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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
           EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

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

                         Commission file number 0-27088

                                SANO CORPORATION
             (Exact name of registrant as specified in its charter)

                      FLORIDA                        65-0263022
            (State or other jurisdiction           (I.R.S. Employer
            of incorporation or organization)      Identification No.)

                              3250 COMMERCE PARKWAY
                             MIRAMAR, FLORIDA 33025
                    (Address of principal executive offices)

                  Registrant's telephone number: (954) 430-3340
                            -------------------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                ON WHICH REGISTERED
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          Common Stock, $.01 par value

   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. [ ]

   As of March 17, 1997, the aggregate market value of the voting stock of the
registrant held by non-affiliates of the Registrant was $64,091,988, based on a
closing price of $12.25 for the Common Stock, par value $.01 per share (the
"Common Stock"), as reported on the NASDAQ National Market on such date.

   As of March 17, 1997, the number of outstanding shares of Common Stock of the
registrant was 9,244,151.

   Information required by Part III is incorporated by reference to portions of
the Registrant's 1997 Proxy Statement for the 1997 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1996 fiscal year.

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<PAGE>

                                     PART I


ITEM 1.        BUSINESS

        Sano Corporation ("Sano" or the "Company") develops novel
controlled-release drug delivery systems for drug therapies licensed from others
and for off-patent drugs ("Proprietary Products"). The Company also develops
generic versions of branded controlled-release products, generally where the
advanced nature of the necessary technologies limit competition from other
manufacturers ("Generic Products"). The Company believes that its transdermal
and solid dose controlled release technologies and expertise can be applied to a
variety of pharmaceutical products. These technologies are designed to reduce
the frequency of drug administration, improve efficacy, increase patient
compliance, reduce side effects, reduce interaction with other drugs in use by a
patient and provide a more consistent and appropriate drug level in the
bloodstream. The Company believes these benefits will also contribute to lower
overall patient care costs, an increasingly important competitive factor in the
managed care environment.

        Sano's strategy is to develop and manufacture a broad line of novel
proprietary and generic, controlled- release drug delivery systems that the
Company believes provide clinical and economic benefits when compared to other
delivery modes. The Company's strategy includes the following elements:

        DEVELOP PRODUCTS INDEPENDENTLY - Sano will seek to identify
opportunities to apply its controlled release technologies to new drug therapies
licensed from others or to off-patent drugs, and to maintain proprietary rights
with respect to the resulting products it develops. Sano does not intend to
develop new chemical entities, but researches academic and industry literature
to identify existing therapeutic drugs to which it can apply its alternative
methods of drug delivery.

        RETAIN OF RIGHTS TO PRODUCTS - Where possible, the Company intends to
enter into arrangements with marketing partners in the late stages of product
development. This strategy requires that the Company commit significantly
greater financial resources to the development of each product than do companies
that license their products at early stages to marketing partners that assume
the cost of clinical trials. If the Company is successful in implementing this
strategy and developing late stage products attractive to prospective marketing
partners it believes that it will be better able to negotiate more favorable
agreements than would otherwise be available from those marketing partners at
earlier stages of product development.

        DEVELOP MULTIPLE DRUG DELIVERY TECHNOLOGIES - Although most of Sano's
products use transdermal delivery technology, the Company intends to expand its
capabilities to include a variety of controlled-release delivery methods. Sano
recently completed a pilot study on its first two solid dose controlled-release
products.

        DEVELOP A BROAD PIPELINE OF PRODUCTS - Sano is developing a broad
pipeline of both Proprietary and Generic Products. The Company's Proprietary
Product development efforts focus on novel delivery systems for existing drugs
in large addressable markets where the Company believes that both clinical and
economic benefits can be obtained from its controlled release technologies. The
Company's Generic Product development efforts focus on controlled-release
branded products where the advanced nature of the delivery technologies may
limit competition.

        HIRE AND RETAIN EXPERIENCED PERSONNEL - Sano believes that in order to
compete effectively in any given area of drug delivery technology it is
essential to attract and retain people with proven success in developing
products utilizing such technologies. Sano believes that it has assembled a team
of qualified and specialized team of scientists and managers. Substantially all
of the Company's employees have ownership interests in the Company. In addition,
certain of the Company's scientists have economic stakes in the performance of
particular products with which they are involved.

<PAGE>

 SANO'S TECHNOLOGY

        Sano has developed proprietary drug delivery technologies in the fields
of transdermal and oral controlled release products. These technologies are
intended to provide the Company with flexible delivery platforms applicable to a
wide range of pharmaceutical products. The Company intends to continue to apply
these technologies to drugs licensed from others and off-patent drugs where the
Company believes that the use of such technologies may result in improved
patient compliance, better clinical results and/or lower patient care costs.

        TRANSDERMAL DRUG DELIVERY

        Transdermal patches deliver drugs through the skin by means of an
adhesive patch. The patch incorporates medication which is released through the
skin into the blood stream at a controlled rate over an extended period of time.
This method of drug delivery is better suited than oral delivery for some drugs
that are degraded either in the gastrointestinal tract or by the liver if
delivered orally, such that only a small fraction of the total administered dose
remains therapeutically effective. Attempts to overcome such inefficient oral
delivery through increased dosage may result in the production of high levels of
metabolic by-products of the metabolized drug that can produce harmful side
effects. Transdermal patches overcome such "first-pass " metabolic problems by
delivering the drug locally or systemically at prescribed rates, providing a
convenient means to administer drugs which would otherwise require frequent oral
dosing over prolonged periods. An additional potential benefit of transdermal
patches is their ability to overcome or significantly reduce the adverse effects
resulting from the "peaks and troughs " routinely encountered in many oral
preparations. In many instances, the "peak" of delivery of an oral product
delivers a higher amount of medication to the blood stream than is
therapeutically necessary, with resulting side effects such as gastrointestinal
distress, headaches, nausea and dizziness, and the "trough" of delivery of an
oral product delivers a subtherapeutic amount of medication to the blood stream.
Transdermal delivery can maintain drug levels in the bloodstream at a consistent
rate and within therapeutically effective ranges.

        The principal attributes necessary for the successful commercialization
of a transdermal patch include a sound medical rationale, cost-effectiveness in
manufacturing, appearance and comfort, the ability to adhere to the skin with
minimal irritation, a stable formulation and the ability to produce desired
local or systemic levels of the drug. Six drugs are currently available in the
United States market in transdermal patches: nitroglycerin, nicotine, estrogen,
clonidine, fentanyl, and testosterone.

   SOLID DOSE CONTROLLED RELEASE DRUG DELIVERY

        Sano is in the process of developing proprietary formulation and
manufacturing technology to control the release characteristics of a variety of
orally-administered drugs. The Company's solid dose controlled release drug
delivery technologies utilize a variety of techniques to control the rate and
locations of drug release in the gastrointestinal tract. Through the application
of specifically designed polymer coating membranes, drugs are released at
controlled rates as they descend through the gastrointestinal tract, thus
providing sustained availability of the drug. The design of an appropriate drug
delivery technology for a particular drug candidate involves consideration of
(i) the physiology of the gastrointestinal tract; (ii) the characteristics of
the drug to be delivered; (iii) the effect of food on absorption; (iv) the
desired location and extent of absorption at any given site in the
gastrointestinal tract; and (v) the physical and chemical characteristics of the
drug.

        Solid dose controlled-release drug delivery technologies eliminate or
reduce certain disadvantages of immediate- release drugs. Controlled release
technologies generally provide more consistent and appropriate drug levels in
the bloodstream than immediate-release drugs, and may overcome or significantly
reduce the adverse effects resulting from the "peaks and troughs " encountered
with many oral immediate-release preparations. Oral controlled- release drug
delivery also allows for the development of dosage forms that reduce the
frequency of drug administration, thereby offering improved patient compliance.

                                      - 2 -

<PAGE>
<TABLE>
<CAPTION>

SANO'S PRODUCT PIPELINE

   The tables below indicate the status of the Company's transdermal and solid
dose controlled-release products under active development:


                        TRANSDERMAL PROPRIETARY PRODUCTS

              DRUG                          POTENTIAL THERAPEUTIC USES                      STATUS
-----------------------------------      --------------------------------         -------------------------------
<S>                                      <C>                                      <C>
Buspirone                                Anxiety                                  Phase III studies in progress
Buspirone                                Attention Deficit Disorder               Phase III studies in progress
Buspirone                                Depression                               Phase III studies in  progress
Nicotine/Mecamylamine                    Smoking Cessation                        Phase III studies in progress
Scopolamine                              Motion Sickness                          IND in  preparation
Confidential                             Alcohol Addiction                        Phase II study in preparation
Estrogen/Progestin                       Menopausal Symptoms/Osteoporosis         IND in preparation
Albuterol                                Asthma                                   Formulation development


                          TRANSDERMAL GENERIC PRODUCTS

       DRUG                BRAND NAME                                 THERAPEUTIC USES                      STATUS
-------------------   ---------------------                    --------------------------------    --------------------------------
Nicotine              Habitrol/Registered Trademark/           Smoking Cessation                   ANDA filed
Nitroglycerin         Transderm-Nitro/Registered Trademark/    Angina Pectoris                     ANDA filed
Nitroglycerin         Nitro-Dur/Registered Trademark/          Angina Pectoris                     ANDA filed
Clonidine             Catapres TTS/Registered Trademark/       Hypertension                        Bioequivalency study in progress
Estradiol             Vivelle/Registered Trademark/            Menopausal Symptoms/Osteoporosis    Bioequivalency study in
                                                                                                   preparation
Estradiol             Climara/Registered Trademark/            Menopausal Symptoms/Osteoporosis    Bioequivalency study in
                                                                                                   preparation


                           SOLID DOSE GENERIC PRODUCTS

       DRUG                BRAND NAME                           THERAPEUTIC USES                       STATUS
-------------------   ----------------------             ----------------------------        -----------------------------
Diltiazem             To be determined                   Hypertension                        Pilot study in progress
Diltiazem             To be determined                   Hypertension/Angina                 Formulation development
Nifedipine            To be determined                   Hypertension                        Pilot study in progress
Nicardipine           Cardene SR/Registered Trademark/   Hypertension                        Formulation development
</TABLE>

                                      - 3 -

<PAGE>

PROPRIETARY PRODUCTS


BUSPIRONE TRANSDERMAL SYSTEMS FOR ANXIETY, DEPRESSION AND ATTENTION DEFICIT
DISORDER

        Sano's  patches for the treatment of anxiety,  depression  and attention
deficit  disorder  each  incorporate  the drug  Buspirone,  a Serotonin  partial
agonist.  Buspirone  has been marketed in the United States under the brand name
Buspar/Registered  Trademark/by  Bristol Myers-Squibb ("BMS") since 1986 for the
management  of  anxiety  disorders  and the  short-term  relief of  symptoms  of
anxiety.  U.S. sales of Buspar/Registered Trademark/ in 1996 were approximately
$369 million.

        The rationale for the development of a transdermal dosage form of
buspirone arises from the complex characteristics of this drug and from clinical
experience. With the oral dosage form of buspirone, patients taking a
therapeutic regimen of buspirone must have their daily dose divided into either
a two-per-day or a three-per-day regimen in order to achieve therapeutic
success. This results in an inconvenient and burdensome dosage regimen which can
result in a lack of compliance. Buspirone is rapidly absorbed after oral
administration; the drug, however, undergoes extensive first-pass metabolism,
through the gastrointestinal tract and the liver, and only a small percentage of
the dose reaching systemic circulation following oral administration. By
avoiding first-pass metabolism through the gastrointestinal tract and the liver,
the dosage required for the transdermal delivery of the product is less than an
oral dose of buspirone and may significantly reduce production of certain
metabolites that may inhibit its action or cause adverse side effects. Sano's
transdermal delivery system for buspirone also provides a continuous level of
drug and eliminates the peaks and troughs of the drug in systemic levels,
characteristic of oral administration, which may cause adverse side effects.

        In August 1996 the Company entered into a worldwide distribution and
supply agreement granting distribution rights for the Company's transdermal
buspirone patch to BMS. Under this agreement, Sano will manufacture the patch
for BMS and will receive a percentage of net sales. Upon signing the agreement,
Sano received a $15 million upfront payment and will be entitled to receive
additional payments upon achieving certain clinical and regulatory milestones.
The Company believes that the availability of a transdermal dosage form of
buspirone will permit a more convenient, once-daily regimen, resulting in
increased patient compliance. In addition, because transdermal delivery of
buspirone allows for consistently therapeutic levels in the bloodstream, the
company believes that its products may decrease gastrointestinal and central
nervous system ("cns") side effects. In addition to the treatment of anxiety,
certain published reports have indicated the potential usefulness of buspirone
in the treatment of depression and attention deficit disorder. The patent rights
of BMS with respect to oral immediate release buspirone for the treatment of
anxiety will expire in late 2000. In June 1996, Sano received a notice of United
States patent allowance for the transdermal delivery of buspirone. This patent
is also pending in Japan, the European Patent Office and Canada.

        In February 1997 BMS initiated a Phase III clinical program on the Sano
buspirone patch for use in the treatment of anxiety and attention deficit
disorder. The clinical program involves multiple sites and thousands of
patients.

