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, 1998

                                       OR

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 For the transition period from________to________

                         Commission file number 0-13948

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

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

                         7001 Weston Parkway, Suite 300
                           Cary, North Carolina 27513
                           --------------------------
               (Address of principal executive offices) (Zip Code)

                                 (919) 653-7001
                                 --------------
              (Registrant's telephone number, including area code)

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

               Common Stock                New York 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.[ X ]

Based on the  closing  price on March 1, 1999 of  $23.125  for the  Registrant's
Common Stock as reported on the New York Stock  Exchange,  the aggregate  market
value of Common Stock held by  nonaffiliates  of  Registrant  was  approximately
$235,844,475.

The number of shares outstanding of the Registrant's Common Stock was 10,333,257
at March 1, 1999.

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 1999 Annual Meeting of Shareholders.


<PAGE>

                                     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, 1998  resulted  from sales of ADENOCARD and ADENOSCAN in the United
States by  Fujisawa  Healthcare,  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
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


                                       2
<PAGE>

development activities involving  pharmaceutical  products; the unpredictability
of the duration and results of regulatory  review of New Drug  Applications  and
Investigational 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.

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.

Over the past two years the Company has  conducted  a  worldwide  assessment  of
adenosine-receptor  technologies and has succeeded in securing commercialization
rights and related  intellectual  properties to a portfolio of  applications  of
intravenous  adenosine as well as adenosine  analogs and allosteric  modulators.
Going forward,  the Company plans to retain U.S.  rights to the compounds  which
indicate potential use as hospital-based cardiovascular products and out-license
non-U.S.  rights to these  compounds  as well as  worldwide  rights to compounds
identified for potential non-cardiovascular use.


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 47 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 a
     pharmacological  stressor.  Commercially  available  from  Fujisawa  in the
     United States and Canada since 1995, the drug also is sold by Sanofi in the
     United  Kingdom and five other  European  countries  as well as  Australia.
     During 1997 Sanofi received  approval for the drug in 14 additional  member
     countries  of  the  European   Community  through  the  mutual  recognition
     procedure.  Additional  markets will be added in 1999 as pricing agreements
     are completed.

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 1998
     71st  Scientific  Sessions  of the  American  Heart  Association,  positive
     clinical results of a Phase II multicenter trial were reviewed,  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. A Phase III trial, involving approximately 2,100 patients to be
     recruited  from  200 to  300  centers  in the  United  States  and  Canada,
     commenced in 1999. The objectives of this trial are to confirm results in a
     sizeable  population  and to provide  additional  information  on  clinical
     outcomes such as death and rehospitalization.


                                       3
<PAGE>

ADENOSINE ANALOGS - chemical  derivatives  of adenosine,  or adenosine  analogs,
     have  been  developed  by  chemists  to  selectively  affect  a  particular
     adenosine   receptor   subtype.   These   compounds   are  referred  to  as
     second-generation  technology. By means of option agreements and a research
     agreement,  the  Company  has  rights  to a number  of  adenosine  analogs,
     including  A2a-,  and A3-  agonists  as well as A3-  antagonists.  The lead
     A2a-agonist,  designated  MRE0470,  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 1998,  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, China,  Columbia,  the Czech Republic,  Denmark, the Dominican
Republic, Egypt, Finland, France, French Polynesia,  Germany, Greece, Guatemala,
Hong-Kong,   Hungary,   India,  Indonesia,   Ireland,   Israel,  Italy,  Kuwait,
Luxembourg,  Malaysia, New Zealand, Norway, Oman, Panama, Peru, the Philippines,
Poland,  Portugal,  Qatar,  the Republic of Estonia,  the Republic of Lithuania,
Romania, Saudi Arabia,  Singapore,  Slovakia,  South Africa, South Korea, Spain,
Switzerland, Taiwan, Thailand, 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
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 last  applicable
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.


                                       4
<PAGE>

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.  In
May 1998, the Company transferred the NDA for ADENOCARD to Fujisawa and engaged
a third party to contract manufacture the drug.

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 has been secured from the health authorities
in the majority of the member countries.  ADENOSCAN is currently marketed in the
United States, Canada, the United Kingdom, Australia, Finland, Germany, Ireland,
Italy, Norway and Spain.  Suntory, the Company's partner for adenosine in Japan,
completed the Phase III trial of Adenoscan in that country.  Suntory  expects to
file a New Drug  Application with the Japanese  regulatory  authority during the
first half of 1999.

Product License: The Company owns the product as it is the exclusive assignee of
patents issued in the U.S. and Canada,  with  counterpart  applications  pending
approval in other  countries  of the world,  covering  the use of adenosine as a
pharmacological  stressor in cardiac  imaging.  By means of an agreement  signed
during the year, the Company's marketing partner, Fujisawa, secured intellectual
property  rights to extend its exclusivity on Adenoscan until 2015. In addition,
in the U.S. the product received three years of exclusivity from the date of NDA
approval under the Hatch-Waxman Act.

                                       5
<PAGE>

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:
----------------------------

Agreements with Fujisawa.  The Company granted Fujisawa an exclusive  license in
the United  States  and Canada to  manufacture  and market  ADENOSCAN.  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  the  expiration  of the last  applicable  patent  rights,  at which  time
Fujisawa would have a paid-up license.  The parties also agreed to share equally
all third party royalties.

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.  In May 1998,  the Company  transferred  the NDA for  ADENOSCAN to
Fujisawa and Fujisawa engaged a third party to contract manufacture the drug.

Agreement  with  Sanofi.  In  December  1992,  the  Company  granted  Sanofi the
exclusive  rights to manufacture and market  ADENOSCAN  worldwide  except in the
United States,  Canada,  Japan,  Korea and Taiwan. In June 1995, Sanofi received
marketing  approval for  ADENOSCAN in the United  Kingdom and in February  1997,
Sanofi  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 has been secured from the health authorities in the majority
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. The Phase III study was completed  during
1998.

                                       6
<PAGE>
                         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 I).
Patient enrollment for the AB-02 trial was completed during 1997 and the results
of the study were analyzed during 1998. Due to difficulty in recruiting patients
in a timely  manner,  the ALIVE trial has been  terminated.  AMISTAD I (Phase II
multicenter trial) was completed in 1997 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.

AMISTAD  I  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 the 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%).

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.

                                       7
<PAGE>

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.

During fourth quarter 1998, the protocol for  AMISTAD-II,  the Company's  second
multicenter  Acute Myocardial  Infarction  Study of Adenosine was completed.  In
January 1999 the Company  announced  the  initiation  of this Phase III trial to
further  investigate  the safety and efficacy of adenosine in  combination  with
thrombolysis or angioplasty in the treatment of acute myocardial infarction. The
name  Pallacor(TM)  has  been  selected  for  this  application  of  intravenous
adenosine - formerly  referenced as part of the MEDR640 program.  The study will
involve  approximately 2,100 patients and is projected to require  approximately
24 months for completion.

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  Investigational  New Drug Application
("IND").  AMISTAD-II (Phase III multicenter trial) was initiated in January 1999
to further  investigate the safety and efficacy of adenosine in combination with
thrombolysis or angioplasty in the treatment of acute myocardial infarction.

Product License: As described below, the Company owns the product, including all
worldwide manufacturing and marketing rights. 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.  In June 1998 Fujisawa  assigned and  transferred  to the
Company all of its right, title and interest in ADENOSINE FOR  CARDIOPROTECTION,
including all of Fujisawa's related scientific data and intellectual  properties
in the  United  States and  Canada.  In the event  that the  Company  markets an
adenosine-containing  cardioprotective  product,  Fujisawa  will  receive  an 8%
royalty on the  Company's  net sales.  In the event that the Company  licenses a
third party to sell such product,  Fujisawa will receive 25% of licensing  fees,
milestone payments,  royalties, and other considerations received by the Company
from such third party after the  Company  has  recouped  the $2 million in costs
incurred for the compound  through May 1998 plus its  substantiated  development
costs from such date to the date of NDA approval.

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.  (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.) See "Patent and Proprietary Rights" 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.


