37
<PAGE>
                              Medco Research, Inc.


Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
                                                          Weighted                        Weighted                       Weighted
                                                           Average                        Average                         Average
                                                          Exercise                        Exercise                       Exercise
                                             1997           Price           1996           Price            1995           Price
                                       ---------------------------------------------------------------------------------------------
<S> <C>
Outstanding at beginning of year                781,982      $11              610,732        $15              781,870        $15
Granted                                         400,080       14              461,000         10              241,000         13
Exercised                                       (27,000)      11                    -          -             (165,000)         7
Expired or canceled                            (171,132)      14             (289,750)        17             (247,138)        17
                                       =============================================================================================
Outstanding at end of year                      983,930      $12              781,982        $11              610,732        $15
                                       =============================================================================================

Available for grant at end of year               56,583      N/A              285,531       N/A               456,781       N/A
Exercisable at end of year                      394,275      N/A              281,257       N/A               341,170       N/A
Weighted average fair value of
options granted                              $6.05           N/A           $3.92            N/A               $5.32         N/A
Price range of options                    $8.63-$15.88       N/A        $8.63-$17.13        N/A          $10.63-$26.69      N/A
Price range of options exercised          $10.13-$13.25      N/A             N/A            N/A                  $6.81      N/A


Options  outstanding  and  exercisable as of December 31, 1997 are summarized as
follows:
<CAPTION>

                                      Options Outstanding                                  Options Exercisable
                      -----------------------------------------------------          ------------------------------------

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

$8 - $11                       434,500        8.5 years         $10                          232,125         $10
$12 - $16                      549,430        8.7               $14                          162,150         $13
                      -----------------                                              ----------------
$8 - $16                       983,930        8.6               $12                          394,275         $11
                      =================                                              ================
</TABLE>


As of December  31,  1997,  the Company had a warrant  outstanding  allowing the
holder to purchase  40,000  shares of the  Company's  common  stock on or before
November  16,  2000 at an  exercise  price of $13.50 per share.  The Company has
reserved  1,080,513  shares of common stock for future exercise of stock options
and warrants.

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 APB Opinion No. 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 1997,  1996 and 1995:  dividend  yield zero (all
years);  expected  volatility  of 37% (1997) and 35% (1996 and 1995);  risk-free


                                       38
<PAGE>
                              Medco Research, Inc.


interest  rate of 6% (all years);  and expected life of 5 years for all options.
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.




<PAGE>
<TABLE>
<CAPTION>
<S> <C>
                                                                          1997                1996                 1995
                                                                 ------------------- -------------------- --------------------
Net income (loss):                            As reported               $10,213,128           $4,321,645         $(3,532,442)
                                              Pro forma                   8,674,702            2,806,507          (4,472,574)

Basic earnings (loss) per share:              As reported                     $0.97                $0.40              $(0.32)
                                              Pro forma                        0.82                 0.26               (0.40)

Diluted earnings (loss) per share:            As reported                     $0.96                $0.40              $(0.32)
                                              Pro forma                        0.82                 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,
                                                  ---------------------------------------------------------
                                                        1997                1996               1995
                                                  ------------------ ------------------- ------------------
        Current expense:
          Federal                                          $208,410            $ 87,000     $            -
          State                                                   -                   -                  -
          Foreign taxes                                      80,000                   -            100,000
                                                  ------------------ ------------------- ------------------
                                                            288,410              87,000            100,000
                                                  ------------------ ------------------- ------------------
        Deferred expense:
          Federal                                                 -                   -                  -
          State                                                   -                   -                  -
                                                  ------------------ ------------------- ------------------
                                                                  -                   -                  -
                                                  ------------------ ------------------- ------------------

          Total                                            $288,410            $ 87,000           $100,000
                                                  ================== =================== ==================





                                       39
<PAGE>
                              Medco Research, Inc.


The  components  of deferred tax assets and the deferred tax  liabilities  as of
December 31, 1997 and December 31, 1996 are as follows:

<CAPTION>

                                                                          Years Ended December 31,
                                                                   ------------------- ------------------
                                                                          1997               1996
                                                                   ------------------- ------------------
      Deferred tax assets:
        Tax loss carryforwards                                         $  3,214,000       $  6,813,000
        Capital losses                                                      381,000            456,000
        Tax credit carryforwards                                          1,625,000          1,305,000
        Compensation accruals                                                33,000             49,000
        Charitable Contributions                                             25,000                  -
        Deferred revenue                                                    567,000            524,000
        Depreciation and Amortization                                        24,000
                                                                   ------------------- ------------------
          Total gross deferred tax assets                                 5,869,000          9,147,000
        Valuation allowance                                              (5,869,000)         (9,131,000)
                                                                   ------------------- ------------------
          Net deferred tax assets                                                               16,000
                                                                                  -
                                                                   ------------------- ------------------
        Deferred tax liabilities:
          Depreciation and amortization                                           -              4,000
          Prepaid expenses                                                        -             12,000
                                                                   ------------------- ------------------
          Total gross deferred tax liabilities                                    -             16,000
                                                                   ------------------- ------------------
        Net deferred tax asset                                         $          -       $          -
                                                                   =================== ==================
</TABLE>

