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

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1997.

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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                          650263022
--------------------------------------------------------------------------------
        (State of other jurisdiction of     (I.R.S. Employer Identification No.)
         incorporation or organization)

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

                                 (954) 430-3340
-------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

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 1933 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

Common Stock, $.01 par value 10,511,781 shares as of November 7, 1997.

<PAGE>

                                SANO CORPORATION
                                      INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

        Balance Sheets -- September 30, 1997 and December 31, 1996

        Statements of Operations -- Three and nine months ended
                                    September 30, 1997 and 1996

        Statements of Cash Flows -- Nine months ended September 30, 1997
                                    and 1996

        Notes to Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

                                       2

<PAGE>


FINANCIAL STATEMENT
ITEM 1.

                                SANO CORPORATION
                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                        September 30,       December 31,
                                                                                            1997                1996
                                                                                            ----                ----
ASSETS                                                                                    (Unaudited)
<S>                                                                                       <C>             <C>
CURRENT ASSETS
     Cash and cash equivalents                                                            $  1,338,215    $  6,696,361
     Marketable securities                                                                  23,457,501      16,984,567
     Receivables                                                                             1,285,380       2,066,196
     Prepaid chemical supplies                                                               1,782,220       1,154,298
     Other current assets                                                                      168,974         302,578
                                                                                          ------------    ------------
           Total current assets                                                             28,032,290      27,204,000
                                                                                          ------------    ------------
PROPERTY, PLANT AND EQUIPMENT, NET                                                          15,946,026      11,647,346
                                                                                          ------------    ------------

OTHER ASSETS
     Patents, net                                                                              638,729         313,242
     Deposits and other                                                                        829,884         456,161
                                                                                          ------------    ------------
         Total other assets                                                                  1,468,613         769,403
                                                                                          ------------    ------------
TOTAL ASSETS                                                                              $ 45,446,929    $ 39,620,749
                                                                                          ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Notes payable                                                                         $  2,049,645    $    166,871
    Current obligation under capitalized leases                                                 40,459          44,418
    Accounts payable                                                                         1,088,121       1,732,146
    Accrued expenses                                                                         1,506,786       1,714,250
                                                                                          ------------    ------------
           Total current liabilities                                                         4,685,011       3,657,685
                                                                                          ------------    ------------

LONG TERM LIABILITIES
     Deferred revenue                                                                        7,913,160       5,275,073
     Capitalized lease obligations, net of current portion                                      37,425          68,204
     Notes payable                                                                                --           521,262
                                                                                          ------------    ------------
           Total long term liabilities                                                       7,950,585       5,864,539
                                                                                          ------------    ------------
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, 10,505,115 and 9,243,735 
       issued and outstanding at September 30, 1997 and December 31, 1996, respectively        105,052          92,437
     Additional paid-in-capital                                                             60,844,037      45,424,428
     Accumulated deficit                                                                   (28,137,756)    (15,418,340)
                                                                                          ------------    ------------
             Total stockholders' equity                                                     32,811,333      30,098,525
                                                                                          ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $ 45,446,929    $ 39,620,749
                                                                                          ============    ============
</TABLE>

                             SEE ACCOMPANYING NOTES

                                       3
<PAGE>


                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                THREE MONTHS ENDED                       NINE MONTHS ENDED
                                                                   SEPTEMBER 30,                           SEPTEMBER 30,
                                                             1997                 1996                1997             1996
                                                             ----                 ----                ----             ----
<S>                                                          <C>                  <C>                 <C>              <C>
REVENUES                                               $        944,800     $      15,000,000    $      944,800    $     15,000,000
                                                     -------------------   -------------------   ---------------   -----------------
OPERATING EXPENSES
   Research and development                                   4,477,385             4,326,524        12,982,950          10,161,958
   General and administrative                                 1,139,961             1,603,053         2,803,489           2,693,919
                                                     -------------------   -------------------   ---------------   -----------------
      Total operating expenses                                5,617,346             5,929,577        15,786,439          12,855,877
                                                     -------------------   -------------------   ---------------   -----------------