         ANXIETY

        Anxiety is an unpleasant mood characterized by feelings of tension and
apprehension. It is usually precipitated by the anticipation of future danger,
distress or difficulties. As an emotional response anxiety is useful in that
activities that arouse anxiety are avoided and those that diminish it are
sustained. Anxiety becomes a medical problem when it is excessive, inappropriate
or without obvious cause. United States sales of anti-anxiety drugs exceeded $2
billion in 1995.

        Transdermal delivery of buspirone for the treatment of anxiety may offer
several advantages over conventional oral delivery. The dosage for the oral
version of the drug is three times a day, whereas the transdermal

                                      - 4 -

<PAGE>

        dosage will be once a day, which enhances patient compliance.
Additionally, the oral drug causes gastrointestinal side effects that are
avoided with transdermal delivery of the product.

        ATTENTION DEFICIT DISORDER

        Attention deficit disorder ("ADD"), sometimes referred to as attention
deficit hyperactivity disorder, consists of development deficiencies in the
regulation and maintenance of behavior and occurs most frequently in children.
These deficiencies give rise to inattention, impulsivity and hyperactivity.
Medications used to treat ADD include psychostimulants (such as
Ritalin/Registered Trademark/, Dexedrine/Registered Trademark/, and
Cylert/Registered Trademark/ and tricyclic anti-depressants(such as
Imipramine/Registered Trademark/ and Desipramine/Registered Trademark/. The
United States market for these psychostimulants exceeded $350 million in 1996.

        Transdermal delivery of buspirone for the treatment of ADD may offer
several advantages over conventional treatment. Unlike buspirone, the principal
treatments for ADD are all DEA controlled substances. Sano's buspirone patch
offers the convenience of the once-a-day administration of a transdermal patch,
which enhances patient compliance. While the use of buspirone for the treatment
of ADD has not been approved by the FDA, the Company has completed a Phase II
open label clinical trial in 32 children ages 9 through 12. The Company believes
that the results of this trial identified an effective dose of buspirone for use
in the treatment of ADD.

        DEPRESSION

        Depression can be described as a state of mind in which the individual
experiences a generalized loss of interest in life or an inability to experience
pleasure. This disorder is characterized by a broad range of symptoms, including
sadness, guilt, apathy, indecision, general irritability, feelings of low
self-esteem, helplessness and hopelessness. Such feelings are a normal component
of the human condition, but when they begin to interfere with normal function,
treatment is desirable.

        Depression-related disorders are among the most common psychiatric
conditions to be encountered by physicians and the most undertreated. United
States sales of anti-depressant drugs exceeded $2 billion in 1995.

        While the use of buspirone for the treatment of depression has not been
approved by the FDA, its anti-depressant activity has been documented in certain
published clinical studies. It is believed that buspirone's anti-depressant
activity may result from its ability to normalize the serotonergic system,
increasing serotonergic tone in depressed patients and decreasing serotonergic
tone in anxious patients.

        As an anti-depressant, buspirone may offer advantages over tricyclic
antidepressant drugs, as buspirone does not cause anticholinergic side effects
such as blurred vision, constipation, urinary retention and dry mucous
membranes. Also, buspirone is nonaddictive, nonsedating and does not cause
insomnia, nervousness or sexual dysfunction, as do other anti-depressant
products. Buspirone is not a Drug Enforcement Agency ("DEA") controlled
substance.

        The Company has conducted a multi-center, double-blind, controlled Phase
III clinical study of 150 patients. Additional Phase III studies will be
required in order to obtain sufficient data to support an NDA for depression.

                                      - 5 -

<PAGE>

NICOTINE/MECAMYLAMINE TRANSDERMAL SYSTEM FOR SMOKING CESSATION

        Smokers are addicted to cigarettes primarily because of the drug
nicotine in tobacco. Therefore, smokers who attempt to quit typically experience
withdrawal symptoms, most commonly craving, headaches, irritability and nausea.
A 1990 study in the JOURNAL OF THE NATIONAL CANCER INSTITUTE found that nearly
90% of all Americans who smoke have made an attempt to quit at some point in
their smoking lives. Several studies have shown that every year nearly 30% of
all Americans who smoke make some attempt at smoking cessation while only a
small percentage succeed. A principal focus of treatment in recent years has
been transdermal nicotine patches. The FDA has approved four nicotine patches
for sale. In 1996, the FDA approved two of these patches for sale
over-the-counter without a prescription.

        A therapy involving the simultaneous delivery of nicotine and
mecamylamine, a nicotine antagonist, over a 24-hour period received a United
States Patent in 1994. In October 1994 Sano obtained an exclusive license to
this patented combination therapy. Sano also intends to explore opportunities
for the manufacture and/or sale of the combination therapy in non-U.S. markets.
Mecamylamine has been marketed for many years as an antihypertensive agent,
Inversine/Registered Trademark/. Mecamylamine has been shown to block many of
the physiologic, behavioral, and reinforcing effects of nicotine. The actions of
an agonist (nicotine) and an antagonist (mecamylamine) are such that they both
occupy the receptors that would otherwise be acted upon by nicotine from
cigarettes. Thus, nicotine and mecamylamine may work in concert, both to reduce
craving and to attenuate the rewarding effects of cigarette smoking, thereby
facilitating smoking abstinence.

        Transdermal nicotine dosed along with oral mecamylamine has been shown
to be more effective for smoking cessation than transdermal nicotine alone. A
clinical study published in the July 1994 issue of CLINICAL PHARMACOLOGY AND
THERAPEUTICS reported the results of a 48-patient trial in which the percent of
abstinence after 12 months in patients that were treated with the combined
therapy (mecamylamine and nicotine) was 37.5%, as compared to 4.2% for a
transdermal nicotine therapy alone. Mecamylamine relieved key withdrawal
symptoms such as craving for cigarettes and appetite for food.

        Sano has developed a transdermal patch which delivers nicotine and
mecamylamine simultaneously, in accordance with the patented combination
therapy. A 260 patient Phase II dose ranging study was completed in September
1996. Based on the results of this study, in February 1997 the Company commenced
a Phase III clinical trial involving over 1000 patients in eight U.S. centers.
Results of these trials are expected in 1997.

        SCOPOLAMINE TRANSDERMAL SYSTEM FOR THE PREVENTION OF MOTION SICKNESS

        Motion sickness is an acute illness characterized by anorexia, nausea,
dizziness and vomiting. Scopolamine has been used to prevent motion sickness for
many years, and is available as scopolamine hydrobromide, either orally or as an
intramuscular injection. This drug in its oral or injectable form has caused
undesirable side effects, especially drowsiness and dry mouth. The delivery of
scopolamine transdermally enables the use of a lower dose of scopolamine to
achieve therapeutic effect and thus decreases the incidence of side effects.

        In 1979, Alza Corporation received FDA approval for Transderm
Scop/Registered Trademark/(transdermal scopolamine system) for the prevention of
nausea and vomiting due to motion sickness in adults. For approximately the past
two years Transderm Scop/Registered Trademark/ has not been available on the
market. Ciba Pharmaceuticals, the company which had marketed Transderm
Scope/Registered Trademark/, has not announced why the product is no longer
being marketed.

        Sano is developing a transdermal scopolamine patch for the prevention of
nausea and vomiting due to motion sickness in adults. The patch will be
manufactured using Sano's proprietary manufacturing techniques. The Company
plans to file an IND for this product in 1997.

                                      - 6 -

<PAGE>

        ESTROGEN/PROGESTIN TRANSDERMAL SYSTEM FOR MENOPAUSAL
        SYMPTOMS/OSTEOPOROSIS

        Menopause occurs naturally in women between the ages of 45 and 55 and is
characterized by a decline in the body's natural production of estrogen and
progestin hormones. Absence of ovarian hormones (mainly estradiol) induces
metabolic and physical changes in the cardiovascular system, connective tissue,
cartilage, and bone resulting in a broad range of unpleasant symptoms including
hot flashes, vaginal dryness and itching, depression, anxiety and insomnia. In
addition, low levels of estrogen can accelerate loss of bone density, resulting
in osteoporosis.

        Certain published reports suggest that estrogen replacement not only
relieves all the acute symptoms but also protects against both the development
of osteoporosis and the occurrence of related fractures. Additionally, research
indicates that estrogen may help prevent heart disease by raising the level of
high-density lipoprotein in the blood and lowering the level of low-density
lipoprotein, which causes the build-up of fatty deposits in arteries. Research
also indicates that women on estrogen replacement therapy during menopause have
a lower death rate from cardiovascular disease than do women who are not on
estrogen replacement therapy.

        The current market for estrogen is dominated by oral products. With oral
administration, high doses of estrogen must be administered because of the rapid
metabolism and inactivation of estrogens within the liver. Transdermal delivery
of estrogen avoids many of the problems inherent in oral administration. By
avoiding first-pass metabolism through the liver, the dosage required for
transdermal delivery is significantly less than the oral dose of estrogen, may
reduce production of harmful metabolites and may result in a more balanced
hormonal level.

        Progestin is a hormone that is frequently prescribed in conjunction with
estrogen in order to mitigate the potentially dangerous side effects of estrogen
replacement therapy alone. Clinical studies suggest that estrogen replacement
therapy alone may increase the risk of uterine cancer. The administration of
estrogen and progestin together more closely imitates the natural female
hormonal cycle. The Company expects that its combination estrogen/progestin
transdermal drug delivery system combines the advantages of both compounds in a
single delivery system. The Company has developed a prototype estrogen/progestin
patch, designed to be worn for three and one-half days, and intends to file an
IND to commence clinical testing.

        ALBUTEROL TRANSDERMAL SYSTEM FOR ASTHMA

        The National Institute of Allergy and Infectious Disease estimates that
more than ten million people in the United States (about 4% of the population)
suffer from asthma. Albuterol stimulates the beta-adrenergic receptors of the
bronchial smooth muscle and produces bronchodilation, thus relieving asthma. In
patients with asthma, albuterol decreases resistance of airway obstructions,
increases vital capacity and expiratory flow rate, and thus relieves asthmatic
symptoms. Albuterol is available as an inhaler and in tablets. The most common
adverse side effects of albuterol are dose-related. The principal adverse side
effects from the oral administration of albuterol are increased heart rate,
decreased blood pressure, tremors, nervousness, nausea, hyperactivity,
excitement and insomnia. Transdermal albuterol may avoid many of these side
effects by providing a constant delivery of drug, which avoids the peaks that
are seen with the oral product.

        Sano is developing a transdermal system for the delivery of albuterol
for the treatment of asthma. Sano's albuterol patch product is being designed to
be worn for one day. Sano's transdermal albuterol patch is designed to provide a
measured amount of drug, allowing for lower drug levels, and thus fewer and/or
less severe side effects. The Company believes these advantages will lead to
improved patient compliance. The Company has developed a formulation for this
product.

        CONFIDENTIAL TRANSDERMAL SYSTEM FOR ALCOHOL ADDICTION

        Alcoholism is a common disease in the United States.

                                      - 7 -

<PAGE>

        Sano is developing a transdermal system for the delivery of an existing
oral drug for the treatment of alcohol addiction. The Company's patch is
designed to be worn for seven days. A Phase I trial has been completed and a
Phase II trial is planned.

        In addition to the specifically identified proprietary products
described above, Sano is evaluating several other chemical entities to access
the potential for delivery of such chemical entities using Sano's proprietary
controlled release technology.

GENERIC PRODUCTS

        The Company has ten Generic Products under development. Six of these
products are transdermal generics and four are oral controlled-release generics.
Generic products are pharmaceuticals which are identical in three principal ways
to a brand name product: (i) the rate at which a drug is delivered over a
specific time frame, (ii) the amount of drug delivered, and (iii) the method of
delivery (i.e., oral, transdermal, etc.). Before determining to initiate the
development of a Generic Product, the Company considers the extent of
competition, the size of the market, patent status, the ease and rapidity of the
approval process and the estimated time of market launch. Before submitting a
Generic Product to the FDA for approval (through filing an ANDA), the Company
conducts bioequivalency studies in patients comparing the rate and extent of
delivery of Sano's generic version to that of a brand name product. However, the
Company is not required to show the safety or efficacy of a Generic Product as
part of the approval process, as is the case with Proprietary Products. Prior to
conducting human trials, Sano first establishes in laboratory tests that its
generic product and the brand name product are equivalent. The Company's Generic
Product development activities are subject to certain risks, including the
likelihood that competition will be encounted from competitors with
significantly greater financial and marketing resources than the Company, delays
in regulatory approval and that the holders of unexpired patents on branded
products for which the Company seeks to market generic counterparts may
institute patent infringement suits against the Company. See "- Legal
Proceedings."

        TRANSDERMAL GENERIC PRODUCTS

        NICOTINE TRANSDERMAL SYSTEMS FOR SMOKING CESSATION

        The Company has developed a generic transdermal nicotine patch for
smoking cessation that the Company believes is generically equivalent to
Habitrol/Registered Trademark/, which is manufactured by Novartis.