                                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>

(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,   MRE0470,  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 MRE0470, on December
28, 1998 the Company  filed an IND with the FDA,  and in late  January  1999 the
Company received  clearance from the FDA to initiate a Phase I clinical trial as
a selective coronary  vasodilator during myocardial perfusion imaging procedures
to diagnose  coronary  artery  disease.  During 1999 the  evaluation  of several
adenosine  A2a-receptor  agonists  in a  wound  healing  model  in  animals  was
completed with positive  results.  In addition to these  A2a-receptor  agonists,
work  advanced  during  1999 in the early  evaluation  of  additional  adenosine
analogs  and U.S.  patent  applications  were  filed for  adenosine  A3-receptor
agonists and antagonists synthesized by the University of Ferrara.

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.  In March  1998,  the  Company  signed  an  option to
exclusively  license  New  York  University's  worldwide  rights  for the use of
adenosine  A2a-receptor agonists for the promotion of wound healing. 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  as well as
additional adenosine A3-receptor agonists and antagonists.  (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.)

                         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
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.


                                       9
<PAGE>

Product License:  The Company has filed patent applications with the U.S. Patent
and Trademark  Office and intends to file  companion  applications  overseas for
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.)

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
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.

                                       10
<PAGE>

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
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.


                                       11
<PAGE>

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. In
order to avoid the cost and risk of a Patent Office proceeding,  or otherwise to
obtain the  intellectual  property  rights,  the Company may seek to obtain from
third parties patent licenses it believes are necessary or appropriate. However,
it is possible  that the third  party  could  refuse a license to the Company in
order to keep the Company's product off the market.

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


                                       12
<PAGE>

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 and
independent  clinical  research  organizations to carry,  what it believes to be
adequate product and clinical studies liability insurance coverage.

RESEARCH AND DEVELOPMENT
------------------------

The Company expended $10,347,570,  $6,902,092,  and $5,839,278, for research and
development   during  the  years  ended  December  31,  1998,   1997  and  1996,
respectively.

EMPLOYEES
---------

As of March 1, 1999 the  Company  employed  twenty-seven  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  26,700 square feet of office space,  in Cary,
North Carolina, for its corporate offices under a lease that expires in December
2003.  This  facility is expected to be adequate for the  Company's  present and
future  operations.  See Note 4 to the financial  statements for a discussion of
future lease payments.

                                       13
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

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.

On December 31, 1998,  Fujisawa filed a motion seeking summary  judgement.  This
action is in the discovery 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
reimburses 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>

                                     PART II

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

The  Company's  Common  Stock traded on the American  Stock  Exchange  under the
symbol MRE during the year ended December 31, 1997 and through December 1, 1998.
On December 2, 1998,  the Company  transferred  to and began  trading on the New
York 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 and the New York Stock Exchange during the applicable periods.

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

Calendar 1998:

                    March 31, 1998                 $19 5/8         $13 3/16
                    June 30, 1998                   25 1/2          17 1/8
                    September 30, 1998              26 5/8          15 5/8
                    December 31, 1998               26 3/16         17 1/2


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

The Company had 233 owners of record and in excess of 4,845 beneficial owners of
its Common  Stock as of March  1,1999,  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 selected  consolidated  financial data set forth below for the Company as of
December  31, 1998 and 1997 and for each of the three years in the period  ended
December 31, 1998 are derived from the audited consolidated financial statements
included  elsewhere herein.  The selected financial data set forth below for the
Company as of December 31, 1996, 1995 and 1994 and for  each of the two years in


                                       15
<PAGE>

the period ended December 31, 1995 are derived from the financial  statements of
the Company not included  elsewhere  herein.  The data presented below should be
read in  conjunction  with  "Management's  Discussion  and Analysis of Financial
Condition  and  Results  of  Operations"  and  with the  Company's  consolidated
financial  statements  and related  notes  thereto  included  elsewhere  in this
report.


Summary Consolidated Statement of Operations Data:

<TABLE>
<CAPTION>
OPERATIONS                                                   Years Ended December 31,
                                -----------------------------------------------------------------------------------
                                         1998             1997             1996             1995            1994
<S>                                 <C>              <C>              <C>              <C>             <C>        
Revenue                             $34,277,842      $22,782,306      $15,824,073      $13,007,734     $10,688,619
Costs and Expenses                   18,035,640       12,569,177       11,502,428       16,540,176      15,103,087
Net Income (Loss)                    16,242,202       10,213,128        4,321,645       (3,532,442)     (4,414,468)
Basic Earnings (Loss) per
  Common Share                            $1.54            $0.97            $0.40           $(0.32)         $(0.40)
Diluted Earnings (Loss) per
  Common Share                            $1.50            $0.96            $0.40          $(0.32)         $(0.40)
Weighted Average Shares
  Outstanding                        10,530,745       10,545,533       10,917,920       11,023,921      11,144,938
Weighted Average Shares
  Outstanding Assuming
  Dilution                           10,857,004       10,620,785       10,938,357       11,023,921      11,144,938
Cash Dividends Declared
  per Common Share                            -                -                -                -               -



Summary Consolidated Balance Sheet Data:

<CAPTION>
                                  December 31,
                                -----------------------------------------------------------------------------------
                                         1998             1997             1996             1995            1994
Working Capital                     $29,812,684      $20,158,833      $18,372,970      $27,734,612     $24,883,199
Total Assets                         64,285,101       49,612,714       42,628,404       43,121,656      44,680,299
Stockholders' Equity                 58,058,941       44,656,284       36,499,005       35,099,683      38,901,572
Accumulated Earnings/(Deficit)       15,061,383       (1,180,819)     (11,393,947)     (15,715,592)    (12,183,150)
Net Book Value
  per Share                                5.58             4.25             3.40             3.19            3.53
</TABLE>


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

For calendar 1998,  adenosine royalties  (ADENOCARD and ADENOSCAN) increased 38%
and  operating  expenses  increased  39%  which  resulted  in a  net  income  of
$16,242,202 for 1998, or $1.54 basic earnings per share, compared to $10,213,128
or $0.97 basic  earnings  per share,  for 1997.  Earnings per share on a diluted
basis  for 1998 and 1997  were  $1.50  and  $0.96,  respectively.  Approximately
two-thirds of all royalty  income in the  three-year  period ended  December 31,
1998 resulted from Fujisawa sales of ADENOSCAN in the United States.

In February 1998, the Company expanded its drug discovery collaboration with the
University of Ferrara,  to include  agonists and  antagonists  which exert their
action at the adenosine A1- and A3-receptor  subtypes.  In March 1998,  Fujisawa
Healthcare,   on  behalf  of  itself  and  the  Company,   licensed   additional
intellectual  property rights for  intravenous  adenosine in cardiac imaging and
the right to use intravenous adenosine as a cardioprotectant in combination with
thrombolytic  therapy,  balloon  angioplasty  and  coronary  bypass  surgery and
extended the  exclusivity  on ADENOSCAN  until 2015. In April 1998,  the Company
obtained an option from the  University  of  California  at San  Francisco to an
exclusive  license  pertaining  to the use of  adenosine  for the  promotion  of
angiogenesis.  In June 1998,  the Company  signed an agreement to acquire right,
title,  and  interest  in certain  patents  relating  to the use of  intravenous


                                       16
<PAGE>

adenosine  as a  cardioprotectant  in  combination  with  thrombolytic  therapy,
balloon  angioplasty  and  coronary  bypass  surgery  and extend  the  Company's
marketing  partner's  exclusivity on ADENOSCAN until 2015. In November 1998, the
Company completed the evaluation of several adenosine  A2a-receptor  agonists in
an animal wound healing  model with  positive  results.  In December  1998,  the
Company,  through its  collaboration  with the  University of Ferrara,  advanced
early evaluation of additional ADENOSINE ANALOGS and allosteric modulators. Also
in  December,  the  Company  filed  an IND for  MRE0470  for use as a  selective
coronary  vasodilator during myocardial perfusion imaging procedures to diagnose
coronary artery disease.  In January 1999, the Company  initiated  AMISTAD II, a
Phase III multi-center  trial to further  investigate the safety and efficacy of
adenosine  in  combination  with  thrombolysis  or  angioplasty  in the  current
treatment of acute myocardial infarction.


RESULTS OF OPERATIONS
---------------------

The  accompanying   consolidated   financial  statements  and  certain  selected
financial  data have been  presented for the calendar  years ended  December 31,
1998, 1997 and 1996. The Company's presentation of the Consolidated  Statements
of  Operations  reflect  gross margin  related to royalty  revenues  followed by
operating expenses, operating income related to gross margin and other income.