OTHER INCOME (EXPENSE)
   Interest and other income                                    992,466               336,967         2,254,590             975,287
   Interest and other expense                                  (38,536)              (14,082)         (132,367)            (68,468)
                                                     -------------------   -------------------   ---------------   -----------------
      Total other income (expense)                              953,930               322,885         2,122,223             906,819
                                                     -------------------   -------------------   ---------------   -----------------

NET INCOME (LOSS)                                    $      (3,718,616)    $        9,393,308     $(12,719,416)    $      3,050,942
                                                     ===================   ===================   ===============   =================

NET INCOME (LOSS) PER COMMON SHARE (NOTE 3):
      Primary                                           $        (0.36)     $            0.91       $    (1.33)    $           0.30
                                                                 ======                  ====            ======                ====
      Fully diluted                                     $        (0.36)     $            0.90       $    (1.33)    $           0.29
                                                                 ======                  ====            ======                ====
WEIGHTED AVERAGE SHARES OUTSTANDING:
      Primary                                                10,208,000            10,341,000         9,572,000          10,329,000
                                                     ===================      ===============    ==============    ================
      Fully diluted                                          10,208,000            10,423,000         9,572,000          10,402,000
                                                     ===================      ===============   ===============    ================
</TABLE>
                             SEE ACCOMPANYING NOTES

                                       4
<PAGE>
                                SANO CORPORATION
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED SEPTEMBER 30,
                                                                        ------------------------------------------------
                                                                                      1997                     1996
                                                                                      ----                     ----
<S>                                                                               <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income (loss)                                                        $ (12,719,416)         $    3,050,942
         Adjustments to reconcile net income (loss) to net cash used
           in operating activities:
             Depreciation and amortization                                              688,637                 518,082
             Expense from issuance of stock options to non-employees                    194,105                      --
             Loss on sale of equipment                                                       --                  16,640
             Accretion of discount on marketable securities                            (730,322)               (246,106)
             Interest accrued on notes payable                                           69,503                  51,617
             Gain on restructuring debt                                               (415,481)                      --
             Changes in operating assets and liabilities:

                 Decrease in accounts receivable                                        780,816                      --
                 Increase in prepaid chemical supplies                                 (627,922)                     --
                 Decrease (increase) in other current assets                            133,604                 (93,419)
                 Increase in deposits and other                                        (373,723)               (420,880)
                 (Decrease) increase in accounts payable and accrued
                    expenses                                                           (785,346)              1,084,014
                                                                       -------------------------  ----------------------
                       Net cash (used in) provided by operating                    (13,785,545)               3,960,890
                         activities                                    -------------------------  ----------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                                        (4,967,904)             (5,006,517)
         Sale of equipment                                                                   --                   2,200
         Sale and maturities of marketable securities                                20,863,000              20,022,819
         Purchase of marketable securities                                          (26,605,612)            (22,383,177)
         Expenditures for patents                                                      (344,900)               (118,383)
                                                                       -------------------------  ----------------------
                      Net cash used in investing activities                         (11,055,416)             (7,483,058)
                                                                       -------------------------  ----------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
            Proceeds from private offering, net                                      15,120,839                       -
            Repayment of notes payable, capital leases & deferred revenue            (2,169,418)               (426,802)
            Advances from distributors                                                6,413,160               1,866,854
            Proceeds from exercise of stock options                                      51,137                  39,385
            Proceeds from notes payable                                                  67,097                 173,407
                                                                         ----------------------   ---------------------
                 Net cash provided by financing activities                           19,482,815               1,652,844
                                                                         ----------------------   ---------------------

         Net decrease in cash and cash equivalents                                  (5,358,146)             (1,869,324)
         Cash and cash equivalents at beginning of period                             6,696,361               5,517,061
                                                                         ======================   =====================
         Cash and cash equivalents at end of period                       $           1,338,215               3,647,737
                                                                         ======================   =====================
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

In March 1997, the Company issued 4,337 shares of common stock to the Company's
401(k) plan.

In July 1997, the Company amended a distribution agreement which resulted in a
$1,406,199 reclassification between deferred revenue and notes payable.