        In January 1995, the Company filed an ANDA for its generic version of
Habitrol/Registered Trademark/ which is in the final stage of review by the FDA.
In August of 1996 the FDA approved an Rx to OTC switch (an "OTC Switch") for two
branded nicotine transdermal patches, Nicotrol/Registered Trademark/ and
Nicoderm/Registered Trademark. As of the date of this Annual Report,
Habitrol/Registered Trademark/ remains a prescription product, and due to the
confidential nature of FDA applications, Sano has no way of knowing whether
Habitrol/Registered Trademark/is seeking an OTC Switch or whether, if such
application is pending, the OTC Switch would be approved. Since Sano's
transdermal nicotine is generic to Habitrol/Registered Trademark/, Sano's
product will, when and if approved, have the same Rx designation as
Habitrol/Registered Trademark/. This Rx designation would limit Sano's sales to
the Rx market. Further, the FDA has granted three year exclusity to
Nicotrol/Registered Trademark and Nicoderm/Registered Trademark/. In the event
Habitrol/Registered Trademark/ receives approval of an OTC Switch it is also
likely Habitrol/Registered Trademark/ would receive the same exclusivity as
Nicotrol/Registered Trademark/ and Nicoderm/Registered Trademark/. If this were
to occur, Sano could be prevented from marketing its nicotine patch for as long
as three years, even if it received earlier regulatory approval.

                                      - 8 -

<PAGE>

        NITROGLYCERIN TRANSDERMAL SYSTEMS FOR ANGINA PECTORIS

        Angina pectoris is a painful condition caused by decreased blood flow to
the heart due to narrowed arteries. Transdermal nitroglycerin patches provide a
continuous therapeutic level of nitroglycerin in the blood stream, dilating the
blood vessels to increase the flow of oxygenated blood to the heart. Transdermal
nitroglycerin patches have been commercially available since 1982 and are
marketed by several companies. Sales of branded and generic transdermal
nitroglycerin patches were approximately $275 million in 1995.

        The Company has developed two generic transdermal nitroglycerin patches
for the treatment of angina pectoris. The patches are designed to be generically
equivalent to Nitro-Dur/Registered Trademark/, produced by Key Pharmaceuticals,
Inc. ("Key") and Ciba's Transderm Nitro/Registered Trademark/, which in 1995 had
total combined sales in the United States in excess of $175 million. In late
1995, the Company filed an ANDA for each of its two generic transdermal
nitroglycerin patches. The patent issued on Nitro-Dur/Registered Trademark/
expires in February 2010. The patent issued on Transderm Nitro/Registered
Trademark/ expired in December 2001. The Company does not believe it infringes
these patents. In March 1996, Key filed a complaint in the United States
District Court of Florida alleging that the Company's transdermal nitroglycerin
patches, a generic version of Nitro-Dur/Registered Trademark/ infringes certain
patents owned by Key. See "Legal Proceedings. "

        CLONIDINE TRANSDERMAL SYSTEM FOR HYPERTENSION

        Hypertension is a leading cause of heart disease. Numerous drugs are
used in the treatment of hypertension, including diuretics, beta blockers, alpha
blockers, calcium channel blockers and angiotensin converting enzyme inhibitors.
Clonidine is an alpha blocker used in the management of hypertension. In the
stepped-care approach to antihypertensive drug therapy, alpha blockers are
generally considered step two drugs and are generally reserved for patients who
fail to respond to diet, exercise and/or weight reduction and therapy with a
step one drug (diuretic or beta blockers). Although many hypertensive patients
may be controlled by clonidine alone, the drug appears to be more effective when
used with a diuretic.

        In 1984, Boehringer Ingelheim received FDA approval for Catapres
TTS/Registered Trademark/, a seven day transdermal patch for the delivery of
clonidine. Several patents on the product Catapres TTS/Registered Trademark/
expire in 2008. In 1995, United States sales of Catapres TTS/Registered
Trademark/ were approximately $75 million.

        Sano has developed a seven-day transdermal clonidine patch as a generic
version of Catapres TTS/Registered Trademark/. Based on laboratory data and a
pilot study completed in March 1995 comparing Sano's clonidine patch to Catapres
TTS/Registered Trademark/, the Company believes that its patch is bioequivalent
to the branded product. Bioequivalency studies are being conducted on this
product. The Company believes that its generic version of Catapres
TTS/Registered Trademark/ does not infringe any of the patents covering the
branded product.

        ESTRADIOL TRANSDERMAL SYSTEM FOR MENOPAUSAL SYMPTOMS/OSTEOPOROSIS

        Sano is developing a transdermal system for the delivery of 17-beta
estradiol, a natural estrogen for the treatment of menopausal symptoms and
osteoporosis. The Company is developing generic three and one-half day and
seven-day estradiol transdermal patches. The transdermal systems under
development by the Company are designed to be generically equivalent to
Vivelle/Registered Trademark/, a three and one half day patch and
Climara/Registered Trademark/, a seven day patch. There are a number of patents
on the branded products.

        SOLID DOSE GENERIC PRODUCTS

        The Company is currently developing four generic versions of branded
solid dose drugs for the treatment of angina and hypertension. One of these
products is in a pilot study and three are in various phases of formulation
development. The pharmaceutical compounds upon which the Company's solid dose
controlled release products are expected to be based are diltiazem, nifedipine
and nicardipine.

                                      - 9 -

<PAGE>

        Diltiazem is a calcium channel blocker that relaxes and dilates the
smooth muscle of the blood vessels and is indicated for the treatment of high
blood pressure and prophylactic management of angina pectoris. Diltiazem is
marketed in the United States in a once-a-day controlled release forms under the
brand name Cardizem CD/Registered Trademark/ by Hoechst Marion Roussel, Dilacor
XR/Registered Trademark/ by Rhone Poulenc Rorer Pharmaceuticals, and
Tiazac/Registered Trademark/ by Forest Laboratories. Nifedipine is marketed in
the United States in an once-a-day controlled-release dosage form by Pfizer Inc.
under the brand name Procardia XL/Registered Trademark/ and by Miles, Inc. under
the brand name Adalat CC/Registered Trademark/. Nicardipine is a calcium channel
blocker indicated for the treatment of hypertension. Nicardipine is marketed in
the United States by Roche Laboratories under the brand name Cardene
SR/Registered Trademark/. The combined worldwide sales of these branded products
were in excess of $1.8 billion in 1995.

MANUFACTURING AND SUPPLY

        The Company leases an 83,000 square foot facility which includes
approximately 10,000 square feet of administrative offices, as well as space for
analytical laboratories, manufacturing areas and research and development areas.
The Company's existing production lines for transdermal products have a capacity
of approximately 100 million patches per year, based upon the Company's
anticipated product mix. By the end of 1997 Sano expects to complete an
expansion program which will bring the Company's capacity to approximately 400
million patches per year. Sano believes that it has the ability to expand the
manufacturing capacity of its current facility to meet its commercial
requirements for the foreseeable future.

        Sano intends to retain manufacturing rights for all of its Proprietary
Products and transdermal Generic Products but may in certain circumstances
contract with third parties to manufacture its solid dose Generic Products. The
Company has developed several proprietary manufacturing and formulation
techniques. The Company intends to file for patents on some, but not all, of
these techniques. The Company believes that the filing of certain manufacturing
process patents would provide only limited protection and, at the same time,
have the negative effect of informing competitors of the Company's approaches to
the manufacture of its transdermal patches.

        Several materials used in the manufacture of the Company's products are
available only from sole source suppliers. These items have generally been
available to Sano and the pharmaceutical industry on commercially reasonable
terms. Sano has not experienced difficulty acquiring materials necessary to
manufacture clinical quantities of its transdermal systems. Suppliers must be
registered with and approved by the FDA. Continued registration requires
compliance with Good Manufacturing Practice regulations ("GMP"). Sano intends to
negotiate supply contracts, as appropriate, prior to commercial introduction of
its transdermal products. While the Company believes that it could develop
alternative sources of supply or redesign its products to avoid the necessity of
relying upon such sources, any interruption of supply would have a material
adverse effect on the Company's ability to manufacture its products.

MARKETING AND SALES

        Sano currently intends to retain marketing rights to substantially all
of its Proprietary Products in the United States until such products have
reached later stages of development, at which time the Company will consider
whether to enter into a licensing or other arrangements with respect to its
Proprietary Products outside the United States. The Company believes that this
strategy will provide the opportunity to maximize royalties or distribution
rights arrangements where appropriate or necessary and to evaluate possible
marketing and distribution strategies so as to maximize profit opportunities.

        Sano has entered into a distribution agreement with Pharmaceutical
Resources, Inc. ("PAR") pursuant to which PAR has a right of first refusal to
distribute the Company's transdermal Generic Products in the United States,
Canada, Latin America and Israel. PAR also has a limited right of first refusal
in connection with the sale of Sano's Generic Products in four countries in
Europe. Sano will manufacture its Generic Products and supply them to PAR at
Sano's cost and will share in the gross profits from the sale of such Generic
Products by PAR. The agreement currently covers Sano's two generic nitroglycerin
patches, one generic nicotine patch and one generic clonidine patch.

                                     - 10 -

<PAGE>

PAR also has a right of first refusal to distribute in the territories described
above any other generic transdermal patches developed by the Company. As to each
product PAR elects to distribute, PAR must pay Sano a portion of Sano's
pre-clinical development costs and all costs of clinical trials and other
post-formulation expenses. This agreement also provides that Sano will reimburse
PAR for such costs and expenses with respect to certain Generic Products. The
Company's agreement with PAR provides that PAR may terminate the agreement if
the Company has not received at least one approval of an ANDA for a Generic
Product covered by the agreement prior to November 30, 1996. While the Company
did not receive an approval by November 30, 1996, PAR has not terminated the
agreement. PAR also is entitled to terminate the agreement with respect to any
product that fails to meet specified annual gross profit thresholds.

        Sano recently advised PAR of the terms of a proposed distribution
agreement with a third party in Italy for Sano's generic clonidine patch. PAR
did not elect to exercise its right of first refusal to meet the terms of this
distribution agreement in Italy. On March 4, 1997 pursuant to the terms of its
agreement with PAR, Sano terminated PAR's right of first refusal with respect to
the distribution in Italy of all products covered by the agreement.

        The agreement between Sano and PAR provides that if PAR chooses not to
initiate a regulatory approval program in a particular country, Sano has the
right to initiate its own program and submit said program and budget to PAR for
funding. Sano has submitted to PAR the Canadian regulatory approval program and
budget for the four generic patches set forth above. PAR has not agreed to fund
such program. Sano then notified PAR that its right of first refusal had
expired. On March 13, 1997, pursuant to the terms of its agreement with PAR,
Sano terminated PAR's rights in Canada to the four generic patches described
above.


PATENTS AND PROPRIETARY TECHNOLOGY

        Sano files patent applications in appropriate situations to protect and
preserve, for its own use, technology, inventions and improvements that it
considers important to the development of its business. The Company also relies
on trade secrets, know-how, continuing technological innovations and possible
licensing opportunities to develop and maintain its competitive position. The
Company has filed two patent applications with the United States Patent and
Trademark Office and has filed corresponding patent applications in Japan, the
European Patent Office and Canada. The Company is not aware of any claims of
infringement against its products or technologies or of any patents which its
products or technologies infringe, except as set forth under "Legal
Proceedings."

        Sano owns or licenses several product related patents. One patent,
developed by Sano, relates to the transdermal delivery of buspirone and a notice
of allowance with respect to this patent, which is expected to be in force until
at least 2013 was issued by the U.S. Patent and Trademark office in June 1996.
Additionally, other patents on the transdermal delivery of buspirone are pending
in Europe and Japan.

        Sano's transdermal nicotine/mecamylamine patch incorporated patented
technology licensed from Dr. Jed E. Rose, Dr. Edward D. Levin and Robert J.
Schapp (collectively, the "Rose Group"). A patent issued to the Rose Group in
1994 relates to the co-administration of nicotine and mecamylamine for smoking
cessation. Recently, the Rose Group was notified of the allowance of an
additional patent relating to the use of agonist/antagonist therapy on certain
receptors in the brain as a treatment for smoking addition. The Company's
license from the Rose Group requires Sano to make progress payments during
various stages of the development, testing and regulatory approval process.
Certain payments were made by the Company upon execution of the license
agreement, upon the receipt of a patent non-infringement opinion and six months
after the execution of the license agreement. Additional annual payments will be
required until the earlier to occur of October 1998 or the filing of an NDA with
the FDA covering products using the patented combination therapy, at which time
the Company is required to make an additional payment to the Rose Group. Sano is
also required to pay the Rose Group a royalty of the net sales of products using
the patented combination therapy and an additional payment in October 1999, less
the amount of any royalties paid under this license agreement. In addition to
the foregoing payments, Sano is required to make an annual payment for a period
of six years commencing on the earlier to occur of October 1999 or one year
after approval of an NDA covering products using the patented combination
therapy.