Calendar Year 1998 Compared to Calendar Year 1997
-------------------------------------------------

Royalty  Revenues.  The Company's 1998 royalty revenue  increased to $27,544,248
from $20,000,366,  an increase of 38%, primarily due to continued year-over-year
increases in unit sales of ADENOSCAN by Fujisawa,  the Company's  North American
licensee,  and a 4% increase in the royalty  revenue rate  recognized as revenue
which  began  midway  through  fourth  quarter  1997.  Fujisawa is the source of
substantially  all of the royalties of the Company.  See Note 6 to the Company's
Financial Statements included in Item 8 below.

Gross Margin.  The Company's 1998 gross margin from adenosine revenues increased
to $22,671,316 from $17,015,292 an increase of 33% due to the continued shift in
the product  sales mix to ADENOSCAN and  continued  year-over-year  increases in
unit sales of  ADENOSCAN,  a drug for which the Company  pays a royalty of 3% of
net sales to a third  party  vis-a-vis  ADENOCARD,  a drug for which the Company
pays a  royalty  of 12.5% of net  sales to the  University  of  Virginia  Alumni
Patents Foundation.  Royalty expense increased to $4,872,932 from $2,985,074, an
increase of 63%  primarily due to the payment of a royalty of 3% of net sales of
ADENOSCAN to a third party beginning January 1, 1998 relating to the procurement
of additional  intellectual  property rights for intravenous adenosine from such
third party.

Operating  Expenses.  Total  operating  expenses  increased to $12,932,088  from
$9,295,693,  an increase of 39% due to  increases  in research  and  development
expenditures  related to ADENOSINE FOR  CARDIOPROTECTION  and the Company's lead
A2a-receptor  agonist MRE0470 for use as a selective coronary vasodilator during
myocardial perfusion imaging procedures to diagnose coronary artery disease.

Research and development  costs  increased to $10,347,570  from  $6,902,092,  an
increase of 50%.  Research and development  expenditures were higher during 1998
primarily due to a one-time  charge of $2,361,000 in the second  quarter of 1998
pertaining  to the purchase of Fujisawa's  commercialization  rights and related
intellectual  properties  for the  cardioprotection  application  of intravenous
adenosine.  Also, research and development  expenditures were higher during 1998
due to a $1 million charge in the fourth quarter 1998 for a milestone payment to
Discovery  Therapeutics,  Inc.  related  to the  December  filing of the IND for
MRE0470.


                                       17
<PAGE>

General and administrative expenses increased to $2,584,518 from $2,393,601,  an
increase of 8% primarily due to one-time  expenditures  related to the Company's
transfer  of its common  stock  listing to the New York Stock  Exchange  and the
Company's  move from  Research  Triangle  Park,  North  Carolina to Cary,  North
Carolina.

Other Income.  Interest  income  increased to  $2,730,032  from  $2,099,550,  an
increase  of 30%.  Investment  income  was  higher in 1998  mainly due to higher
investment  balances.  Other income  increased to  $4,003,562  from  $682,389 an
increase of 487%.  Other income was higher in 1998 due to the Company's  receipt
of a $4 million payment from Fujisawa for the assistance provided by the Company
to Fujisawa in  connection  with the contract  manufacturing  of  ADENOSCAN  and
ADENOCARD by a third party and the transfer of the ADENOSCAN and ADENOCARD  NDAs
to Fujisawa.  In 1997, the Company recognized a $300,000 licensing fee as income
and also received and  recognized a $400,000  payment as other income  following
Suntory's,  the Company's  development  and  marketing  partner for adenosine in
Japan,  announcement of the initiation of Phase III clinical trials of ADENOSCAN
in Japan.

Earnings Per Share.  Basic  earnings  per share  increased to $1.54 per share in
1998 from $0.97 per share in 1997 on weighted average common shares  outstanding
of 10,530,745 and 10,545,533, respectively. The basic earnings per share reflect
net  income of  $16,242,202  and  $10,213,128  in 1998 and  1997,  respectively.
Diluted  earnings per share  increased to $1.50 per share in 1998 from $0.96 per
share in 1997 on weighted  average  common shares  outstanding of 10,857,004 and
10,620,785, respectively.

Calendar Year 1997 Compared to Calendar Year 1996
-------------------------------------------------

Royalty  Revenues.  The Company's 1997 royalty revenue  increased to $20,000,366
from   $13,453,958,   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 the source of substantially all
of the royalty revenue of the Company.

Gross Margin.  The Company's 1997 gross margin from adenosine revenues increased
to $17,015,292 from  $10,880,081,  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  owned the  underlying
patent  and  therefore  paid no third  party  royalty  in 1996 or 1997.  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 to $2,985,074 from $2,573,877, an increase of 16%.

Operating  Expenses.  Total  operating  expenses  increased to  $9,295,693  from
$8,841,551,  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 to $6,902,092  from  $5,839,278,  an
increase of 18%.  Research and development  expenditures were higher during 1997
primarily due to the Company  nearing the  completion of the three  multi-center
Phase II trials associated with ADENOSINE FOR  CARDIOPROTECTION and pursuing the
filing  of an IND  for  MRE0470,  an  adenosine  A2a-receptor  agonist  for  the
diagnosis of coronary artery disease.

General and administrative  expenses decreased to $2,393,601 from $3,002,273,  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.


                                       18
<PAGE>

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

Earnings Per Share.  Basic  earnings  per share  increased to $0.97 per share in
1997 from $0.40 per share in 1996 on weighted average common shares  outstanding
of 10,545,533 and 10,917,920, respectively. The basic earnings per share reflect
net income of $10,213,128 and $4,321,645 in 1997 and 1996, respectively. Diluted
earnings per share  increased to $0.96 per share in 1997 from $0.40 per share in
1996 on weighted average common shares outstanding of 10,620,785 and 10,938,357,
respectively.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

As of  December  31,  1998,  the  Company  had  total  cash and  investments  of
$51,250,671 comprised of $4,742,016 of cash and cash equivalents and $46,508,655
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, 1998 was $29,812,684  compared to $20,158,833
as of December 31, 1997.

The Company  generated  $14,257,117 in cash flow from operations during the year
ended December 31, 1998 primarily due to increased  ADENOSCAN  royalty  revenues
partially offset by payment of a royalty obligation to Abbott Laboratories, Inc.
This  increase in cash and  investments  was  further  offset by  $4,132,132  in
treasury stock repurchases during 1998.

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.  At December 31, 1998 the royalty  obligation
to Abbott  Laboratories  was fully paid.  See Note 6 to the Company's  Financial
Statements included in Item 8 below.

At December 31, 1997, the Company maintained a full valuation  allowance against
its  deferred tax assets due to  uncertainty  surrounding  timing of  partnering
arrangements  and  uncertainty  surrounding  the ultimate  cost of the research,
clinical trials and development of pharmaceutical  products. These uncertainties
could have adversely affected future operations and profit levels.  During 1998,
actual profit levels,  estimated future research and development spending levels
and the development of certain tax planning  strategies made it more likely than
not that the benefits of the Company's deferred tax assets will be realized.  As
such,  at December  31, 1998,  the  valuation  allowance  was  eliminated  and a
deferred  tax asset was  recognized  on the  balance  sheet.  See Note 10 to the
Company's Financial Statements included in Item 8 below.

ADENOSCAN  is  currently  marketed  in the  United  States,  Canada,  the United
Kingdom,  Australia,  Finland,  Germany,  Ireland,  Italy,  Norway,  and  Spain.
ADENOCARD  is  currently  marketed  in the  United  States,  Canada,  the United
Kingdom,  Austria,  Australia,  Belgium,  Bulgaria,  Chile, China, Columbia, the
Czech Republic,  Denmark, the Dominican Republic, Egypt, Finland, France, French
Polynesia,  Germany, Greece,  Guatemala,  Hong-Kong,  Hungary, India, Indonesia,
Ireland, Israel, Italy, Kuwait, Luxembourg, Malaysia, New Zealand, Norway, Oman,
Panama, Peru, the Philippines, Poland, Portugal, Qatar, the Republic of Estonia,
the Republic of Lithuania,  Romania, Saudi Arabia,  Singapore,  Slovakia,  South
Africa, South Korea, Spain, Switzerland, Taiwan, Thailand, and Uruguay.