                             SEE ACCOMPANYING NOTES

                                       5
<PAGE>

                                SANO CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997

(1)  BASIS OF PRESENTATION:

The information at September 30, 1997 and for the three and nine months ended
September 30, 1997 and 1996 is unaudited. However, such information includes all
adjustments (consisting of normal recurring adjustments) which in the opinion of
management of Sano Corporation (the "Company") are necessary for a fair
financial presentation of the results for the periods presented. The results of
operations and cash flows for the three and nine month periods ended September
30, 1997 are not necessarily indicative of results of operations and cash flows
to be expected for the entire year or any subsequent period. These financial
statements should be read in conjunction with the audited financial statements
for the year ended December 31, 1996.

(2) 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 are expensed as research and development
costs or cost of sales, as applicable.

(3) INCOME (LOSS) PER COMMON SHARE:

Income (loss) per common share is determined by dividing the net income (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.

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earning Per Share" effective for fiscal years ending after December 15, 1997.
SFAS No. 128 simplifies the calculation of earnings per share to measure the
performance of an entity over a reporting period for both basic earnings per
share and diluted earnings per share. SFAS No. 128 does not currently have an
impact on the Company's earnings per share as the Company is incurring net
losses.

                                       6
<PAGE>

                                SANO CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                   (CONTINUED)

(4)  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. In May 1997, an additional 300,000 shares
of common stock were approved by the stockholders to be reserved for issuance
pursuant to the exercise of stock 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 in which such director serves on the Board
an option to purchase 5,000 shares of common stock upon the release of the prior
year earnings.

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:
<TABLE>
<CAPTION>

                                                                                 NUMBER OF         OPTION PRICE 
                                                                                  SHARES             PER SHARE
                                                                            ------------------    ------------------
<S>                                                                         <C>                   <C>
          Outstanding at December 31, 1996                                          1,450,807     $    0.67 - 19.25
          Granted                                                                     375,666          9.75 - 20.25
          Exercised                                                                  (57,043)          0.67 - 11.00
          Canceled                                                                   (13,393)          2.70 - 11.00
                                                                            ------------------    ------------------

          Outstanding at September 30, 1997                                         1,756,037          0.67 - 20.25
                                                                            ==================    ==================

          Options exercisable at September 30, 1997                                 1,057,682          0.67 - 16.75
                                                                            ==================    ==================

          Shares of common stock available for future grants
           at September 30, 1997                                                      174,199
                                                                            ==================
</TABLE>                                                                        

The following table summarizes information about fixed stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>

                             OPTIONS OUTSTANDING                                          OPTIONS EXERCISABLE
                                                                                        NUMBER            WEIGHTED
    RANGE OF      NUMBER OUTSTANDING AS       REMAINING       WEIGHTED AVERAGE     EXERCISABLE AS OF       AVERAGE
EXERCISE PRICES   OF SEPTEMBER 30, 1997   CONTRACTUAL LIFE     EXERCISE PRICE     SEPTEMBER 30, 1997   EXERCISE PRICE
---------------   ---------------------   ----------------     --------------     ------------------   --------------
<S>               <C>                     <C>                 <C>                 <C>                  <C>

$0.67                    560,170                 .64                  .67                493,497                .67
1.50 - 3.60              562,918                4.44                 2.45                469,352               2.26
9.75 - 13.38             446,950                4.72                10.74                 68,933              11.34
14.38 - 20.25            185,999                3.97                17.66                 25,900              15.38
                         -------                ----                -----                 ------              -----
$0.67 - 20.25          1,756,037                3.25                 5.61              1,057,682               2.44
</TABLE>

                                       7
<PAGE>
                                SANO CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                   (CONTINUED)

(4)  STOCK OPTION PLANS (CONTINUED):

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:

                                                              1997
                                                              ----
Net Loss                 As reported..................    $    12,719,416
                             Proforma.................    $    13,691,457

Loss Per Share           As reported..................    $    1.33
                             Proforma.................    $    1.43

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. For the
nine months ended September 30, 1997, the Company recorded compensation expense
of $194,105 related to stock options granted on various dates to non-employees
of the Company.

(5) LEGAL PROCEEDINGS:

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. On October 17, 1997, Sano withdrew from
consideration by the United States Food and Drug Administration ("FDA") the
Abbreviated New Drug Application that gave rise to this lawsuit. The parties
have since agreed upon a stipulation and order dismissing the lawsuit.