                                     - 11 -

<PAGE>

        The Company requires each of its employees, consultants and advisors to
execute a confidentiality agreement, and, as to its scientific staff, an
assignment of proprietary rights, upon the commencement of an employment,
consulting or advisory relationship with the Company. These agreements generally
provide that all inventions, ideas, discoveries, improvements and copyrightable
material made or conceived by the individual arising out of the employment,
consulting or advisory relationship and all confidential information developed
or made known to the individual during the term of the relationship shall be the
exclusive property of the Company. This information is required to be kept
confidential and not disclosed to third parties except in specified
circumstances. See "Executive Compensation-Employment Agreements. "

        If a patent is listed with the FDA for a branded drug for which the
Company seeks to develop a generic counterpart, the Company may obtain opinions
of counsel as to the Company's non-infringement, or invalidity of, the listed
patent. Even in cases where the Company obtains an opinion that its product does
not infringe another party's patent or that such patent is invalid, there can be
no assurance that a court would agree with such opinion or that the Company
would not be found liable for patent infringement.


COMPETITION

        Competition in the development and marketing of drug delivery products
is intense and expected to increase. The Company's transdermal delivery
competitors include 3M Corp., ALZA Corporation, Cygnus, Inc., Ethical Holdings,
plc, Noven Pharmaceuticals, Inc. and TheraTech, Inc. Most of these companies
have substantially greater financial resources and larger research and
development staffs than Sano. In addition, these companies have greater
experience in obtaining regulatory approvals and in manufacturing and marketing
pharmaceutical products. Competition with these companies involves not only
product development, but also competition for the acquisition of products and
technologies from universities and other research institutions. The Company also
competes with pharmaceutical companies, universities and other research
institutions in the development of products, technologies and processes.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing a
therapeutic effect than products being developed by the Company. There can be no
assurance that the Company will successfully develop technologies and products
that are more effective or affordable than those being developed by its
competitors. In addition, one or more of the Company's competitors have or may
achieve product commercialization or patent protection earlier than Sano.
Products that may be competitive with certain of the Company's products in
clinical studies have either been approved or are being developed, including
generic nitroglycerin patches, proprietary nicotine patches and proprietary
estrogen patches. The first pharmaceutical product to reach the market in a
therapeutic area and the first generic to a branded product often have a
significant competitive advantage over later entrants to the market. Currently
there are no approved transdermal patches for the treatment of anxiety, ADD,
depression or a combined agonist/antagonist patch directed toward smoking
cessation. In addition, the Company is not aware of any generic transdermal
products pending before, or which have been approved by, the FDA, other than for
nitroglycerin. To the extent that the Company expands its solid dose controlled
release technology, the Company may be subject to additional competition with
respect to such technology.

        The Company expects that its products will compete primarily on the
basis of product efficacy, price, patient compliance, reduced side effects,
product appearance and comfort, reliability and, in certain cases, scope of
patent rights. The Company's competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel, develop
effective Generic and Proprietary Products, implement production and marketing
plans, obtain patent protection and secure adequate capital resources.

                                     - 12 -

<PAGE>

GOVERNMENT REGULATION AND PRODUCT APPROVALS

        The production and marketing of the Company's products and its research
and development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
pharmaceutical products are subject to the Federal Food, Drug and Cosmetic Act,
the Public Health Services Act, and other federal statutes and regulations.
These regulations and statutes govern the testing, manufacture, labeling,
storage, record keeping, advertising, promotion and approval of such
pharmaceutical products. Failure to comply with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal by the government to approve marketing of the product and
criminal prosecution.

        In order to obtain FDA approval of a new dosage form of an existing
product, the Company must submit proof of safety, efficacy and stability and
obtain validation of its manufacturing process. Such proof and validation can
entail extensive pre-clinical, clinical and laboratory testing in order to
prepare the necessary application for FDA approval. The testing and application
process is expensive and time consuming, often taking several years to complete.
There is no assurance that the FDA will act favorably or quickly in reviewing
such applications. Delays imposed by the governmental approval process may
materially reduce the periods during which the Company will have the exclusive
right to exploit patented or proprietary products or technologies.

        The FDA approval process for a new chemical entity typically includes
(i) pre-clinical laboratory and animal studies to enable FDA approval of an
Investigational New Drug ("IND") application, (ii) initial clinical studies to
define safety and dose parameters, (iii) well-controlled clinical trials to
demonstrate product efficacy and safety, and (iv) submission and FDA approval of
an NDA. Pre-clinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential, but
partially overlapping, phases. Phase I trials normally consist of testing the
product in a small number of volunteers for safety and pharmacokinetic
parameters using single and multiple dosing regimens. In Phase II, continued
safety and initial efficacy of the product is evaluated in a somewhat larger
patient population for dose ranging. Phase III trials typically involve
additional testing for safety and clinical efficacy using multiple dosage
regimens in an expanded patient population at multiple clinical testing centers.
A clinical plan or protocol, accompanied by the approval of the entity
participating in the trials, must be submitted to the FDA prior to commencement
of each clinical trial. The FDA may order the temporary or permanent
discontinuation of clinical trials at any time.

        All the results of the pre-clinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. In responding to an NDA, the FDA
may grant marketing approval, require additional testing and/or information, or
deny the application. Continued compliance with all FDA requirements and the
conditions in an approved application, including product specification,
manufacturing process, labeling and promotional material and record keeping and
reporting requirements, is necessary throughout the life of the product. Failure
to comply, or the occurrence of unanticipated adverse effects during commercial
marketing, could lead to the need for product recall or other FDA-initiated
actions that could delay further marketing until the products or processes are
brought into compliance.

        For each Generic Product under development, the Company will be required
to submit an ANDA for approval to commence commercial distribution. The ANDA
must set forth a study demonstrating bioequivalency (i.e. that the rate and
extent of drug delivered by Sano's product are essentially identical to the rate
and extent of delivery of the branded product).

        The Waxman-Hatch amendments require that when a drug developer files an
ANDA for a generic drug, and there is an unexpired patent listed with the FDA
covering that brand name product, that developer must certify to the FDA that
the patent will not be infringed by the developer's product or is invalid or
unenforceable. That certification must also be provided to the patent holder,
who may challenge the developer's certification of non- infringement, invalidity
or unenforceability by filing a suit for patent infringement. If a suit is filed
within 45 days of the patent holder's receipt of such certification, the FDA can
review and approve the ANDA, but is precluded

                                     - 13 -

<PAGE>

from granting final marketing approval of the product until a final judgment in
the action has been rendered or 30 months from the date the certification was
received, whichever is sooner.

        Each pharmaceutical manufacturer's facilities and those of its suppliers
must be registered with and approved by the FDA. Continued registration requires
compliance with Good Manufacturing Practice ("GMP") regulations. While the
Company believes that it could develop alternative sources of supply or redesign
its products to avoid the necessity of relying upon such sources in the event
that any of its suppliers are unable to comply with GMP or for any other reason,
any interruption of supply would have a material adverse effect on the Company's
ability to manufacture its products. Manufacturers must also be registered with
the DEA and similar state and local regulatory authorities if they handle
controlled substances, and with the Environmental Protection Agency ("EPA") and
similar state and local regulatory authorities if they generate toxic or
dangerous wastes. The Company is required to obtain permits from local, state
and federal agencies in connection with emissions resulting from its
manufacturing operations, and the Company may be required to spend significant
funds to comply with appropriate regulations or to obtain future permits.

        For international markets, a pharmaceutical company is subject to
regulatory requirements, interactions and product approvals substantially the
same as those in the United States. Although the technical descriptions of the
clinical trials are different, the trials themselves are substantially the same
as those in the United States and are commonly referred to in the industry as
Phases I, II and III. In connection with any future marketing, distribution and
license agreements into which Sano may enter, Sano's partners may accept or
assume responsibility for such foreign regulatory approvals. The time and cost
required to obtain these international market approvals may be longer or shorter
than those required for FDA approval.

EMPLOYEES

        Sano had 82 full-time employees at December 31, 1996. In addition, the
Company had approximately 34 part-time employees and consultants at that date.
The Company uses part-time and temporary employees to assist in manufacturing
and packaging products. The Company's employees are principally engaged in
research and development, clinical studies, regulatory affairs and quality
control and pilot production. The Company has no union contracts and believes
that its relationship with its employees is good.

ITEM 2.          PROPERTIES

        Sano's facility is located in Miramar, Florida. This facility, which is
leased by the Company, contains 83,000 square feet of usable space. The building
includes 10,000 square feet of office and administrative space. The balance of
the space is dedicated to formulation and analytical laboratories and production
areas. The Company also leases an adjacent parcel for use as a parking lot.
These leases require the Company to pay an aggregate monthly rental payment of
approximately $29,000, subject to an annual increase of 3.5%. The Company is
also required to make a monthly payment to the lessor of approximately $12,000
for maintenance and taxes. The leases expire in May 2006. The leases provide for
four renewal options, each for a term of five years, that may be exercised upon
six months advance notice to the lessor prior to the expiration of the
particular lease term. The Company believes that this facility can adequately
support the development and manufacture of its products currently under
development.

ITEM 3.          LEGAL PROCEEDINGS

        On March 6, 1996, Key filed a complaint in the United States District
Court of Florida alleging that one of the Company's transdermal nitroglycerin
patches, for which the Company has filed an ANDA with the FDA, infringed certain
patents owned by Key. The Company had previously obtained non-infringement
opinions with regard to its product and believes that there is no merit to the
allegations in the complaint. The Company has filed an answer and counterclaim
to the complaint and intends to vigorously defend this lawsuit. However, patent
litigation is extremely costly, protracted and burdensome, and there can be no
assurance that the outcome of the lawsuit will be favorable to the Company. If
the Company is found in violation of Key's patents, it may not be able to market
its generic version of Nitro-Dur/Registered Trademark/ on a commercially
acceptable basis or at all.

                                     - 14 -

<PAGE>

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

        No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.


                                     PART II


ITEM 5.          MARKET FOR THE REGISTRANT'S COMMON EQUITIES AND RELATED
                 SHAREHOLDER MATTERS

        The Company's Common Stock (Nasdaq National Market symbol "SANO") began
trading on the Nasdaq National Market on November 7, 1995. Prior to that date,
there was no public market for the Company's Common Stock. The following table
presents quarterly information on the price range of the Company's Common Stock.
This information indicates the high and low sale prices reported by the
Nasdaq National Market.

                                                  High        Low
                                                  ----        ---
1996
First Quarter .................................. $15.00      $11.00
Second Quarter .................................  18.63       13.63
Third Quarter ..................................  21.75       10.38
Fourth Quarter .................................  20.75       14.63

1995
Fourth Quarter (beginning November 7, 1995) .... $15.00      $11.00

As of March 17, 1997, there were approximately 163 record holders of the
Company's Common Stock. The Company never paid cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.

ITEM 6.          SELECTED FINANCIAL DATA

        The following selected financial data should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this Annual
Report. The statement of operations data for the years ended December 31, 1995,
1994 and 1993 and the balance sheet data as of December 31, 1996, 1995 and 1994
are derived from, and are qualified by reference to, the audited financial
statements included elsewhere in this Annual Report. The statement of operations
data set forth below for the periods ended December 31, 1993 and 1992 and the
balance sheet data as of December 31, 1994, 1993 and 1992 are derived from the
audited financial statements of the Company not included herein.
<TABLE>
<CAPTION>

                                                                    YEAR ENDED DECEMBER 31,
                                               ----------------------------------------------------------------
                                                  1996         1995           1994          1993         1992
                                               ----------  ----------     ----------     ---------    ---------
                                                          (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S>                                            <C>         <C>            <C>            <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................   $   15,000   $      --      $     --      $     --     $      --
                                               ----------   ----------     ---------     ---------    ---------
Operating expenses:
  Research and development..................       13,175        8,429         2,680         1,129          441
  General and administrative................        4,088          911           790           163           94
                                               ----------   ----------     ---------     ---------    ---------
   Total operating expenses.................       17,263        9,340         3,470         1,292          535
Product development fees....................           --           --           228            --           --
Interest Income.............................        1,336          335            28             7            4
Interest and other expense..................         (105)        (126)          (51)           --           --
                                                ----------   ---------     ---------     ---------    ---------
Net income (loss)...........................       (1,032)   $  (9,131)    $   (3,265)   $  (1,285)   $    (531)
                                                ==========   =========     ==========    =========    =========
</TABLE>

                                     - 15 -

<PAGE>
<TABLE>
<CAPTION>

<S>                                             <C>          <C>           <C>          <C>          <C>
                                                ==========   ==========    ==========   ==========   =========
Net income (loss) per common share(1).......    $    (0.11)  $    (1.43)   $    (0.71)  $    (0.31)  $   (0.16)
                                                ==========   ==========    ==========   ==========   =========
Weighted average shares outstanding.........         9,223        6,374         5,054        4,478       3,658
                                                ==========   ==========    ==========   ==========   =========
</TABLE>
<TABLE>
<CAPTION>

                                                                         DECEMBER 31,
                                                --------------------------------------------------------------
                                                  1996          1995          1994         1993         1992
                                                ---------   -----------    ----------   ----------   ---------
                                                                       (IN THOUSANDS)
<S>                                             <C>         <C>            <C>          <C>          <C>
BALANCE SHEET DATA:
 Cash and cash equivalents and marketable
   securitie                                       $23,681      $28,299        $2,586       $  267       $  28
Working capital:............................        23,546       27,029         1,956          (27)        (10)
Total assets................................        39,621       34,625         5,189          792         115
Deferred revenue............................         5,275        1,452            --           --          --
Note payable(3).............................           521          473           776           --          --
Redeemable preferred stock..................            --           --         8,960        2,624         800
Total stockholders' equity (deficit)........        30,099       31,060        (5,456)      (2,130)       (725)
<FN>
----------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net income (loss) per common share.