The Company will recognize a full valuation allowance for its deferred tax asset
due to the uncertainty  surrounding  timing of partnering  arrangements  and the
uncertainty  surrounding the ultimate cost of the research,  clinical trials and
other  development of  pharmaceutical  products that potentially could adversely
affect future operations and profit levels.

The  actual  income  tax  expense  for  1997,  1996  and 1995  differs  from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the earnings before income taxes) as follows:
<TABLE>
<CAPTION>
<S> <C>

                                          December 31, 1997              December 31, 1996              December 31, 1995
                                   -------------------------------- ----------------------------- -------------------------------
                                        Amount             %             Amount           %            Amount            %
                                   ------------------ ------------- ----------------- ----------- ----------------- -------------
Computed "expected" tax expense
(benefit)                                $3,570,523          34.0%       $1,498,940        34.0%      $(1,167,030)        (34.0)%
Change in valuation allowance            (3,262,000)        (31.1)      (1,725,000)       (39.1)        2,706,000          78.8
Tax credits                                       -             -             8,000         0.2          (488,664)        (14.2)
State tax expense (benefit)                  12,366           0.1           325,934         7.4          (430,245)        (12.5)
Write down of marketable
securities                                        -             -           (29,469)       (0.7)         (315,111)         (9.2)
Stock options                              (101,023)         (1.0)               -           -           (278,779)         (8.1)
Foreign taxes                                52,940           0.5                 -           -            66,000           1.9
Other                                        15,605           0.2             8,595         0.2             7,829           0.2
                                   ================== ============= ================= =========== ================= =============
Current provision                      $    288,410           2.7%      $    87,000         2.0%     $    100,000           2.9%
                                   ================== ============= ================= =========== ================= =============
</TABLE>
At December 31, 1997, the Company had Federal net operating  loss  carryforwards
of  approximately  $8,500,000  and  $9,000,000  for regular tax and  alternative


                                       40
<PAGE>
                              Medco Research, Inc.


minimum tax purposes,  respectively. The net operating loss carryforwards expire
in  various  amounts  from  2008 to  2010.  Additionally,  the  Company  has net
operating loss  carryforwards of  approximately  $6,000,000 for state income tax
purposes which expire between 1998 and 2000.

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,  1997,  the Company had  available  approximately  $1,332,000,
$289,000 and $4,000 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 2011.

The Company has a capital loss  carryover  of $974,000 at December 31, 1997,  of
which $47,000 will expire in 1999 and the
remainder will expire in 2000.

The Company made income tax payments of $528,750 and $87,000 for the years ended
December 31, 1997 and 1996, respectively. There were no income tax payments made
during the year ended December 31, 1995.

10.      Related Party Transactions

Fees of $144,000 as well as related travel expenses were paid in 1997, 1996, and
1995 to an individual  director for consulting  with the Company on matters such
as acquisitions, financial public relations and pending litigation.

11.      Contingencies

There are no material legal proceedings pending against the Company. However, on
October 3, 1997,  Richard  A.  Wilson,  Debra A.  Angello,  and Paul S.  Angello
("Plaintiffs")  filed a  complaint  against  Fujisawa,  USA,  Inc. in the United
States  District  Court,  District of Oregon,  alleging that  Fujisawa's sale of
ADENOSCAN in the United States induces,  or contributes to, the  infringement of
plaintiffs' U.S. Patent No.  4,824,660 ("the `660 patent"),  entitled "Method of
Determining  the  Viability of Tissue in an  Organism."  which the Patent Office
issued on April 25, 1989.  According  to  plaintiffs,  the `660 patent  claims a
specific  technique for more reliably  locating  viable or nonviable  regions of
heart tissue,  namely using an adenosine  triphosphate  repleting  agent such as
ribose or adenosine as an adjunct to radioactive  isotope  (e.g.,  thallium-201)
myocardial  perfusion  scintigraphy,  where regions of heart tissue in which the
scan images show no  radioactivity  indicate  the  presence of  nonviable  heart
tissue. In its Answer and Counterclaim, Fujisawa denied that it infringed any of
the claims of the `660  patent and  alleged  that the `660  patent was  invalid.
Fujisawa further alleged that  plaintiffs'  claims of patent  infringement  were
barred by the doctrines of laches and estoppel.  In its  Counterclaim,  Fujisawa
requested a declaratory judgment that it did not infringe the claims of the `660
patent and that such patent is invalid.