On September 15, 1997, Novartis Pharmaceuticals Canada Inc. and Alza Corporation
filed a motion in the Federal Court of Canada, seeking to prohibit the Minister
of Health and Welfare from issuing a notice of compliance to the Company for
certain of the Company's transdermal nitroglycerine patches. The motion seeks to
determine if the Company's proposed patches infringe a Canadian patent owned by
Alza. The Company believes there is no merit to the allegations in the motion.
The Company is contesting the motion and intends to vigorously defend its
position.

(6) DISTRIBUTION AND LICENSE AGREEMENTS:

In August 1996, the Company entered into an exclusive worldwide distribution and
supply agreement with Bristol-Myers Squibb Company ("BMS") and received a $15
million license payment. Because the $15 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 Sano
may receive under the BMS agreement will also be recorded as revenue upon the
achievement of the related milestones. An advance of $6 million received in
April 1997 from BMS to fund the purchase of production equipment is recorded as
deferred revenue and will be recognized as revenue as sales of the products are
made and related royalties are earned.

In May 1997, the Company entered into an exclusive distribution agreement with a
third party to distribute a generic transdermal product in Italy, Vatican City
and the Republic of San Marino. An upfront nonrefundable license payment of
$100,000 will be payable to the Company upon meeting certain regulatory filing
requirements expected to be completed in 1998.

                                       8
<PAGE>

                                SANO CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                   (CONTINUED)

DISTRIBUTION & LICENSE AGREEMENTS (CONT.)

In July 1997, the Company entered into an exclusive license agreement for the
North American rights to use Nestorone(R), a novel progestin, in transdermal
patches for female hormone replacement therapy and contraception. Sano paid an
upfront license fee which is included in Patents, net in the accompanying
balance sheet which the Company is obligated to pay future royalties upon
marketing of this product. The Company also secured an option to acquire
exclusive worldwide rights for the transdermal use of a patented, synthetic
androgen, MENT, for the treatment of testosterone deficiency, male contraception
and muscle wasting in males. The Company paid an option fee which is included in
Patents, net in the accompanying balance sheet.

In July 1997, the Company amended its distribution agreement with Pharmaceutical
Resources, Inc. ("PAR") with respect to generic transdermal products under
development. The amendment confirms the Company's worldwide distribution rights
to all of its generic transdermal products with the exception of U.S. rights and
right of first refusal in Israel for one Nicotine and two Nitroglycerin products
(the "PAR Products").

In exchange for the retention of these rights, the Company has agreed to return
prior advances made by PAR for all products other than the PAR Products totaling
$3,906,786. Of this amount, $1,953,393 was repaid upon the execution of the
amendment and $1,953,393 will be repaid in the form of a promissory note due
September 1998 accruing interest at 8.5%.

The amendment provides for the Company to repay $1,500,000 of the prior advances
made by PAR for the PAR Products out of future gross profits. The balance of
such advance which had been deferred by the Company was $1,915,000 at September
30, 1997. Accordingly, the Company recognized other income of $415,000 in July
1997.

(7) PRIVATE OFFERING

In July 1997, the Company issued an additional 1,200,000 shares of Common Stock
through a private offering. Proceeds to the Company totaled approximately $15
million, net of expenses associated with the offering.

(8) SUBSEQUENT EVENTS

In October 1997, the Company was granted its first product approval on its
generic transdermal nicotine patch by the FDA.

In October 1997, the Company withdrew from consideration by the FDA the
abbreviated new drug application filed for one of its generic transdermal
nitroglycerine patches. In connection with the Company's decision to withdraw
this product, if the Company has not received an approval of the product by the
FDA prior to May 1998, the distribution company may terminate the agreement with
respect to this product and the Company will be required to return $844,000 in
advances.