(2) Note payable represents the net present value of a promissory note
    discounted at a 9.75% annual rate. The Company's financial statements
    reflect the difference between the original proceeds of the note and its net
    present value as of the dates of such statements as additional paid-in
    capital. See Note 8 of Notes to Financial Statements.
</FN>
</TABLE>


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


OVERVIEW

        Since its commencement of operations in October 1992, the Company has
devoted substantially all of its resources to drug delivery research and
development programs and now has nine Proprietary Products and ten Generic
Products in various stages of development. The Company was classified as a
development stage company until the third quarter of 1996, when it began to
generate revenue through its receipt of a $15.0 million non-refundable license
payment under its agreement with BMS. At December 31, 1996 after giving effect
to the receipt of the payment from BMS, the Company had an accumulated deficit
of $15.4 million, resulting from expenses incurred in research and development,
clinical trials, facilities operations, the acquisitions of supplies and, to a
lesser extent, general and administrative operations. The Company expects to
incur losses at least through 1997, which losses may be substantial. The
Company's sources of working capital have been an initial public offering,
equity financings prior to the initial public offering and, to a far lesser
extent, interest earned on investment of cash. In the near term, revenues are
expected to consist principally of revenues from license fees, milestone
payments, research fees and payments from other entities under collaborative
marketing and other agreements, which payments are likely to be irregular and
unpredictable.

        Under its product development agreement with PAR, the Company receives
fees from PAR with respect to the development of specified transdermal Generic
Products to which PAR wishes to obtain distribution rights. Prior to 1995, the
Company recorded the amounts received from PAR as product development fees.
Following a May 1995 modification of the original agreement, pursuant to which
the Company agreed to repay the amounts paid by PAR from the gross profits
derived from product sales, amounts received from PAR have been classified as
deferred revenue. As a result, $228,000 recorded in 1994 as product development
fees was charged to research and development expense in 1995 and a corresponding
amount was recorded as deferred revenue.

                                     - 16 -

<PAGE>

        In August 1996, the Company entered into an exclusive worldwide
distribution and supply agreement with BMS and received a $15.0 million license
payment. Because the $15.0 million license payment is non-refundable and the
Company has no further obligations related to the license payment, that amount
has been recognized as revenue. Any milestone payments Sano may receive under
the BMS agreement will also be recorded as revenue upon the achievement of the
related milestones. An advance to be received from BMS to fund the purchase of
production equipment will be reflected as deferred revenue and recognized as
revenue as sales of the products are made and related royalties are earned.

RESULTS OF OPERATIONS

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995

        REVENUES. As a result of the August 1996 license payment under the BMS
Agreement, the Company recognized revenue of $15.0 million for the year ended
December 31, 1996. To date, the Company had recognized no revenue.

        RESEARCH AND DEVELOPMENT. The Company's research and development
expenses increased by $4.7 million, or 56% to $13.2 million for 1996, from $8.4
million during 1995. This increase is primarily attributable to the Company's
increased clinical trial expenses. The significant increase in laboratory and
clinical activity required by the number of products in development resulted in
a $1.54 million increase in personnel and personnel-related expenditures, a
$1.59 million increase in the cost of clinical trial programs and a $665,000
increase in supplies. In additions, operating overhead allocated to research and
development increased by $500,000 as a result of the expansion of the Company's
facility and increased rent, common area maintenance and taxes. All
manufacturing expenses incurred in production of supplies for clinical trials
are included within research and development expenses. The Company intends to
continue to increase its research and development expenditures. Actual
expenditures will depend on, among other things, the outcome of clinical testing
of products under development, delays or changes in required governmental
testing and approval procedures, technological and competitive development and
strategic marketing decisions.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $3.2 million or 349%, to $4.1 million for 1996 from $911,000 in
1995. This increase was attributable to increases in personnel and
personnel-related expenditures associated with the expansion of facilities and
administrative support for the Company's research and development efforts, as
well as increases in professional fees, principally the $1.0 million investment
banking fee incurred in connection with the BMS agreement and legal fees
incurred in connection with a patent lawsuit.

        OTHER INCOME (EXPENSE). Interest income increased by $1 million to $1.3
million in 1996 from $335,000 in 1995, as a result of the investment of the
remaining proceeds of the Company's initial public offering, and the $15.0
million non-refundable license payment received in August from BMS. Interest and
other expense was $105,000 in 1996 compared to $127,000 in 1995. Interest and
other expense principally reflects the accretion of interest on a discounted
note.

        NET LOSS. As a result of the foregoing, the Company reported a net loss
of $1.0 million for 1996, a decrease of $8.1 million from the net loss of $9.1
million in 1995.

COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994

        RESEARCH AND DEVELOPMENT. The Company's research and development
expenses increased by $5.7 million, or 215%, to $8.4 million for 1995 from $2.7
million during 1994. The increase is primarily attributable to the Company's
increased clinical trial expenses. The significant increase in laboratory and
clinical activity required by the number of products in development resulted in
a $1.3 million increase in personnel and personnel-related expenditures and an
$818,000 increase in supplies consisting primarily of chemicals. The Company
incurred $3.4 million in expenses relating to clinical trials in 1995, compared
to $823,000 in 1994. In 1995, the Company increased its facility's usable square
footage to 74,000 square feet compared to approximately 6,000 square feet
available for use in 1994. The Company's facility houses the Company's
production, operation, laboratories, and headquarters. This expansion resulted
in increases in depreciation due to leasehold improvements and acquisition of
lab equipment, furniture and fixtures. In 1995, the

                                     - 17 -

<PAGE>

$228,000 previously received pursuant to the PAR agreement was charged to
research and development expense and a corresponding amount was recorded as
deferred revenue.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $121,000, or 15%, to $911,000 in 1995 from $790,000 in 1994. The
increase is due to personnel and personnel-related expenditures associated with
the expansion of facilities and administrative support for the Company's
research and development efforts as well as increases in facilities operation
expenses, depreciation and insurance expenses.

        OTHER INCOME (EXPENSE). The Company received product development fees of
$1.2 million from PAR in 1995, which amount, together with the $228,000
discussed above, was recorded as deferred revenue. Interest income in 1995
increased by $307,000 to $335,000 from $28,000 during the comparable period in
1994. This increase is attributable to the Company's short-term investment of
the proceeds of its initial public offering, as well as the proceeds of its
preferred stock equity financing in May 1995. Interest and other expense for
1995 was $127,000, compared to $51,000 for 1994. The $76,000 difference is
primarily a result of the accretion of interest on a discounted note issued in
1994.

        NET INCOME (LOSS). As a result of the foregoing, the Company reported a
net loss of $9.1 million for 1995, an increase of $5.5 million from the net loss
of $3.6 million in 1994.

COMPARISON OF YEARS ENDED DECEMBER 31, 1994  AND DECEMBER 31, 1993

        RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$1.6 million, or 138%, to $2.7 million in 1994 from $1.1 million in 1993. This
increase is primarily attributable to increased clinical trial expenses and, to
a lesser extent, increased ancillary costs, such as consulting fees, product
liability insurance costs and personnel and associated costs including group
health, life, disability and workers' compensation insurance. Additionally,
during 1994, to accommodate its expanded development program, the Company
expanded its laboratory facilities and functions, increased its leasehold and
equipment depreciation expenses and incurred additional administrative overhead
expenses.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $627,000, or 385%, to $790,000 during 1994 from $163,000 in 1993.
This increase was primarily attributable to increases in personnel and
personnel- related costs to support the Company's increased research and
development activities and additional clinical trials, business development
expenses, professional fees, and rent and depreciation.

        OTHER INCOME (EXPENSE). The Company received product development fees of
$228,000 in the fourth quarter of 1994 as a result of attaining certain
milestones under its distribution agreement with PAR. Interest income increased
to $28,000 in 1994 from $7,000 in 1993 as a result of the Company's short-term
investment of the proceeds of an equity financing. Interest expense was $51,000
in 1994 as a result of the accretion of interest on a discounted note . The
Company incurred no interest expense in 1993.

        NET LOSS. As a result of the foregoing, the Company reported a net loss
of $3.6 million in 1994, an increase of $2.2 million from the net loss of $1.4
million in 1993.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash used in operating activities was $1.5 million for the year
ended December 31, 1996, compared to net cash used in operating activities of
$8.8 million in the comparable period of 1995. This increase reflects the
Company's receipt of $15.0 million in licensing revenue form BMS, which more
than offset increased cash outlays for clinical trials, payroll and overhead.

        The Company had capital expenditures of $7.0 million for plant and
equipment acquisitions and $123,000 in expenditures for patents during the year
ended December 31, 1996, compared to $3.6 million and $117,000, respectively,
for the same period in 1995. At December 31, 1996, the Company had purchase
commitments for capital expenditures of approximately $2.1 million.

                                     - 18 -

<PAGE>

        At December 31, 1996, the Company had working capital of $23.5 million
compared to $27.0 million at December 31, 1995. Cash and cash equivalents and
marketable securities were $23.7 million and $28.3 million at December 31, 1996
and December 31, 1995, respectively.

        The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended which represent the
Company's intentions, expectations or beliefs concerning future events,
including, but not limited to, statements regarding management's expectations
with respect to FDA approval, the commencement of sales and the sufficiency of
the Company's cash flow for the Company's future liquidity and capital resource
needs. These forward looking statements are qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                     - 19 -
<PAGE>
REPORT OF
--------------------------------------------------------------------------------
INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

TO THE STOCKHOLDERS OF SANO CORPORATION:

               We have audited the accompanying balance sheets of Sano
               Corporation (a Florida corporation) as of December 31, 1996 and
               1995, and the related statements of operations, stockholders'
               equity and cash flows for each of the three years in the period
               ended December 31, 1996. 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 in accordance with generally accepted
               auditing standards. Those standards require that we plan and
               perform the audit to obtain reasonable assurance about whether
               the financial statements are free of material misstatement. An
               audit includes examining on a test basis, evidence supporting the
               amounts and disclosures in the financial statements. An audit
               also includes assessing the accounting principles used and
               significant estimates made by management, as well as evaluating
               the overall financial statement presentation. We believe that our
               audits provide a reasonable basis for our opinion.

               In our opinion, the financial statements referred to above
               present fairly, in all material respects, the financial position
               of Sano Corporation as of December 31, 1996 and 1995, and the
               results of its operations and its cash flows for each of the
               three years in the period ended December 31, 1996 in conformity
               with generally accepted accounting principles.


               /s/ ARTHUR ANDERSEN LLP
               -----------------------
               ARTHUR ANDERSEN LLP

               Miami, Florida,
                 January 30, 1997

                                       1

<PAGE>

BALANCE                                                        SANO CORPORATION
--------------------------------------------------------------------------------
SHEETS
<TABLE>
<CAPTION>
                                                                                    1996           1995
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
ASSETS
         Current assets:
           Cash and cash equivalents .......................................   $  6,696,361    $  5,517,061
           Marketable securities ...........................................     16,984,567      22,782,221
           Receivables .....................................................      2,066,196
                                                                                                     51,634
           Prepaid chemical supplies .......................................      1,154,298            --
           Other current assets ............................................        302,578         268,767
                                                                               ------------    ------------
             Total current assets ..........................................     27,204,000      28,619,683
                                                                               ------------    ------------
          Property, plant and equipment, net ...............................     11,647,346       5,304,167
                                                                               ------------    ------------
          Other assets:
                 Patents, net ..............................................        313,242         236,815
                 Deposits and other ........................................        456,161         463,838
                                                                               ------------    ------------
                 Total other assets ........................................        769,403         700,653

                   Total assets ............................................   $ 39,620,749    $ 34,624,503
                                                                               ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
                 Notes payable .............................................   $    166,871    $    213,816
                 Current obligation under capitalized leases ...............         44,418          33,429
                 Accounts payable ..........................................      1,732,146         696,015
                 Accrued expenses ..........................................      1,714,250         647,871
                                                                               ------------    ------------
                   Total current liabilities ...............................      3,657,685       1,591,131
                                                                               ------------    ------------
               Long term liabilities:
                 Deferred revenue ..........................................      5,275,073       1,451,655
                 Capitalized lease obligations, net of current portion .....         68,204          48,990
                 Notes payable .............................................        521,262         473,024
                                                                               ------------    ------------
                   Total long term liabilities .............................      5,864,539       1,973,669
                                                                               ============    ============
               Commitments and contingencies (Notes 1 and 7)