This  action is in the  pre-discovery  motion  stage.  Fujisawa  has advised the
Company that Fujisawa  intends to vigorously  defend this action and believes it

                                       41
<PAGE>
                              Medco Research, Inc.


has no merit. Under the terms of its ADENOSCAN  exclusive license agreement with
Fujisawa,  the Company will reimburse  Fujisawa for 50% of the cost of defending
this action.

The Company  also  believes  the action has no merit.  The Company has long been
aware of the `660 patent,  and as part of its normal  operating  procedures  the
Company has received the written opinions of separate patent counsel that the
manufacture and sale of ADENOSCAN for use in myocardial  imaging does not
infringe any valid claim of the `660  patent.  The  Company  disclosed  its
receipt  of its patent counsel non-infringement opinion in its 1993 Form 10-K
Report.

The Company  prevailed in the liability claims pending against it as reported in
its 1996 Form 10-K:  In November  1997,  the  American  Arbitration  Association
denied, in its entirety,  the damage claims of Dr. Eliezer Rapaport;  and in May
1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed
the dismissal of the class action  litigation  alleging the Company had violated
federal securities laws. Both decisions are final and binding on the parties.

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

 No information  is required by this Item;  however,  information  pertaining to
this Item is required and contained in the Company's  definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders  under the caption  "Ratification of
the Appointment of Independent Accountants".





                                       42
<PAGE>
                              Medco Research, Inc.

                                    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 1998 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 1998 Annual Meeting of Shareholders under the
caption "Executive Compensation" and is incorporated herein by this reference.


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 1998 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 1998 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:

         Independent Accountants' Report

         Independent Auditors' Report

         Consolidated Balance Sheets--December 31, 1997 and 1996

         Consolidated  Statements of Operations--Years  Ended December 31, 1997,
         1996 and 1995

         Consolidated  Statements of Stockholders'  Equity--Years Ended December
         31, 1997, 1996 and 1995



                                       43
<PAGE>
                              Medco Research, Inc.


         Consolidated  Statements of Cash Flows--Years  Ended December 31, 1997,
         1996 and 1995

         Notes to Consolidated Financial Statements

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, 1997.


(c)      Exhibits

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)

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)



                                       44
<PAGE>
                              Medco Research, Inc.


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)

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. (11)

10.25     Amendment  to  Consulting  Agreement  dated  December  1,  1994 by and
          between Richard C. Williams. (11)

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

23.1      Consent of Independent Accountants.

23.2      Accountants' Consent.





                                       45
<PAGE>
                              Medco Research, Inc.

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

(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.

(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  exhibits are  incorporated  herein by reference to Exhibits
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.

(11)     The  referenced  exhibits  are  incorporated  herein  by  reference  to
         Exhibits 10.24 and 10.25 to the Registrant's Form 10-K for the calendar
         year ended  December  31, 1996 filed with the  Securities  and Exchange
         Commission on March 27, 1997.






                                       46
<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 Executive
                                      Officer

                                      Date:    March 24, 1998



                                      By: /s/ Glenn C. Andrews
                                      Glenn C. Andrews
                                      Vice President, Finance and
                                      Administration and Chief
                                      Financial Officer


                                      Date:    March 24, 1998



                                      By: /s/ Adam C. Derbyshire
                                      Adam C. Derbyshire
                                      Corporate Controller and
                                      Secretary

                                      Date:    March 24, 1998

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 24, 1998
         --------------------------------------------
         Richard C. Williams,
         Chairman of the Board


By:      /s/ Albert D. Angel                             Date:    March 24, 1998
         -------------------------------------------
         Albert D. Angel, Director


By:      /s/ William M. Bartlett                         Date:    March 24, 1998
         -----------------------------------
         William M. Bartlett, Director




                                       47
<PAGE>
                              Medco Research, Inc.


By:      /s/ Jay N. Cohn                                 Date:    March 24, 1998
         -----------------------------------
         Jay N. Cohn, M.D., Director


By:      /s/ Marvin S. Hausman                           Date:    March 24, 1998
         -----------------------------------
         Marvin S. Hausman, M.D., Director


By:      /s/ Mark B. Hirsch                              Date:    March 24, 1998
         -----------------------------------
         Mark B. Hirsch, Director


By:      /s/ Eugene L. Step                              Date:    March 24, 1998
         -----------------------------------
         Eugene L. Step, Director



                                       48