                                       9
<PAGE>

PART I.   FINANCIAL INFORMATION:

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

GENERAL

     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 may limit competition from other manufacturers ("Generic
Products"). The Company's strategy is to develop a comprehensive line of both
Proprietary Products and Generic Products utilizing controlled release
technologies. The Company now has nine Proprietary Products and ten Generic
Products in various stages of development. At September 30, 1997, the Company
had an accumulated deficit of $28.1 million, resulting from expenses incurred in
research and development, clinical trials, facilities operations, the
acquisition of supplies and, to a lesser extent, general and administrative
operations. The Company expects to incur losses at least through 1998, which
losses are likely to be substantial. The Company's sources of working capital
have been an initial public offering, equity financings, a license payment and
development fees from BMS and, to a lesser extent, interest earned on investment
of cash. In July 1997, the Company issued an additional 1,200,000 shares of
Common Stock through a private offering. Proceeds to the Company totaled
approximately $15 million, net of expenses associated with the offering. 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. Such payments are likely to be
irregular and unpredictable.

     In July 1997, the Company amended its distribution agreement with PAR for
generic transdermal products under development. The amendment confirms the
Company's worldwide distribution rights to all of its generic transdermal
products with the exception of U.S. rights and right of first refusal in Israel
for the PAR Products.

     In exchange for these rights, the Company has agreed to return prior
advances made by PAR for all products other than the PAR Products, totaling
$3,906,786. Of this amount, $1,953,393 was repaid upon the execution of the
amendment and $1,953,393 will be repaid in the form of a promissory note due
September 1998 accruing interest at 8.5%.

    The amendment provides for the Company to repay $1,500,000 of the prior
advances made by PAR for the PAR Products out of future gross profits. The
balance of such advance which had been deferred by the Company was $1,915,000 at
September 30, 1997. Accordingly, the Company recognized other income of $415,000
in July 1997.

    Under its distribution and supply agreement with BMS, any milestone payments
the Company may receive under the BMS agreement will be recorded as revenue upon
the achievement of the related milestones. An advance received from BMS of $6.0
million to fund the purchase of production equipment is recorded as deferred
revenue and will be recognized as revenue as sales of the products are made and
related royalties are earned. The Company has agreed to repay the advance by BMS
from revenue earned from product sales.

      In October 1997, the Company received FDA approval to market its generic
transdermal nicotine patch for smoking cessation. The product is the Company's
first FDA product approval.

    In October 1997, the Company withdrew from consideration by the FDA the
abbreviated new drug application filed for one of its generic transdermal
nitroglycerine patches. In connection with the Company's decision to withdraw
this product, if the Company has not received an approval of the product by the
FDA prior to May 1998, the distribution company may terminate the agreement with
respect to this product and the Company will be required to return $844,000 in
advances.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

      REVENUES. Under the Company's distribution agreement with BMS, the Company
recognized $945,000 in research and development revenue for the three months
ended September 30, 1997. As a result of the August 1996 license payment under
the BMS agreement, the Company recognized revenue of $15.0 million for the three
months ended September 30, 1996.

RESEARCH AND DEVELOPMENT. The Company's research and development expenses
increased by $151,000, or 3%, to $4.5 million for the three months ended
September 30, 1997, from $4.3 million during the comparable period in 1996. This
increase is primarily attributable to the Company's increase in personnel due to
preproduction start-up costs associated with staffing to prepare for product
commercialization. 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

                                       10
<PAGE>

competitive developments and strategic marketing decisions.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
29%, to $1.1 for the three months ended September 30, 1997 from $1.6 million in
the comparable period of 1996. This decrease was attributable to the $1.0
million investment banking fee incurred in connection with the BMS agreement in
the quarter ended September 30 1996. This decrease was offset by 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.

     OTHER INCOME (EXPENSE). Interest and other income increased by $655,000 or
195% to $992,000 for the three months ended September 30, 1997 from $337,000 in
the comparable period in 1996. Included in interest and other income is $259,000
from BMS in connection with the Company supplying BMS with transdermal patches
for its clinical studies as well as reimbursements for other costs incurred by
the Company on behalf of BMS. Those costs are reimbursable to the Company
pursuant to the BMS Agreement and have been classified as other income. Included
in other income is $415,000 recognized in connection with the amendment of the
distribution agreement with PAR. Interest and other expense was $39,000 for the
three months ended September 30, 1997 compared to $14,000 in the comparable
period in 1996. Interest and other expense principally reflects the accretion of
interest on a discounted note.