                                       19
<PAGE>

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.

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

Readiness
The Year 2000  ("Y2K")  issue  results  from  programmers  using  two  digits to
indicate the century value in date fields. This generally affects older software
and  embedded  systems  of the  Company  and third  parties  with  which it does
business,  thereby  threatening  data.  The team that the Company  assembled  to
address the Y2K issue brings to bear knowledge from all areas of the Company and
helps minimize the potential impact to the Company.

The Company has  categorized the Y2K issue into three parts:  internal  business
systems software; internal non-business  software/embedded systems; and external
vendors. The Company's reliance on an outsourcing  philosophy,  which encourages
the use of partnering  agreements with third parties to accomplish many business
functions,  eases the Y2K issue as the Company  does not have a large  number of
internal business systems applications or embedded systems.  However, given that
the Company  receives  substantially  all of its royalty  revenues from Fujisawa
Healthcare,  Inc.,  the Y2K  issue  is still a threat  and is being  given  full
attention by the Company,  especially  in assessing  the  Company's  third party
relationships.

Internal Business Systems
The  Company  does not  rely on  custom  developed  solutions  for its  business
systems.  The software that it uses is mass-produced  and has been  inventoried.
The  providers  have  advised  the Company  that it has been made Y2K  compliant
through normal manufacturer  upgrades and updates to the software.  Accordingly,
all  software  is either Y2K  compliant  or is due to be  replaced in the normal
course of business by the end of first quarter 1999.


                                       20
<PAGE>

Internal Non-Business Software/Embedded Systems
All internal  non-business  software and embedded systems have been inventoried.
The  providers  have been queried  regarding  Y2K  compliance.  At this time all
software  and  systems  are either Y2K  compliant  or due to be  replaced in the
normal course of business by the end of first quarter 1999.

External Vendors
A database has been  established  to track  progress the  Company's  vendors are
making in becoming Y2K compliant. The Company is closely monitoring the progress
and  potential  impact of vendors that may fail to become Y2K  compliant by year
end 1999. The Company has submitted questionnaires to its licensees and material
vendors,  including  Fujisawa,  relative  to their Y2K  compliance.  The Company
expects to  complete  this phase along with  assessing  risks and  planning  for
contingencies relating to third party relationships by April 1, 1999.

Costs
The costs of  addressing  the Y2K issue are not  expected  to be material to the
operation of the Company.  The costs of software  and hardware  inventories  are
currently  being  absorbed  in  the  normal  course  of  business.  The  Company
anticipates  incurring  less than $2,000 for mailing  and  reviewing  Y2K status
reports for external vendors. The costs anticipated by the Company to replace or
upgrade  software or hardware are not being  accelerated  due to Y2K compliance.
These  costs are  expected  to total  $6,000 of which none has been  incurred at
December 31, 1998.

Risks
At this stage of its assessment, the Company does not anticipate that Y2K issues
will  materially   impact  any  of  its  operations,   including   research  and
development,  manufacturing,  supply and distribution and financial control. All
internal  systems are  expected  to be  operational  at the Century  Date Change
(CDC).  However,  due to the large number of the  Company's  vendors  (including
utility companies and governmental bodies) and their reliance, in turn, on other
vendors (including hospitals and distributors),  it is impossible for the impact
of the CDC to be fully  known.  The Company is unable to  determine at this time
whether it will be materially  impacted by unknown  factors beyond the Company's
control affecting third parties or their vendors including royalties the Company
receives  from Fujisawa  Healthcare,  Inc. The Company's Y2K plan is expected to
significantly reduce the Company's level of uncertainty about Y2K issues and, in
particular,  about Y2K  compliance  and readiness of its material  vendors.  The
Company  believes  that,  with  the  completion  of the plan as  scheduled,  the
possibility of significant interruptions of normal operations should be reduced.

Contingency Plans
Contingency  planning  has begun  relative to the  Company's  material  vendors,
banking operations and governmental  bodies. Such plans will be updated based on
information received from the vendors on their Y2K readiness.  Other contingency
plans  will  be  developed  on a  vendor-by-vendor  basis  if  deemed  necessary
following the Company's assessment of (1) Y2K readiness of other vendors and (2)
the risk of business  interruption  to the Company.  The Company expects to have
formal plans in place by June 1, 1999. The Company's contingency plan takes into
account the fact that the  Company's  agreements  obligate  Fujisawa to maintain
inventories of ADENOCARD and ADENOSCAN  finished product and  work-in-process in
quantities  sufficient to satisfy at least six months of projected  orders based
on orders received during the prior six month period. In addition,  in the event
Fujisawa cannot fulfill orders for such drugs on a timely basis  consistent with
U.S. industry practice for any period in excess of 30 calendar days, Fujisawa is
obligated to pay royalties to the Company during such "outage"  periods based on
the average daily net sales of the drug during the prior twelve  months,  except
if such outage results from force majeure and other specified events.


                                       21
<PAGE>

Disclaimer
The discussion of the Company's efforts and management's  expectations  relating
to the Year  2000 are  forward-looking  statements.  The  Company's  ability  to
achieve Y2K  compliance,  to verify external  vendors' Y2K  compliance,  and the
costs  associated  with those  activities are subject to change as the Company's
Y2K plan is  implemented.  Completion  of the plan is dependent on the Company's
ability to discover and correct the potential Y2K sensitive problems which could
have a serious  impact on  operations  and the ability of third party vendors to
bring their systems into Y2K compliance.


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  and  Investigational  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.


                                       22
<PAGE>

ITEM 7A.   QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
--------   --------------------------------------------------

The Company is exposed to various  types of market risk in the normal  course of
business,  including  interest rate risk. To manage this  exposure,  the Company
employs   risk   management   strategies   including   diversification   and   a
hold-to-maturity investment policy.

A  significant  portion of the  Company's  assets are invested in U.S.  Treasury
Notes, debt securities of various federal governmental agencies and high quality
corporate  debt  securities  which are  subject to the impact of  interest  rate
changes. The Company's strategy for managing interest rate risk is to maintain a
balance  of U.S.  Government  and  Corporate  obligations  across a  variety  of
maturities.  Additionally,  the Company has adopted a hold-to-maturity policy to
eliminate risk  associated  with temporary  fluctuations  in the market value of
securities.  All of the Company's  investments are in U.S Treasury  Notes,  debt
securities of various federal  governmental  agencies and high quality corporate
debt securities,  and as such, the Company  considers the risk of nonperformance
to be remote.

The following table provides information,  by maturity date, about the Company's
interest rate sensitive financial instruments,  which consist of marketable debt
securities that are recorded at cost and accounted for as held-to-maturity.

                                    1999              2000              2001
                                -----------        -----------       -----------

Fixed rate marketable debt
securities                      $21,434,398        $13,069,804       $12,004,453
Average interest rate               5.8%              5.6%              5.8%


                                       23
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS
-------  --------------------

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

Page     24       Report of Independent Accountants

Page     25       Independent Auditors' Report

Page     26       Consolidated Balance Sheets--December 31, 1998 and 1997

Page     27       Consolidated  Statements of  Operations--Years  Ended December
                  31, 1998, 1997 and 1996

Page     28       Consolidated  Statements of Stockholders'  Equity--Years Ended
                  December 31, 1998, 1997 and 1996

Page     29       Consolidated  Statements of Cash  Flows--Years  Ended December
                  31, 1998, 1997 and 1996

Page     31       Notes to Consolidated Financial Statements


                                       24
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present  fairly,  in all  material  respects,  the  financial  position of Medco
Research,  Inc. and its  subsidiary  as of December  31, 1998 and 1997,  and the
results  of their  operations  and their  cash  flows for each of the years then
ended  in  conformity  with  generally  accepted  accounting  principles.  These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.


                                   PricewaterhouseCoopers LLP



Raleigh, North Carolina
January 22, 1999

                                       25
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


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

We have audited the consolidated statements of operations,  stockholders' equity
and  cash  flows of Medco  Research,  Inc.  and  subsidiary  for the year  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 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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the results of operations and the cash flows
of Medco Research,  Inc. and subsidiary for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.

As discussed in Note 11 to the consolidated  financial  statements  contained in
the 1996 Form 10-K, the Company is party to certain claims and  litigation.  The
ultimate outcome of these matters cannot  presently be determined.  Accordingly,
no provisions for liability, if any, that may result from the resolution of such
matters  have  been  recognized  in  the  accompanying   consolidated  financial
statements.