               Stockholders' equity:
                 Preferred stock, $0.01 par value, 5,000,000 authorized,
                   none issued or outstanding ..............................           --              --
                 Common stock $0.01 par value, 25,000,000 shares authorized,
                   9,243,735 issued and outstanding at December 31, 1996 and
                   9,206,932 issued and outstanding at December 31, 1995 ...         92,437          92,069
                 Additional paid-in-capital ................................     45,424,428      45,354,225
                 Accumulated deficit .......................................    (15,418,340)    (14,386,591)
                                                                               ------------    ------------
                   Total stockholders' equity ..............................     30,098,525      31,059,703
                                                                               ------------    ------------
                   Total liabilities and stockholders' equity ..............   $ 39,620,749    $ 34,624,503
                                                                               ============    ============
</TABLE>

               SEE ACCOMPANYING NOTES

                                       2


<PAGE>

STATEMENT OF                                                    SANO CORPORATION
-------------------------------------------------------------------------------
OPERATIONS
<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                     1996            1995            1994
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
REVENUES .....................................   $ 15,000,000    $       --      $       --
                                                 ------------    ------------    ------------

OPERATING EXPENSES:
  Research and development ...................     13,175,416       8,429,671       2,680,294
  General and administrative .................      4,087,785         910,552         789,894
                                                 ------------    ------------    ------------
    Total operating expenses .................     17,263,201       9,340,223       3,470,188
                                                 ------------    ------------    ------------

Other income (expense):
  Product development fees ...................           --              --           228,025
  Interest income ............................      1,336,404         335,480          28,109
  Interest and other expense .................       (104,952)       (126,515)        (51,323)
                                                  -----------     -----------     -----------
    Total other income (expense) .............      1,231,452         208,965         204,811
                                                  -----------     -----------     -----------

NET LOSS .....................................     (1,031,749)     (9,131,258)     (3,265,377)

Dividends on redeemable preferred stock ......           --              --          (335,950)
                                                 ------------    ------------    ------------
  Net loss attributable to common shareholders   $ (1,031,749)   $ (9,131,258)   $ (3,601,327)
                                                 ============    ============    ============
Loss per common share (Note 2) ...............   $      (0.11)   $      (1.43)   $      (0.71)
                                                 ============    ============    ============
Weighted average shares outstanding: .........      9,223,000       6,374,000       5,054,000
                                                 ============    ============    ============
</TABLE>

      SEE ACCOMPANYING NOTES

                                       3

<PAGE>

STATEMENTS OF                                                   SANO CORPORATION
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                                                                                 NOTES
                                              COMMON STOCK        ADDITIONAL   RECEIVABLE                       TOTAL
                                          --------------------     PAID-IN        FROM         ACCUMULATED     STOCKHOLDERS'
                                           SHARES    PAR VALUE     CAPITAL     STOCKHOLDERS      DEFICIT          EQUITY
                                          ---------  ---------   ------------  ------------  -------------   ---------------
<S>                                       <C>        <C>         <C>           <C>           <C>             <C>
BALANCE, December 31, 1993 ...........    2,419,780    $24,198   $     19,078    $(13,000)   $ (2,160,016)   $ (2,129,740)
Accrued interest on preferred stock ..         --         --             --          --          (335,950)       (335,950)
Addition to capital resulting from
  discounting of note payable to
  preferred shareholder (Note 8) .....         --         --          274,946        --              --           274,946
Net loss .............................         --         --             --          --        (3,265,377)     (3,265,377)
                                          ---------    -------   ------------    --------    ------------    ------------
BALANCE, December 31, 1994 ...........    2,419,780     24,198        294,024     (13,000)     (5,761,343)     (5,456,121)
  Reversal of all accrued interest for
  conversion of preferred stock
  to common stock ....................         --         --             --          --           506,010         506,010
Addition to capital resulting from
  discounting of note payable to
  shareholder (Note 8) ...............         --         --          180,706        --              --           180,706
Collection of notes receivable
  from stockholders ..................         --         --             --        13,000            --            13,000
Reversal of unamortized
  interest due to prepayment of
  discounted notes payable to
  preferred stockholder (Note 8) .....         --         --         (230,185)       --              --          (230,185)
Conversion of Series A
  Preferred Stock ....................      888,887      8,889        391,111        --              --           400,000
Conversion of Series B
  Preferred Stock ....................      820,736      8,207        545,790        --              --           553,997

Conversion of Series C
  Preferred Stock ....................      358,423      3,584      1,496,405        --              --         1,499,989
Conversion of Series D
  Preferred Stock ....................    1,000,000     10,000      5,990,000        --              --         6,000,000
Conversion of Series E
  Preferred Stock ....................      729,167      7,291      5,089,220        --              --         5,096,511
Net proceeds from initial public
  offering ...........................    2,990,000     29,900     31,597,861        --              --        31,627,761
Fractional shares ....................          (61)      --             (707)       --              --              (707)
Net loss .............................         --         --             --          --        (9,131,258)     (9,131,258)
                                          ---------    -------   ------------    --------    ------------    ------------
BALANCE, December 31, 1995 ...........    9,206,932     92,069     45,354,225        --       (14,386,591)     31,059,703
Exercise of stock options ............       36,803        368         46,267        --              --            46,635
Stock options issued to non-employees          --         --           23,936        --              --            23,936
Net loss .............................         --         --             --          --        (1,031,749)     (1,031,749)
                                          ---------    -------   ------------    --------    ------------    ------------
BALANCE, December 31, 1996 ...........    9,243,735    $92,437   $ 45,424,428    $   --      $(15,418,340)   $ 30,098,525
                                          ==========   =======   ============    ========    ============    ============
</TABLE>

SEE ACCOMPANYING NOTES

                                       4

<PAGE>

STATEMENTS OF                                                  SANO CORPORATION
-------------------------------------------------------------------------------
CASH FLOWS
<TABLE>
<CAPTION>

                                                                 YEARS ENDED DECEMBER 31,
                                                            1996            1995            1994
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss .........................................   $ (1,031,749)   $ (9,131,258)   $ (3,265,377)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization ..................        683,775         433,234         153,842
    Interest accrued on notes payable ..............         59,878         103,343          51,323
    Loss on sale and disposal of equipment .........         47,069            --              --
    Accretion of discount on marketable securities .       (148,657)       (163,248)           --
    Expense from issuance of stock options
      to non-employees .............................         23,936            --              --
    Changes in operating assets and liabilities:
      Increase in receivables ......................     (2,014,562)        (51,634)           --
      Increase in prepaid chemical supplies ........     (1,154,298)           --              --
      Increase in other current assets .............        (33,811)       (146,413)       (119,534)
      (Increase) decrease in deposits and other ....          7,677        (341,707)       (120,697)
        accrued expenses ...........................      2,102,510         460,560         586,044
                                                       ------------    ------------    ------------

        Net cash used in operating activities ......     (1,458,232)     (8,837,123)     (2,714,399)
                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures .............................     (6,965,750)     (3,559,479)     (1,771,578)
  Proceeds from sale of equipment ..................          2,200            --              --
  Sales and maturities of marketable securities ....     32,835,142            --              --
  Purchase of marketable securities ................    (26,888,831)    (22,618,973)           --
  Expenditures for patents .........................       (123,147)       (117,062)        (64,676)
                                                       ------------    ------------    ------------

    Net cash used in investing activities ..........     (1,140,386)    (26,295,514)     (1,836,254)
                                                       ------------    ------------    ------------


CASH FLOWS FROM FINANCING ACTIVITIES:
  Fractional share payoff ..........................           --              (707)           --
  Proceeds from notes payable ......................        229,007       1,434,970       1,025,667
  Repayment of notes payable .......................       (321,142)     (1,715,973)           --
  Advances from distributor ........................      3,823,418       1,451,655            --
  Collection of notes receivable from stockholders .           --            13,000            --
  Proceeds from issuance of common stock,
    net of expenses ................................           --        31,627,761            --
  Proceeds from issuance of Preferred Stock Series D           --           156,563       5,843,437
  Proceeds from issuance of Preferred Stock Series E           --         5,096,511            --
  Exercise of stock options ........................         46,635            --              --
                                                       ------------    ------------    ------------

    Net cash provided by financing activities ......      3,777,918      38,063,780       6,869,104
                                                       ------------    ------------    ------------

  Net increase in cash and cash equivalents ........      1,179,300       2,931,143       2,318,451
  Cash and cash equivalents at beginning of year ...      5,517,061       2,585,918         267,467
                                                       ------------    ------------    ------------

  Cash and cash equivalents at end of year .........   $  6,696,361    $  5,517,061    $  2,585,918
                                                       ============    ============    ============

Supplemental disclosure of non-cash activities:
  Accrued interest on redeemable preferred stock ...   $       --      $       --      $    335,950
                                                       ============    ============    ============

  Capitalized leases ...............................   $     63,753    $     95,396    $       --
                                                       ============    ============    ============

  Outstanding stock subscription ...................   $       --      $       --      $    156,563
                                                       ============    ============    ============
</TABLE>


In November 1995, in connection with its initial public offering of Common
Stock, the Company effected a 5 for 6 reverse stock split of its common stock
and all preferred stock was converted into 3,797,213 shares of common stock.

SEE ACCOMPANYING NOTES


                                       5
<PAGE>
NOTES TO                                                       SANO CORPORATION
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS

1 GENERAL:
          Sano Corporation (the "Company"), was incorporated in Florida in May
          1991. The Company develops novel controlled release drug delivery
          systems for drug therapies licensed from others and for off-patent
          drugs. The Company also develops generic versions of branded
          controlled release products, generally where the advanced nature of
          the necessary technologies may limit competition from other
          manufacturers.

          Management of the Company anticipates incurring substantial losses in
          the near term. As of December 31, 1996, the Company has not marketed
          any products. Future revenues, if any, are expected to be generated
          from sales of products, license fees, research fees and payments from
          other entities under collaborative marketing and other agreements. No
          assurance can be given that the Company's product development efforts
          will be successfully completed, that required regulatory approvals
          will be obtained, that products under development can be manufactured
          at acceptable costs and with appropriate quality or that any products
          can be successfully marketed.

          In November 1995, the Company completed an initial public offering of
          its common stock to finance operations of the Company. The initial
          public offering closed with net proceeds to the Company of
          approximately $31.6 million, including the exercise of the
          over-allotment option, net of underwriting discounts and commissions,
          expense allowances and registration costs.

          The Company continuously evaluates licensing and joint development
          opportunities and other transactions that may result in fees or
          revenues to the Company. The likelihood of the success of the Company
          must be considered in light of the uncertainty caused by problems,
          expenses, complications, and delays frequently encountered in
          connection with the development of new business ventures. These
          business risks include the possible need for additional capital,
          dependence on a limited number of key personnel, competition and the
          ability to successfully obtain required regulatory approvals and
          market its products and services.

          In August 1996, the Company entered into an exclusive worldwide
          distribution and supply agreement with Bristol-Myers Squibb Company
          ("BMS") and received a $15.0 million license payment. Because the
          $15.0 million license payment is non-refundable and the Company has no
          further obligations related to the license payment, such amount has
          been recognized as revenue. Any milestone payments the Company may
          receive under the BMS agreement will also be recorded as revenue upon
          the achievement of the related milestones. An advance to be received
          from BMS to fund the purchase of production equipment will be
          reflected as deferred revenue and recognized as revenue as sales of
          the products are made and related royalties are earned.

          The Company was classified as a development stage company until the
          third quarter of 1996, during which it began to generate revenue
          through its receipt of the $15 million license payment under its
          agreement with BMS.

2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          (a) CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
          investments with maturities of three months or less at the time of
          purchase to be cash equivalents. All amounts are interest bearing at
          December 31, 1996 and 1995.

          (b) MARKETABLE SECURITIES: Investments are classified as "Available
          for Sale" securities pursuant to Statement of Financial Accounting
          Standard (SFAS) No. 115 "Accounting for Certain Investments in Debt
          and Equity Securities" and accordingly are recorded at market value.
          As of December 31, 1996 and 1995 all securities consisted of
          short-term U.S. Government obligations for which amortized cost
          approximated market value.

          (c) PREPAID CHEMICAL SUPPLIES: Effective fourth quarter 1996, the
          Company adopted a policy in which raw materials are classified as
          prepaid chemical supplies at the time of purchase. When the raw
          materials are used they will be expensed as research and development
          costs or cost of sales as applicable.

          (d) PROPERTY, PLANT AND EQUIPMENT : Property, plant and equipment are
          recorded at cost. Routine maintenance, repairs and replacement costs
          are charged against current operations. Depreciation is provided on
          the straight-line method over the estimated useful lives of the
          assets, which ranges from seven to fifteen years. Amortization of
          leasehold improvements is computed based on the shorter of the terms
          of the lease agree-
                                       6
<PAGE>
NOTES TO
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)

          ments or estimated useful lives. In addition, the Company's policy is
          to capitalize all costs incurred during the construction of a project
          and to begin depreciating the asset once the project is operational,
          over the estimated useful life.

          (e) PATENTS: Patents consist of costs incurred in connection with the
          filing of certain patent applications. Such costs are amortized on a
          straight-line basis over the shorter of the product's useful life or
          the life of the patent (not to exceed 20 years). Amortization begins
          at the time the patent is issued to the Company.