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


                                                KPMG  LLP




Raleigh, North Carolina
January 28, 1997

                                       26
<PAGE>
<TABLE>
                                               Medco Research, Inc.


                                            Consolidated Balance Sheets
                                                                                             December 31,
                                                                             --------------------------------------------
                                                                                     1998                  1997
                                                                             --------------------------------------------
    <S>                                                                              <C>                     <C>       
    Assets
    Current assets:
       Cash and cash equivalents                                                      $4,742,016              $2,726,486
       Investments held to maturity (Note 2)                                          21,434,398              14,272,791
       Accounts and notes receivable:
         Royalties                                                                     8,348,719               6,003,629
         Other                                                                            84,654                 244,486
       Accrued interest income                                                           577,691                 563,294
       Deferred tax asset, current portion (Note 10)                                     458,497                       -
       Prepaid expenses and other                                                        242,869                 503,568
                                                                             --------------------------------------------
    Total current assets                                                              35,888,844              24,314,254
    Investments held to maturity (Note 2)                                             25,074,257              23,530,192
    Deferred tax asset (Note 10)                                                       1,227,503                       -
    Property and equipment, at cost, net of accumulated 
      depreciation (Note 3)                                                              465,759                 243,996
    Patent, trademark and distribution rights, at cost,
      net of accumulated amortization (Note 5)                                         1,628,738               1,524,272
                                                                             --------------------------------------------
    Total assets                                                                     $64,285,101             $49,612,714
                                                                             ============================================
    Liabilities and stockholders' equity 
    Current liabilities:
       Accounts payable and accrued expenses                                          $3,400,670              $2,378,933
       Accrued royalties (Note 5)                                                      2,166,339               1,300,650
       Accrued compensation                                                              509,151                 475,838
                                                                             --------------------------------------------
    Total current liabilities                                                          6,076,160               4,155,421
       Deferred royalty payment (Note 6)                                                       -                 451,009
       Other long-term liabilities                                                       150,000                 350,000
    Stockholders' equity (Notes 8 and 9):
       Common stock, no par value,  authorized  40,000,000 
         shares; shares issued of 11,298,732 and 11,182,832  
         at December 31, 1998, and 1997, respectively; 
         shares outstanding of 10,409,332 and 10,513,832 at 
         December 31, 1998 and 1997, respectively                                     53,805,722              52,513,135
       Retained earnings (accumulated deficit)                                        15,061,383              (1,180,819)
       Cost of stock held in treasury, 889,400 and 669,000  
         shares at December 31, 1998 and 1997, respectively                          (10,808,164)             (6,676,032)
                                                                             --------------------------------------------
    Total stockholders' equity                                                        58,058,941              44,656,284
                                                                             --------------------------------------------
    Commitments and contingencies (Notes 5, 6  and 12)
                                                                             ============================================
    Total liabilities and stockholders' equity                                       $64,285,101             $49,612,714
                                                                             ============================================
</TABLE>
           See accompanying notes to consolidated financial statements.


                                       27
<PAGE>
                            Consolidated Statements of Operations

<TABLE>  
                     
<CAPTION>

                                                                                          Years Ended December 31,
                                                                           ------------------------------------------------------
                                                                                 1998               1997             1996
                                                                           ------------------------------------------------------
                <S>                                                               <C>               <C>              <C>
                Net Revenues:
                 Royalty revenue (Note 5)                                       $27,544,248        $20,000,366      $13,453,958
                 Royalty expense (Note 5)                                         4,872,932          2,985,074        2,573,877
                                                                           ------------------------------------------------------
                   Gross margin                                                  22,671,316         17,015,292       10,880,081
                                                                           ------------------------------------------------------

                Operating expenses:
                   Research and development costs                                10,347,570          6,902,092        5,839,278
                   General and administrative expenses                            2,584,518          2,393,601        3,002,273
                                                                           ------------------------------------------------------
                                                                                 12,932,088          9,295,693        8,841,551
                                                                           ------------------------------------------------------
                   Operating income                                               9,739,228          7,719,599        2,038,530
                                                                           ------------------------------------------------------

                Other income:
                   Interest income                                                2,730,032          2,099,550        2,020,115
                   Other income (Note 7)                                          4,003,562            682,389          350,000
                                                                           ------------------------------------------------------
                                                                                  6,733,594          2,781,939        2,370,115
                                                                           ------------------------------------------------------

                Income  before income taxes                                      16,472,822         10,501,538        4,408,645

                Provision for income taxes (Note 10)                                230,620            288,410           87,000
                                                                           ------------------------------------------------------

                Net income                                                      $16,242,202        $10,213,128      $ 4,321,645
                                                                           ======================================================

                Basic earnings  per share                                              $1.54             $0.97            $0.40
                                                                           ======================================================

                Diluted earnings  per share                                            $1.50             $0.96            $0.40
                                                                           ======================================================

                Weighted average shares outstanding                               10,530,745        10,545,533       10,917,920
                                                                           ======================================================

                Weighted average shares outstanding
                  assuming dilution                                               10,857,004         10,620,785       10,938,357
                                                                           ======================================================

</TABLE>
          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

                                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                            Common stock
                                     -----------------------------
                                                                Accumulated
                                                                   other          Retained
                                       Number of               comprehensive     earnings/        Cost of stock
                                         shares      Amount        income       (accumulated     held in treasury     Total
                                                                                  deficit)
                                     --------------------------------------------------------------------------------------------
     <S>                                <C>          <C>             <C>           <C>               <C>              <C>
     Balance at December 31, 1995     11,013,732    $52,216,010      $133,972     $(15,715,592)     $(1,534,707)     $35,099,683
                                                                                                    
        Purchase of stock held in
          treasury                      (273,700)             -             -               -        (2,788,351)      (2,788,351)
        Reclassification adjustment
          to other comprehensive
          income due to the sale of
          an investment                        -              -      (133,972)              -                 -         (133,972)
         Net income                            -              -             -        4,321,645                -        4,321,645
                                     --------------------------------------------------------------------------------------------
     Balance at December 31, 1996     10,740,032     52,216,010             -     (11,393,947)       (4,323,058)      36,499,005
        Stock options exercised           27,000        297,125             -               -                 -          297,125
        Purchase of stock held in
          treasury                      (253,200)            -              -               -        (2,352,974)      (2,352,974)
        Net income                             -             -              -      10,213,128                 -       10,213,128
                                                                                   
                                     --------------------------------------------------------------------------------------------
     Balance at December 31, 1997     10,513,832     52,513,135             -      (1,180,819)       (6,676,032)      44,656,284
        Stock options exercised          115,900      1,292,587             -               -                 -        1,292,587
        Purchase of stock held in
          treasury                      (220,400)             -             -               -        (4,132,132)      (4,132,132)
        Net income                             -              -             -      16,242,202                 -       16,242,202
                                     --------------------------------------------------------------------------------------------
     Balance at December 31, 1998      10,409,332   $53,805,722        $    -     $15,061,383      $(10,808,164)     $58,058,941
                                     ============================================================================================

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       29
<PAGE>

                                               Medco Research, Inc.