          (f) RESEARCH AND DEVELOPMENT COSTS: All research and development costs
          are reflected in the Company's statements of operations as incurred.

          (g) LOSS PER COMMON SHARE: Loss per common share is determined by
          dividing the net loss attributable to holders of the Company's common
          stock by the weighted average number of shares of common stock and
          dilutive common stock equivalents outstanding after applying the
          treasury stock method and after giving effect to the reverse stock
          split effected in November 1995 and the conversion into common stock
          of all outstanding preferred stock in connection with the Company's
          initial public offering. For loss periods, common stock equivalents do
          not include the issuance of stock options and warrants because their
          effect would be anti-dilutive.

          (h) INCOME TAXES: The Company follows SFAS No. 109, "Accounting for
          Income Taxes". This statement requires, among other things,
          recognition of future tax benefits or obligations measured at enacted
          rates attributable to temporary differences between the financial
          statement and income tax basis of assets and liabilities and to net
          operating loss carryforwards to the extent that the realization of
          said benefits is "more likely than not". The Company has set up a 100%
          valuation allowance on net operating loss carryforwards given the
          Company's limited operating history.

          (i) USE OF ESTIMATES: 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.

          (j) FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures
          about Fair Value of Financial Instruments" requires disclosure of the
          fair value of certain financial instruments. Cash and cash
          equivalents, marketable securities, receivables, other assets,
          patents, accounts payable, accrued expenses and debt are reflected in
          the financial statements at cost which approximates fair value.

          (k) STOCK-BASED COMPENSATION: Beginning in 1996, the Company
          implemented the provisions of SFAS 123 "Accounting for Stock-Based
          Compensation" in accounting for stock-based transactions with
          non-employees and accordingly records compensation expense in the
          statement of operations for such transactions. The Company continues
          to apply the provisions of APB 25 for transactions with employees, as
          permitted by SFAS 123.

3  DEFERRED REVENUE:

          In 1994, the Company entered into an agreement with a distribution
          company pursuant to which such distribution company agreed to pay
          certain product development fees in exchange for the right to
          distribute certain products in development by the Company. In 1994,
          fees under this agreement of $228,025, were classified as other income
          in the statement of operations. In May 1995, the agreement was
          modified whereby any monies received by the Company would be repaid
          out of future gross profits of certain products developed by the
          Company and distributed by the distribution company. Accordingly, the
          Company expensed as research and development expense, amounts
          previously received aggregating $228,025, and reported such amount and
          subsequent receipts as deferred revenue. At December 31, 1996, the
          distribution company is a holder of 347,221 shares of the Company's
          common stock, equivalent to an ownership's position in the Company of
          approximately 4%.

                                       7

<PAGE>
                                                               SANO CORPORATION
--------------------------------------------------------------------------------


4 PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following:

                                                          DECEMBER 31,
                                                     1996               1995
                                                ------------       ------------
Leasehold improvements ...................      $  3,304,937       $  3,207,241
Machinery and equipment ..................         3,840,611          1,212,920
Furniture and equipment ..................           671,953            406,484
Construction in progress .................         4,552,404          1,082,942
                                                ------------       ------------
                                                  12,369,905          5,909,587
Less - accumulated depreciation ..........          (722,559)          (605,420)
                                                ------------       ------------
                                                $ 11,647,346       $  5,304,167
                                                ============       ============

5  PATENTS:

Patents consists of the following:

                                                             DECEMBER 31,
                                                        1996             1995
                                                     ---------        ---------
Amortized currently ......................           $ 358,423        $ 162,961
Not amortized currently ..................               8,148           81,778
                                                     ---------        ---------
                                                       366,571          244,739
Less - accumulated amortization ..........             (53,329)          (7,924)
                                                     ---------        ---------
                                                     $ 313,242        $ 236,815
                                                     =========        =========

Amortization expense related to patents for the years ended December 31, 1996
and 1995 was $45,405 and $7,924, respectively.

6  INCOME TAXES:

          At December 31, 1996, the Company had tax net operating loss
          carryforwards and research and dev elopment ("R&D") credit
          carryforwards of approximately $13,587,000 and $998,000, respectively.
          These carryforwards expire at various dates through the year 2011. The
          following table is a summary of tax net operating loss carryforwards
          and R&D credit carryforwards and corresponding dates of expiration:

             NET OPERATING LOSSES             R&D CREDIT CARRYFORWARDS
         FISCAL YEAR-END     AMOUNT          FISCAL YEAR-END     AMOUNT
-------------------------------------------------------------------------------
               2006      $   165,000               2006         $  8,000
               2007          511,000               2007           30,000
               2008        1,183,000               2008           67,000
               2009        2,966,000               2009          163,000
               2010        8,750,000               2010          322,000
         Thereafter           12,000         Thereafter          408,000
-------------------------------------------------------------------------------
              Total      $13,587,000            Total           $998,000
===============================================================================

                                       8

<PAGE>
NOTES TO
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)

At December 31, 1996 and 1995, deferred income taxes consisted of:

                                                     1996               1995
                                                 -----------        -----------
Net operating loss carryforwards .........       $ 5,113,000        $ 5,108,000
R & D credit carryforwards ...............           998,000            590,000
Accrued expenses .........................           495,000             91,000
Stock options ............................             9,000               --
                                                 -----------        -----------
  Deferred tax assets ....................         6,615,000          5,789,000
                                                 -----------        -----------
Prepaid expenses .........................           (13,000)           (13,000)
Depreciation .............................            (9,000)           (16,000)
  Deferred tax liabilities ...............           (22,000)           (29,000)
                                                 -----------        -----------
Valuation allowance ......................        (6,593,000)        (5,760,000)
                                                 -----------        -----------
Net deferred taxes .......................       $      --          $      --
                                                 ===========        ===========

          In addition to the above deferred tax assets, the Company has $111,000
          in tax credits available, related to the exercise of employee stock
          options, to reduce future taxes payable, if any. The Company will
          record increases in additional paid-in-capital as such credits are
          utilized.


7  COMMITMENTS:

          (a) OPERATING LEASE COMMITMENTS: The Company operates in one building
          under two leases. The Company also leases an adjacent parcel for use
          as a parking lot. These obligations extend through 2006, with yearly
          increases of 3.5% to the base rent, each with four five-year renewal
          options. The Company has also entered into operating leases for office
          equipment.

          At December 31, 1996, the future minimum annual commitments under
          non-cancelable operating lease agreements are as follows:

YEAR                                                                    AMOUNT
----                                                                  ----------
1997 .............................................................    $  500,721
1998 .............................................................       512,887
1999 .............................................................       523,472
2000 .............................................................       536,504
2001 .............................................................       549,992
Thereafter .......................................................     2,602,924
                                                                      ----------
Total minimum rentals due ........................................     5,226,500
                                                                      ==========

          Rent expense for the years ended December 31, 1996, 1995 and 1994 was
          approximately $439,000, $409,000 and $167,000 respectively.

          (b) Capital Leases: The future minimum payments under all capital
          lease agreements as of December 31, 1996 are as follows:

1997 ..........................................................       $  57,245
1998 ..........................................................          47,035
1999 ..........................................................          31,000
                                                                      ---------
Total minimum lease payments ..................................         135,280
Less--amount representing interest ............................         (22,658)
                                                                      ---------
Present value of minimum lease payments .......................         112,622
                                                                      ---------
Less--Current obligation under capitalized leases .............         (44,418)
                                                                      $  68,204
                                                                      =========

          The recorded costs of equipment under capital lease agreement is
          $112,622 with accumulated amortization of $6,057 as of December 31,
          1996.

                                       9

<PAGE>
                                                               SANO CORPORATION
--------------------------------------------------------------------------------


          (c) EMPLOYMENT AGREEMENTS: The Company has entered into three year
          employment agreements with certain of its principal officers and key
          employees. In addition to minimum salary levels, the agreements for
          two key employees call for royalty payments of 0.5% to 1% of net sales
          over five years for certain products commencing with the first
          commercial sales for such products. Furthermore, the employment
          agreements for two of its principal officers contain death benefit
          provisions which expire in November 1998. Each of these provisions
          requires the Company to pay one year's base salary to the officer's
          family in the event of death. No accrual has been made in the
          financial statements for the death benefits as occurrence is not
          probable during the lives of the contracts. The minimum annual
          commitment for future salaries at December 31, 1996 is as follows:

YEAR                                                                     AMOUNT
----                                                                    --------
1997 .................................................................  $940,000
1998 .................................................................   893,750
1999 .................................................................   332,500

          (d) CONSULTING AGREEMENTS : The Company engages several consultants
          with expertise in clinical trials, medical research, pharmaceutical
          operations management, architecture and engineering.

          (e) RESEARCH AND DEVELOPMENT AGREEMENTS: The Company has entered into
          agreements with respect to clinical trials with unrelated entities.
          The Company is primarily responsible for funding the clinical trials,
          and such other entities are primarily responsible for providing
          personnel, equipment and facilities to conduct clinical research
          activities.

          (f) PURCHASE COMMITMENTS: The Company has outstanding purchase
          commitments for capital expenditures of approximately $2,071,000 as of
          December 31, 1996.


8  NOTES PAYABLE:
<TABLE>
<CAPTION>

Notes payable consists of the following:                                 December 31,
                                                                        1996       1995
                                                                      --------   --------
<S>                                                                   <C>        <C>
Note payable in monthly installments through June 1997
   with interest at7.64% ..........................................   $117,105   $   --
Note payable in monthly installments through August 1997
   with interest at 8.45% .........................................     49,766       --
Note payable in monthly installments through June 1996
   with interest at 8.16% .........................................       --       56,261
                                                                      --------   --------
Note payable in monthly installments through August 1996
   with interest at 8.15% .........................................       --      130,218
Note payable in monthly installments through May 1996
   with interest at 17% ...........................................       --       27,337
Total short-term notes payable ....................................   $166,871   $213,816
                                                                      ========   ========

Long-term notes payable to stockholder under distribution agreement   $521,262   $473,024
                                                                      ========   ========
</TABLE>


          During 1994, the Company entered into an exclusive distribution
          agreement (the "Distribution Agreement") for certain generic
          transdermal products under development and rights of first refusal for
          other generic products to be produced by the Company. Under the terms
          of the Distribution Agreement, the distributor advanced the Company
          $1.0 million. The advance is non-interest bearing and, accordingly,
          has been discounted at a rate of 9.75% to reflect it at its net
          present value. The difference between the proceeds from the note
          payable and the discounted value has been reflected as an addition to
          capital in the accompanying statement of stockholders' equity.

          In July 1995, the Company received two additional advances in the
          amounts of $418,666 and $578,010 (these amounts are reflected at a
          9.75% discount). The difference between the proceeds from the two
          additional advances and the discounted value has been reflected as an
          addition to capital in the accompanying statement of stockholders'
          equity. The original $1.0 million promissory note was canceled and a
          new

                                       10

<PAGE>
NOTES TO
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)

          promissory note in the amount of $1.5 million was issued. In November
          1995, the Company repaid the $1.5 million from the proceeds of its
          initial public offering. The unamortized interest on the advances has
          been reflected on the statement of stockholders' equity as a reduction
          of capital. The Company must repay the $521,262 plus interest upon
          commercialization of a product or the third anniversary of the note,
          whichever should occur first.

9  REDEEMABLE PREFERRED STOCK:

          The Company's redeemable Series A, B, C, D and E Preferred Stock were
          unregistered and were subject to all laws pertaining to unregistered
          securities. Holders of Series A, B, C, D and E Preferred Stock were
          entitled to vote their preferred shares (adjusted for conversion
          values into equivalent common shares) on all corporate matters as if
          they held common stock. Dividends declared on common stock shares
          would have been payable to the holders of Series A, B, C, D and E
          Preferred Stock.

          In May 1995 the Company completed the private placement of 875,000
          shares of Series E Preferred Stock at $6.00 per share, which raised
          approximately $5.1 million.

          Each share of Series A, B, C, D and E Preferred Stock was converted
          into one share of common stock (adjusted for dilution and the 5-for-6
          reverse stock split) upon the completion of the Company's initial
          public stock offering in November 1995.

10  STOCKHOLDERS' EQUITY:

          On November 10, 1995, the Company completed an initial public offering
          of its common stock. Simultaneously with the completion of the
          offering, (i) all outstanding shares of redeemable preferred stock
          (consisting of 1,066,664 shares of Series A Preferred Stock, 984,884
          shares of Series B Preferred Stock, 430,108 shares of Series C
          Preferred Stock, 1,200,000 shares of Series D Preferred Stock and
          875,000 shares of Series E Preferred Stock) were automatically
          converted into an aggregate of 3,797,213 shares of common stock and
          (ii) the Company's articles of incorporation was amended and restated
          to provide that the authorized capital stock of the Company consists
          of 25,000,000 shares of common stock, $0.01 par value, and 5,000,000
          shares of preferred stock, $0.01 par value.

          In connection with the initial public offering, the Board of Directors
          of the Company approved a 5-for-6 reverse stock split of its common
          stock effective coincident with the date of the initial public
          offering. Such split has been retroactively reflected in the
          accompanying financial statements.