                                       Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                      -----------------------------------------------------------
                                                                            1998                1997                1996
                                                                      -----------------------------------------------------------
<S>                                                                          <C>                 <C>                  <C>
Operating activities
Net income                                                                 $16,242,202         $10,213,128          $4,321,645
Adjustments to reconcile net income to net cash provided by (used
   in) operating activities:
     Depreciation of property and equipment                                     99,808             101,965             143,934
     Amortization of patent, trademark and other distribution
       rights                                                                  608,034             573,817              51,403
     Deferred tax benefit                                                   (1,686,000)                  -                   -
     Realized gain on investments available for sale                                 -                   -             (49,258)
     Net amortization of investment discount                                  (334,539)           (101,869)           (260,912)
     (Gain) loss on disposition of property and equipment
                                                                                (3,162)             10,852                   -
     Loss on disposal of patents                                                     -              14,759                   -
     Changes in operating assets and liabilities:
         Accounts receivable                                                (1,185,258)           (226,490)         (2,286,735)
         Accrued interest income                                               (14,397)           (186,430)           (124,644)
         Prepaid expenses and other                                            260,699             109,876              34,427
         Deferred asset                                                              -             124,212           1,727,703
         Accounts payable and accrued expenses                                 855,050             199,451            (126,659)
         Accrued royalties                                                     865,689             121,093            (129,764)
         Deferred  revenue                                                           -            (548,202)           (751,798)
         Deferred royalty payment                                           (1,451,009)         (1,265,863)           (884,353)
                                                                      -----------------------------------------------------------
Net cash provided by operating activities                                  14,257,117            9,140,299           1,664,989
                                                                      -----------------------------------------------------------
</TABLE>

      (Continued)


                                       30
<PAGE>

                               Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>

                                                                                      Years Ended December 31,
                                                                    -------------------------------------------------------------
                                                                            1998                  1997               1996
                                                                    -------------------------------------------------------------
<S>                                                                             <C>                 <C>              <C>
Investing activities
Purchase of investment securities                                             (34,293,133)        (20,161,540)      (45,707,862)
Maturity of investment securities                                              25,922,000           8,478,579        52,106,334
Purchases of property and equipment                                              (332,769)            (51,298)         (121,786)
Proceeds from sale of property and equipment                                       14,360               2,006                -
Purchases of patent, trademark and distribution rights                           (712,500)         (1,732,406)         (351,403)
                                                                    -------------------------------------------------------------
Net cash provided by (used in) investing activities                            (9,402,042)        (13,464,659)        5,925,283
                                                                    -------------------------------------------------------------

Financing activities
Net proceeds from exercise of stock options                                     1,292,587             297,125                -
Purchase of stock held in treasury                                             (4,132,132)         (2,352,974)       (2,788,351)
                                                                    -------------------------------------------------------------
Net cash used in financing activities                                          (2,839,545)         (2,055,849)       (2,788,351)
                                                                    -------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                                2,015,530          (6,380,209)        4,801,921
Cash and cash equivalents at beginning of year                                  2,726,486           9,106,695         4,304,774
                                                                    -------------------------------------------------------------
Cash and cash equivalents at end of year                                      $ 4,742,016         $ 2,726,486       $ 9,106,695
                                                                    =============================================================

          See accompanying notes to consolidated financial statements.
</TABLE>


                                       31
<PAGE>

Notes to Consolidated Financial Statements

December 31, 1998, 1997 and 1996

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
its products to corporate  partners 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.


                                       32
<PAGE>

Summary of Significant Accounting Policies (continued)

Investments

The Company's  investments  include  primarily  investments  in marketable  debt
securities  which are  recorded at cost,  net of  amortization  of premiums  and
discounts.  All premiums and/or  discounts are amortized over the remaining term
of the related  security  using the  straight-line  method which does not differ
significantly from the effective interest rate 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.  All of the  Company's
investments are accounted for as held-to-maturity  securities as of December 31,
1998 and 1997.  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.

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
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 (see note 2). If quoted  market prices are not readily  available,
fair values are based on quoted market prices of comparable instruments.

Property and Equipment

Property and  equipment  are  primarily  made up of furniture  and equipment and
leasehold  improvements  and are stated at cost.  Depreciation is computed using
the  straight-line  method over the useful lives of the related  assets which is
generally 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.

                                       33
<PAGE>

Summary of Significant Accounting Policies (continued)

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.
Amortization periods on capitalized patent costs at December 31, 1998 range from
2 to 17 years.  Periodically,  these  costs are  reviewed  and the  amortization
adjusted  based on the estimated  future  benefits  remaining.  Patent costs are
presented net of accumulated  amortization  of $885,440 and $277,406 at December
31, 1998 and 1997, respectively.

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  at  December  31,  1998 and 1997  relates  to the  Company's  corporate
partner, Fujisawa (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.

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.

                                       34
<PAGE>

Summary of Significant Accounting Policies (continued)

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  on the date of grant of all  stock-based
awards.  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.  Accordingly,   compensation  expense  has  been
recognized to the extent of employee or director  services rendered based on the
intrinsic value of compensatory options or shares granted under the plans.

Earnings Per Share

The Company adopted Statement of Financial  Accounting  Standards No. 128 ("SFAS
No. 128"),  "Earnings Per Share," on December 31, 1997. Basic earnings per share
is computed  using the  weighted  average  number of common  shares  outstanding
during the year.  Diluted  earnings  per share is  computed  using the  weighted
average  number of common  shares plus the effects of any dilutive  common share
equivalents,  primarily stock options, outstanding during a period. Earnings per
share for all periods presented conforms to the provisions of SFAS No. 128.

The  following  is a  reconciliation  of the weighted  average  number of common
shares and common share equivalents used to determine diluted earnings per share
for each of the years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                                                    Years Ended December 31,
                                           -------------- --------------- ---------------
                                               1998            1997            1996
                                           -------------- --------------- ---------------

<S>                                           <C>             <C>             <C>       
Basic weighted average shares outstanding     10,530,745      10,545,533      10,917,920

Net effect of dilutive stock options
   based on treasury stock method
   using average market price                    326,259          75,252          20,437
                                           -------------- --------------- ---------------

Weighted average shares assuming
   dilution                                   10,857,004      10,620,785      10,938,357
                                           ============== =============== ===============
</TABLE>

Adoption of New Accounting Pronouncements

The  Company  adopted  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
representing  the total  comprehensive  income  for the  period  in a  financial
statement  which  is  displayed  with  the same  prominence  as other  financial
statements.  The Company has no items of comprehensive income or loss during the
years ended  December 31, 1998 and 1997.  The Company has an unrealized  loss on
investments  in marketable  equity  securities  at December 31, 1995,  which was
adjusted  due to the sale of an  investment  during the year ended  December 31,
1996.


                                       35
<PAGE>

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No.  131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") for its fiscal year ended  December  31,  1998.  SFAS No. 131 requires the
Company to report selected  information about operating  segments in interim and
annual financial reports issued to shareholders.  It also establishes  standards
for related disclosures about products and services, geographic areas, and major
customers.  The  adoption  of this  pronouncement  did not impact the  Company's
disclosures as the Company manages its business as one segment and substantially
all of the Company's revenues come from one source (see note 5).

The Company  will adopt  Statement  of Financial  Accounting  Standards  No. 133
"Accounting for Derivative  Investments and Hedging Activities" ("SFAS No. 133")
for its fiscal year ending  December 31, 2000.  SFAS No. 133  establishes  a new
model for accounting for derivatives  and hedging  activities and supersedes and
amends a number of existing  standards.  The adoption of this  pronouncement  is
expected to have no impact on the  Company's  results of operations or financial
condition.

2.       Investments

The aggregate fair values of investment securities at December 31, 1998 and 1997
along with  unrealized  gains and losses  determined on an  individual  security
basis are as follows:

<TABLE>
<CAPTION>
                                                                      GROSS                  GROSS
                                                                    UNREALIZED            UNREALIZED              MARKET
                                                  COST                GAINS                 LOSSES                VALUE
                                            ------------------ --------------------- ---------------------- -------------------
1998 Held to maturity
---------------------
<S>                                               <C>                      <C>                   <C>               <C>        
U.S. Government Obligations                       $26,046,715              $216,618              $      -          $26,263,333
Corporate Obligations                              20,461,940                     -               (99,347)          20,362,593
                                            ------------------ --------------------- ---------------------- -------------------
Total securities held to maturity                 $46,508,655              $216,618              $(99,347)         $46,625,926
                                            ================== ===================== ====================== ===================

1997 Held to maturity
---------------------
U.S. Government Obligations                       $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
                                            ================== ===================== ====================== ===================
</TABLE>

There were no realized  gains or losses in 1998 or 1997.  Net realized  gains in
1996 were $49,258 as a result of the sale of an investment in the Pimco Fund.

The following  represents the contractual  maturities of investments  held as of
December 31, 1998.