11  STOCK OPTION PLANS

          During 1993, the Board of Directors of the Company adopted the Sano
          Corporation 1993 Nonqualified Stock Option Plan (the "1993 Plan")
          which has been approved by the Company's stockholders. All directors,
          officers, employees and certain related parties of the Company
          designated by the Board are eligible to receive options under the 1993
          Plan.

          The 1993 Plan is administered by the Stock Option Committee of the
          Board of Directors of the Company. The 1993 Plan was established on
          May 5, 1993 and terminates on May 4, 2003.

          The purchase price per share of stock purchased under an option
          pursuant to the Plan is determined by the Board, but in no event may
          such price be below the fair market value of such stock. The maximum
          term of any option is ten years from the date of grant. All options
          terminate within 120 days of termination of employment.

          In September 1995, the Company adopted the 1995 Stock Option Plan (the
          "1995 Plan") which provides for the granting of stock options to
          employees, officers, directors and independent contractors for the
          purchase of up to 500,000 shares of the Company's common stock.
          Options granted under the Plan may be incentive stock options or
          nonqualified options.

          Additionally, under the 1995 Plan, each non-employee director shall
          receive, on the date of his appointment as Director, an option to
          purchase 5,000 shares of common stock and each subsequent year an
          option to purchase 5,000 shares of common stock upon the release of
          the prior year earnings.

                                       11

<PAGE>
<TABLE>
<CAPTION>
                                                               SANO CORPORATION
--------------------------------------------------------------------------------


               The 1995 Plan provides for immediate vesting of options in the
               event of certain changes in control of the Company.

               The following is a summary of stock option activity:

                                                          NUMBER OF      OPTION PRICE
                                                           SHARES          PER SHARE
                                                         -----------    --------------
<S>                                                       <C>           <C>        <C>
Outstanding at December 31, 1993 ....................      630,334      $ 0.67
Granted .............................................      370,416        1.50 -  2.70
Exercised ...........................................         --                    --
Canceled ............................................         --                    --
                                                         ---------      ------   -----
Outstanding at December 31, 1994 ....................    1,000,750        0.67 -  2.70
Granted .............................................      275,083        3.60 - 11.50

Exercised ...........................................         --                    --
Canceled ............................................       (3,333)       1.50
                                                         ---------      ------   -----
Outstanding at December 31, 1995 ....................    1,272,500        0.67 - 11.50
Granted .............................................      338,750       11.88 - 19.25
Exercised ...........................................      (36,803)       0.67 -  3.60
Canceled ............................................     (123,640)       1.50 - 11.00
                                                        ----------      ------   -----
Outstanding at December 31, 1996 ....................    1,450,807        0.67 - 19.25
                                                        ----------      ------   ------
Options exercisable at December 31, 1996 ............      948,337      $ 0.67 - 14.38
                                                        ----------      ------   -----
Shares of common stock available for future grants at
  December 31, 1996 .................................      236,472
                                                        ==========
</TABLE>

               The following table summarizes information about fixed stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>

                          OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
                         NUMBER          REMAINING         WEIGHTED           NUMBER          WEIGHTED
   RANGE OF        OUTSTANDING AS OF    CONTRACTUAL        AVERAGE      EXERCISABLE AS OF     AVERAGE
EXERCISE PRICES        12/31/96            LIFE         EXERCISE PRICE     12/31/96        EXERCISE PRICE
----------------   -----------------    -----------     --------------  -----------------  --------------
<S>                <C>                  <C>             <C>             <C>                <C>
  $ 0.67                613,670            1.38            $ 0.67           546,997           $ 0.67
    1.50 - 3.60         536,387            5.33              2.52           369,674             2.08
   11.00 - 16.75        288,250            5.13             13.53            31,666            12.86
   19.25                 12,500            4.81             19.25                 0                0
----------------   -----------------    ------------    --------------  -----------------  --------------
    0.67 - 19.25      1,450,807            3.62              4.07           948,337             1.63
                   =================                                    =================
</TABLE>

          The Company applies APB Opinion 25 and related interpretations in
          accounting for its plans. Accordingly, no compensation cost has been
          recognized for its fixed stock option plans. Had compensation cost for
          the Company's stock been based on the fair value at the grant dates
          for awards under those plans consistent with the method of FASB
          Statement 123, the Company's net loss and loss per share would have
          been reduced to the proforma amounts indicated below:

                                                   1996             1995
                                             --------------   --------------
Net Loss            As reported ............ $  (1,031,749)   $  (9,131,258)
                       Proforma ............ $  (2,060,000)   $  (9,322,460)

Loss Per Share      As reported ............ $       (0.11)   $       (1.43)
                       Proforma ............ $       (0.22)   $       (1.46)

          The fair value of each option grant is estimated on the date of grant
          using the Black-Scholes option pricing model with the following
          weighted average assumptions: expected volatility of 57.6%, risk-free
          interest rates ranging from 6.11% to 6.32%, expected dividends of $0
          and expected lives of 5 years. In 1996, the Company recorded
          compensation expense of $23,936 related to 11,000 stock options
          granted on various dates throughout the year to non-employees of the
          Company.

                                       12

<PAGE>
NOTES TO
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONTINUED)

12  401(K) SAVINGS PLAN:

          During January 1996, the Company adopted a 401(K) Savings Plan which
          allows eligible employees to allocate up to 16% of their salary to
          such plan. The Company may make a discretionary match of up to 6% of
          such salary. As of December 31, 1996, the Company had elected to match
          up to 4% of such contributions made by employees with stock of the
          Company and accordingly recorded an expense of $66,143.

13  LITIGATION:

          On March 6, 1996, Key Pharmaceuticals, Inc. ("Key") filed a complaint
          in the United States District Court of Florida alleging that one of
          the Company's transdermal nitroglycerin patches, for which the Company
          had filed an Abbreviated New Drug Application with the U.S. Food and
          Drug Administration, infringed certain patents owned by Key. The
          Company had previously obtained non-infringement opinions with regard
          to its product and believes that there is no merit to the allegations
          in the complaint. The Company has filed an answer and counterclaim to
          the complaint and intends to vigorously defend this lawsuit. However,
          patent litigation is extremely costly, protracted and burdensome, and
          there can be no assurance that the outcome of the lawsuit will be
          favorable to the Company. If the Company's product is found to be in
          violation of Key's patents, the Company may not be able to market its
          product on a commercially acceptable basis or at all.

                                       13


<PAGE>

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

         None.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Incorporated by reference from the Company's definitive 1997 Proxy
Statement for the Annual Meeting of Shareholders.


ITEM 11.  EXECUTIVE COMPENSATION

         Incorporated by reference to the Company's definitive 1997 Proxy
Statement for the Annual Meeting of Shareholders.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated by reference from the Company's definitive 1997 Proxy
Statement for the Annual Meeting of Shareholders.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated by reference from the Company's definitive 1997 Proxy
Statement for the Annual Meeting of Shareholders.

                                        - 20 -

<PAGE>

                                     PART IV


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

    (1) See Item 8 above for a list of financial statements and financial
statement schedules included as part of this Annual Report on Form 10-K.

    (2)  The Company filed one report on Form 8-K, dated May 15, 1996, during
the last quarter of fiscal 1996.

    (3)  Exhibits.

EXHIBIT
NUMBER             DESCRIPTION

3.1        Articles of Incorporation of the Registrant (1)
3.2        Bylaws of the Registrant (1)
10.1       1993 Non-Qualified Stock Option Plan of Registrant (1)
10.2       1995 Stock Option Plan of Registrant (1)
10.3       Form of Indemnification Agreement between the Registrant and each of
                its directors and executive officers (1)
10.4       Employment Agreement, dated as of September 20, 1995, between the
                Registrant and Marc M. Watson (2)
10.5       Employment Agreement, dated as of September 20, 1995, between the
                Registrant and Reginald L. Hardy (2)
10.6       Employment Agreement, dated as of May 31, 1993, between the
                Registrant and Charles Betlach (1)
10.7       Employment Agreement, dated as of September 30, 1993, between the
                Registrant and Cheryl Gentile, as amended (2)
10.8       Employment Agreement, dated as of May 28, 1993, between the
                Registrant and Jesus Miranda, as amended (2)
10.9       Employment Agreement, dated as of September 30,1993, between the
                Registrant and Joseph Gentile (1)
10.10      Distribution Agreement, dated February 24, 1994, between the
                Registrant and Pharmaceutical Resources, Inc. (1)(7)
10.11      Lease Agreement, dated May 6, 1994, between the Registrant and
                Sunbeam Properties, Inc.
                (3250 Commerce Parkway, Miramar, Florida property) (1)
10.12      Lease Agreement, dated June 10, 1994, between the Registrant and
                Sunbeam Properties, Inc.
                (3251 Corporate Way, Miramar, Florida property) (1)
10.13      Consulting Agreement dated January 7, 1994 between the Registrant
                and Dr. Donald Robinson (2)
10.14      License Agreement dated October 28, 1994 by and between Dr. Jed E.
                Rose, Dr. Edward D.Levin and Robert J. Schaap and the
                Registrant (3)
10.15      Distribution and Supply Agreement for Transdermal Buspirone, dated
                August 28, 1996, between the Registrant and Bristol-Myers Squibb
                Company (4)(7)
10.16      Letter agreement, dated May 8, 1995, between the Registrant and
                Pharmaceutical Resources, Inc. and PAR Pharmaceutical, Inc.,
                amending the PAR Agreement (5)(7)
10.17      Extension of Employment Agreement, dated October 24, 1996, between
                the Registrant and Charles Betlach(6)
10.18      Extension of Employment Agreement, dated October 24, 1996, between
                the Registrant and Cheryl Gentile(6)

                                        - 21 -

<PAGE>



10.19      Extension of Employment Agreement, dated October 24, 1996, between
                the Registrant and Jesus Miranda(6)
10.20      Extension of Employment Agreement, dated October 24, 1996, between
                the Registrant and Joseph Gentile(6)
10.21      Business Lease, dated September 11, 1996, between the Registrant and
                Sunbeam Properties, Inc.(6)
10.22      Lease Extension and Amendment, dated September 1,1996, between the
                Registrant and Sunbeam Properties, Inc.
                (3251 Corporate Way,Miramar, Florida property)(6)
10.23      Lease Extension and Amendment dated September 11,1996 between the
                Registrant and Sunbeam Properties, Inc.
                (3251 Corporate Way, Miramar, Florida property)(6)

11.1       Statement Regarding Computation of Per Share Earnings

23.1       Consent of Arthur Andersen LLP

27.1       Financial Data Schedule
--------------------

(1)      Exhibit is incorporated by reference to an identically numbered
         exhibit to the Company's Registration Statement on Form S-1, file
         number 33-97194.

(2)      Exhibit is incorporated by reference to an identically numbered exhibit
         to the Company's Amendment No. 1 to Registration Statement on Form S-1,
         file number 33-97194.

(3)      Exhibit is incorporated by reference to an identically numbered exhibit
         to the Company's Amendment No. 2 to Registration Statement on Form S-1,
         file number 33-97194.

(4)      Exhibit is incorporated by reference to Exhibit 10.1 to the Company's
         Current Report on Form 8-K dated May 15, 1996.

(5)      Exhibit is incorporated by reference to Exhibit 10.2 to the Company's
         Current Report on Form 8-K dated May 15, 1996.

(6)      Exhibit is incorporated by reference to an identically numbered exhibit
         to the Company's Registration Statement on Form S-1, file number
         333-10506

(7)      Certain marked portions of this Agreement have been redacted and filed
         separately with the U.S. Securities and Exchange Commission pursuant to
         Rule 406 of the Securities Act of 1933.

                                        - 22 -

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                             SANO CORPORATION


                                             By: /s/ REGINALD L. HARDY
                                                -----------------------
                                                Reginald L. Hardy, President
Dated:   March 31, 1997

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



           SIGNATURE                    TITLE                        DATE
           ---------                    -----                        ----


  /s/ REGINALD L. HARDY        President and Director            March 31, 1997
----------------------------   (principal executive officer)
Reginald L. Hardy


  /s/ MARC M. WATSON           Chairman of the Board             March 31, 1997
----------------------------
Marc M. Watson


  /s/ GERALD S. COOMBS         Chief Financial Officer           March 31, 1997
----------------------------   (principal financial officer and
Gerald S. Coombs                principal accounting officer)



  /s/ CHARLES J. BETLACH II    Director                          March 31, 1997
----------------------------
Charles J. Betlach II


  /s/ HUBERT E. HUCKEL, M.D.   Director                          March 31, 1997
----------------------------
Hubert E. Huckel, M.D.


  /s/ MARCO POSSATI            Director                          March 31, 1997
----------------------------
Marco Possati


  /s/ ROY S. WALZER            Director                          March 31, 1997
---------------------------
Roy S. Walzer

<PAGE>

                               INDEX TO EXHIBITS

EXHIBIT NUMBER          DESCRIPTION
--------------          -----------

11.1          Statements Regarding Computation of Per Share Earnings

23.1          Consent of Arthur Andersen LLP

27.1          Financial Data Schedule