                        Less than 1 year                 $21,434,398
                        1 to 5 years                      25,074,257
                                                       ==============
                        Total                            $46,508,655
                                                       ==============


                                       36
<PAGE>

3.       Property and Equipment

                                        December 31,
                                    1998             1997
                               -------------------------------

Property and equipment            $907,592          $717,675
Leasehold improvements              24,851                 -
Accumulated depreciation          (466,684)         (473,679)
                               ===============================
                                  $465,759          $243,996
                               ===============================

4.       Leases

The Company  leases  office  space  under an  operating  lease which  expires in
November 2003.  Lease expense  approximated  $208,366,  $210,800 and $206,100 in
1998, 1997 and 1996, respectively. Future minimum lease payments under operating
lease agreements at December 31, 1998 are:

                               Year Ending December 31,
                               1999           $ 411,663
                               2000             521,854
                               2001             537,509
                               2002             553,635
                               2003             570,244
                                        ===============
                                             $2,594,905
                                        ===============

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.  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 licensing 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, 1998 to pay $350,000 in nonrefundable payments which are payable in
quarterly  installments  of $50,000  through July 1, 2000. At December 31, 1998,
approximately  $200,000 of this  obligation is included in accounts  payable and
accrued  expenses and the remaining  obligation of $150,000 is included in other
long-term obligations in the consolidated balance sheet. The Company may also be
required to pay a maximum of $5,500,000 in nonrefundable payments generally upon
the  completion of development  milestones  and the FDA's  approvals of NDAs for
certain compounds.


                                       37
<PAGE>

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  receives  royalties  from  Fujisawa  based on a  percentage  of
ADENOCARD net sales.  The Company has also entered into an agreement with Sanofi
Pharma  (France)  (Sanofi) for the manufacture and marketing of ADENOCARD in all
countries  other than the United States and Canada.  In September  1991,  Sanofi
received  marketing  approval  (under  the trade  name  ADENOCOR)  in the United
Kingdom  and, in May 1992,  received  marketing  approval  (under the trade name
KRENOSIN) in Switzerland.  The Company receives 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 which the Company acquired
rights to ADENOCARD.

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. In March 1998, Fujisawa
on behalf of itself and the Company,  licensed additional  intellectual property
rights  for  intravenous  adenosine  in  cardiac  imaging  and the  right to use
intravenous  adenosine as a  cardioprotectant  in combination with  thrombolytic
therapy,   balloon   angioplasty   and  coronary   bypass  surgery  and  secured
intellectual  property rights to extend the exclusivity of ADENOSCAN until 2015.
Pursuant to the Agreement and the May 1996  agreement,  the Company paid its 50%
share of the  one-time  up-front  fee due to the  licensor,  which  the  Company
capitalized and is amortizing over the life of the patents,  and is obligated to
pay its 50% share of a 6% royalty on ADENOSCAN net sales to this third party.

In June 1998 Fujisawa  assigned and transferred to the Company all of its right,
title  and  interest  in  the  May  1996  cardioprotective  product  development
agreement,  including all of Fujisawa's related scientific data and intellectual
properties  in the United  States  and  Canada.  In the event  that the  Company
markets an adenosine-containing  cardioprotective product, Fujisawa will receive
an 8% royalty on the Company's net sales. In the event that the Company licenses
a third party to sell such product, Fujisawa will receive 25% of licensing fees,
milestone payments,  royalties, and other considerations received by the Company
from such third  party after the  Company  has  recouped  $2 million  toward its
investment plus its substantiated  future  development costs. Also in June 1998,
the Company  transferred  the NDA for  ADENOCARD  and  ADENOSCAN to Fujisawa and
provided  assistance to Fujisawa in connection  with the contract  manufacturing
agreement for both products with a third party.

Two-thirds of all royalty  income in the  three-year  period ended  December 31,
1998 resulted from Fujisawa sales of ADENOSCAN in the United States. In December
1992, the Company granted Sanofi the exclusive  rights to manufacture and market
ADENOSCAN  worldwide  except in the  United  States,  Canada,  Japan,  Korea and
Taiwan.  In June 1995, Sanofi received  marketing  approval for ADENOSCAN in the
United Kingdom and in February 1997,  Sanofi  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 has been secured from the
health authorities in the majority of the member countries.


                                       38
<PAGE>

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  license  under certain U.S.
and  foreign  patents  and  pending  applications   relating  to  DTI's  current
intellectual property related to A2a-agonists.  The Company has exclusive rights
under certain U.S. and foreign  patents and pending  applications  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.  The  Company was
required to make a $1 million payment to DTI in the fourth quarter of 1998. This
payment was recorded as research and  development  expenses in the  accompanying
statement of operations.

6.       Deferred 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 the
end of exclusivity on ADENOSCAN.

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.

Included  in  liabilities  for the year ended  December  31, 1997 was an accrued
liability  (current  and  non-current  portion) of  approximately  $1.5  million
relating  to the  balance of the  Company's  guaranteed  royalty  obligation  to
Abbott. At December 31, 1998 the royalty  obligation to Abbott  Laboratories was
fully paid.

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
recognized royalty revenue of 29%.

                                       39
<PAGE>

7.       Agreement with Fujisawa

In June 1998 the Company  received a $4 million  payment  from  Fujisawa for the
transfer of the ADENOSCAN and ADENOCARD NDAs and for the assistance  provided by
the Company to Fujisawa in connection with its contract manufacturing  agreement
with a third party relating to ADENOSCAN and ADENOCARD. The Company has included
this  payment in other  income.  Additionally,  the Company  incurred a one-time
charge of $2,361,000 pertaining to the purchase of Fujisawa's  commercialization
rights and related intellectual properties for the cardioprotection  application
of  intravenous  adenosine,  which  is  included  in  research  and  development
expenses.

8.       Equity

The  Company  adopted  a  Shareholder  Rights  Plan on April 2,  1998.  The plan
provides for a dividend  distribution of rights to purchase shares of the common
stock of the Company, exercisable upon the occurrence of certain events.


9.       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 1998,  1997 and 1996, the Company
accrued approximately $27,000, $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  currently  has one stock option plan in  operation,  the 1989 Stock
Option and Stock  Appreciation  Rights Plan. Options to purchase up to 2,090,000
shares of the Company's common stock may be granted to its officers,  directors,
employees  and to other persons who provide  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 in part 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 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, 1998 115,900 options were  exercised.  During
the year ended December 31, 1997 27,000 options were exercised.  During the year
ended December 31, 1996 there were no options exercised.


                                       40
<PAGE>
<TABLE>
Changes in the status of options are summarized as follows:
<CAPTION>
                                                        Weighted                       Weighted                     Weighted
                                                         Average                       Average                       Average
                                                        Exercise                       Exercise                     Exercise
                                            1998          Price          1997           Price           1996          Price
                                      -----------------------------------------------------------------------------------------

<S>                                            <C>         <C>            <C>            <C>              <C>         <C>
Outstanding at beginning of year               983,930     $12              781,982       $11              610,732     $15
Granted                                        340,936      20              400,080        14              461,000      10
Exercised                                     (115,900)     11              (27,000)       11                    -       -
Expired or canceled                            (89,660)     14             (171,132)       14             (289,750)     17
                                      -----------------------------------------------------------------------------------------
Outstanding at end of year                   1,119,306     $14              983,930       $12              781,982     $11
                                      =========================================================================================

Available for grant at end of year             395,307     N/A               56,583       N/A              285,531     N/A
Exercisable at end of year                     561,618     N/A              394,275       N/A              281,257     N/A
Weighted average fair value of
  options granted with exercise
  price equal to fair value of
  underlying stock                               $9.04     N/A                $6.05       N/A                $3.92     N/A
Price range of options outstanding        $8.63-$23.88     N/A         $8.63-$15.88       N/A         $8.63-$17.13     N/A
Price range of options exercised          $8.88-$15.88     N/A        $10.13-$13.25       N/A                  N/A     N/A


Options  outstanding  and  exercisable as of December 31, 1998 are summarized as
follows:
<CAPTION>
                                        Options Outstanding                                   Options Exercisable
                       -----------------------------------------------------          ------------------------------------
                                        Weighted Average
                                           Remaining           Weighted                                 Weighted Average
  Range of Exercise         Number        Contarctual          Average                    Number        
       Prices            Outstanding         Life           Exercise Price              Exercisable      Exercise Price
----------------------------------------------------------------------------          ----------------- ------------------

$  8 - $15                  629,800         7.3 years            $11                       488,225            $11
  15 -  24                  489,506         9.5                   19                        73,393             16
                       -------------                                                  -------------    
$  8 - $24                1,119,306         8.3                  $14                       561,618            $12
                       =============                                                  =============    
</TABLE>

As of December  31,  1998,  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  1,554,613  shares of common stock for future exercise of stock options
and warrants.


                                       41
<PAGE>

For disclosure purposes, the fair value of each option grant is estimated on the
date of grant,  in accordance  with the  requirements of SFAS No. 123, using the
Black-Scholes  option-pricing  model  with the  following  assumptions  used for
grants in 1998,  1997 and  1996:  dividend  yield  zero  (all  years);  expected
volatility of 43% (1998), 37% (1997) and 35% (1996);  risk-free interest rate of
5% (1998) 6% (1997 and 1996); 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 on pro forma net income in future years.

<TABLE>
<CAPTION>
                                                                         1998                1997                 1996
                                                                  ------------------- -------------------- --------------------
<S>                                             <C>                      <C>                  <C>                   <C>       
Net income:                                     As reported              $16,242,202          $10,213,128           $4,321,645
                                                Pro forma                 14,951,394            8,674,702            2,806,507

Basic earnings per share:                       As reported                    $1.54                $0.97                $0.40
                                                Pro forma                       1.42                 0.82                 0.26

Diluted earnings per share:                     As reported                    $1.50                $0.96                $0.40
                                                Pro forma                       1.38                 0.82                 0.26

</TABLE>

10.      Income Taxes

The components of income tax expense consisted of the following:
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                  ---------------------------------------------------------
                                                        1998                 1997                 1996
                                                  ------------------ ------------------- ------------------
     <S>                                                 <C>                  <C>               <C>  
      Current expense:
        Federal                                          $1,523,232            $208,410           $ 87,000
        State                                                15,130                   -                  -
        Foreign taxes                                        15,272              80,000                  -
                                                  ------------------ ------------------- ------------------
                                                          1,553,634             288,410             87,000
                                                  ------------------ ------------------- ------------------
      Deferred benefit:
        Federal                                          (1,323,014)                  -                  -
        State                                                     -                   -                  -
                                                  ------------------ ------------------- ------------------
                                                         (1,323,014)                  -                  -
                                                  ------------------ ------------------- ------------------

        Total                                              $230,620            $288,410           $ 87,000
                                                  ================== =================== ==================

</TABLE>


                                       42
<PAGE>

The  components  of deferred tax assets and the deferred tax  liabilities  as of
December 31, 1998 and December 31, 1997 are as follows:

                                                 Years Ended December 31,
                                           ------------------ ------------------
                                                 1998                1997
                                           ------------------ ------------------
    Deferred tax assets:
      Tax loss carryforwards                    $        -          $3,214,000
      Capital loss carryforwards                   332,000             381,000
      Tax credit carryforwards                   1,264,000           1,625,000
      Compensation accruals                         42,000              33,000
      Charitable contributions                           -              25,000
      Deferred revenue                                   -             567,000
      Depreciation and Amortization                 48,000              24,000
                                           ------------------ ------------------
        Total gross deferred tax assets          1,686,000           5,869,000
      Valuation allowance                                -          (5,869,000)
                                           ------------------ ------------------
        Net deferred tax assets                 $1,686,000          $        -
                                           ------------------ ------------------

The Company establishes  valuation  allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes". Management continually
reviews the adequacy of the valuation  allowance and  recognizes  these benefits
only as  reassessment  indicates  that it is more  likely  than not that the tax
benefits will be realized.

At December 31, 1997, the Company maintained a full valuation  allowance against
its  deferred tax assets due to  uncertainty  surrounding  timing of  partnering
arrangements  and  uncertainty  surrounding  the ultimate  cost of the research,
clinical  trials and  development of the Company's  portfolio of  pharmaceutical
products.  These  uncertainties  could have adversely affected future operations
and profit levels. During 1998, actual profit levels,  estimated future research
and development spending levels based on existing agreements and the development
of  certain  tax  planning  strategies  made it more  likely  than  not that the
benefits of the  Company's  deferred  tax assets will be realized.  As such,  at
December 31, 1998,  the valuation  allowance was  eliminated  and a deferred tax
asset was recognized on the balance sheet.


                                       43
<PAGE>

The  actual  income  tax  expense  for  1998,  1997  and 1996  differs  from the
"expected" amount (computed by applying the statutory federal income tax rate of
35% for 1998 and 34% for 1997 and 1996 to the earnings  before  income taxes) as
follows:
<TABLE>
<CAPTION>
                                                 December 31, 1998            December 31, 1997          December 31, 1996
                                            ------------------------------------------------------ ----------------------------
                                                   Amount           %          Amount          %          Amount          %
                                            ------------------------------------------------------ ----------------------------
<S>                                              <C>               <C>       <C>              <C>        <C>             <C>  
Tax expense at federal statutory rate            $5,765,488        35.0%     $3,570,523       34.0%      $1,498,940      34.0%
Change in valuation allowance                    (5,869,000)       (35.6)    (3,262,000)     (31.1)      (1,725,000)    (39.1)
Write-off of state operating loss
carryforwards                                       406,074         2.5               -          -                -         -
Tax credits                                               -           -               -          -            8,000       0.2
State tax expense                                    15,130         0.1          12,366        0.1          325,934       7.4
Write down of marketable securities                       -           -               -          -          (29,469)     (0.7)
Stock options                                      (383,600)       (2.3)       (101,023)      (1.0)               -         -
Foreign taxes                                         9,927           -          52,940        0.5                -         -
Other                                               286,601         1.7          15,605        0.2            8,595       0.2
                                            ================= =========== =============== ========== ================ =========
Tax provision                                     $ 230,620         1.4%      $ 288,410        2.7%        $ 87,000       2.0%
                                            ================= =========== =============== ========== ================ =========
</TABLE>


At December 31, 1998, the Company had available approximately $974,000, $286,000
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 1999 through 2012.

The Company has a capital loss  carryover  of $974,000 at December 31, 1998,  of
which $47,000 will expire in 1999 and the remainder will expire in 2000.

The Company made income tax payments of  $845,000,  $528,750 and $87,000  during
the years ended December 31, 1998, 1997 and 1996, respectively.

11.      Related Party Transactions

Fees of $108,000, $144,000 and $144,000 as well as related travel  expenses were
paid in  1998,  1997 and  1996,  respectively,  to an  individual  director  for
consulting with the Company on matters such as  acquisitions,  financial  public
relations and pending litigation.

12.      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


                                       44
<PAGE>

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.

On December 31, 1998,  Fujisawa filed a motion seeking summary  judgement.  This
action is in the discovery 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 ADENODSCAN  exclusive license agreement with Fujisawa,  the Company
reimburses 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 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
-------  --------------------------------------------------------------- 
         FINANCIAL DISCLOSURE
         --------------------

None.


                                       45
<PAGE>

                                    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 1999 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 1999 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 1999 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 1999 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, 1998 and 1997

         Consolidated  Statements of Operations--Years  Ended December 31, 1998,
         1997 and 1996

         Consolidated  Statements of Stockholders'  Equity--Years Ended December
         31, 1998, 1997 and 1996

         Consolidated  Statements of Cash Flows--Years  Ended December 31, 1998,
         1997 and 1996

         Notes to Consolidated Financial Statements


                                       46
<PAGE>

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, 1998.

(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)

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)


                                       47
<PAGE>

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. (12)

23.1      Consent of Independent Accountants

23.2      Accountants' Consent

27        Financial Data Schedule


                                       48
<PAGE>

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

(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.

(12)   The referenced  exhibits are incorporated  herein by reference to Exhibit
       10.26 to the Registrant's  Form 10-K for the calendar year ended December
       31, 1997 filed with the Securities  and Exchange  Commission on March 24,
       1998.

                                       49
<PAGE>

                                   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 16,1999


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

                                      Date:    March 16,1999

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

                                      Date:    March 16,1999


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 16,1999
         -------------------------------
         Richard C. Williams,
         Chairman of the Board


By:      /s/ William M. Bartlett                     Date:    March 16,1999
         -------------------------------
         William M. Bartlett, Director


By:      /s/ Jay N. Cohn, M.D.                       Date:    March 16,1999
         -------------------------------
         Jay N. Cohn, M.D., Director



                                       50
<PAGE>

By:      /s/ Mark B. Hirsch                          Date:    March 16,1999
         -------------------------------
         Mark B. Hirsch, Director


By:      /s/ Eugene L. Step                          Date:    March 16,1999
         -------------------------------
         Eugene L. Step, Director


                                       51