    NET INCOME (LOSS). As a result of the foregoing, the Company reported net
loss of $3.7 million for the three months ended September 30, 1997, compared to
a net income of $9.4 million in the comparable period in 1996.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

    REVENUES. Under the Company's distribution agreement with BMS, the Company
recognized $945,000 in research and development revenue for the three months
ended September 30, 1997. As a result of the August 1996 license payment under
the BMS agreement, the Company recognized revenue of $15.0 million for the nine
months ended September 30, 1996.

    RESEARCH AND DEVELOPMENT. The Company's research and development expenses
increased by $2.8 million, or 28%, to $13.0 million for the nine months ended
September 30, 1997, from $10.2 million during the comparable period in 1996.
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 $393,000
increase in personnel and personnel related expenditures and a $1.6 million
increase in the cost of clinical trial programs, primarily the initiation of the
Phase III program for the Company's smoking cessation patch, as well as
continued research to expand the Company's product pipeline. Preproduction
start-up expenses associated with staffing to prepare for product
commercialization resulted in a $864,000 increase in personnel and personnel
related expenditures. 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 developments and strategic marketing decisions.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
4%, to $2.8 million for the nine months ended September 30, 1997 from $2.7
million in the comparable period of 1996. This decrease was attributable to the
$1.0 million investment banking fee incurred in connection with the BMS
agreement in the third quarter of 1996. This decrease was offset by increases in
personnel and personnel-related expenditures associated with expansion of
facilities and administrative support for the Company's research and development
efforts, as well as increases in professional fees, principally legal fees
incurred in connection with patent litigation. See "Notes to Financial
Statements-Legal Proceeding."

     OTHER INCOME (EXPENSE). Interest and other income increased by $1.3
million, or 131% to $2.3 million for the nine months ended September 30, 1997
from $975,000 in the comparable period in 1996. Included in Interest and other
income is $951,000 from BMS in connection with the Company supplying BMS with
transdermal patches for its clinical studies as well as reimbursements for other
costs incurred by the Company on behalf of BMS. Those costs are reimbursable to
the Company pursuant to the BMS Agreement and have been classified as other
income. Included in other income is $415,000 recognized in connection with the
amendment of the distribution agreement with PAR. Interest and other expense was
$132,000 for the nine months ended September 30, 1997 compared to $68,000 in the
comparable period in 1996. Interest and other expense principally reflects the
accretion of interest on a discounted note.

    NET INCOME (LOSS). As a result of the foregoing, the Company reported net
loss of $12.7 million for the nine months ended September 30, 1997, compared to
a net income of $3.1 million in the comparable period in 1996.

                                       11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES:

    Net cash used in operating activities was $13.8 million for the nine months
ended September 30, 1997, compared to net cash provided by operating activities
of $4.0 million in the comparable period of 1996. This increase reflects the
increased cash outlays for clinical trials, payroll and overhead.

    The Company had capital expenditures of $5.0 million for plant and equipment
acquisitions and $345,000 in expenditures for patents during the nine months
ended September 30, 1997, compared to $5.0 million and $118,000 respectively,
for the same period in 1996.

     Net cash provided by financing activities totaled $19.5 million for the
nine months ended September 30, 1997 compared to $1.7 million for the same
period in 1996. In July 1997, the Company issued an additional 1,200,000 shares
of Common Stock through a private offering. Proceeds to the Company totaled
approximately $15.1 million, net of expenses associated with the offering. The
Company also received $4.0 million in net advances from distributors.

    On April 1, 1997, the Company received a $6 million payment from BMS under
the terms of its distribution agreement with the Company for the development and
commercialization of transdermal buspirone for the treatment of anxiety and
attention deficit disorder. The payment was used to purchase and upgrade
equipment used in the manufacture of transdermal buspirone. The Company
recorded the $6 million payment as deferred revenue.

    At September 30, 1997, the Company had working capital of $23.3 million
compared to working capital of $23.5 million at December 31, 1996. Cash and cash
equivalents and marketable securities were $24.8 million and $23.7 million at
September 30, 1997 and December 31, 1996, respectively. As of November 7, 1997,
Cash and cash equivalents and marketable securities were $23.3 million.

    Based on its current expectations of product development, the Company
expects to continue to expend significant amounts on capital improvements,
machinery, equipment and clinical trials. Assuming no material changes in
clinical, research and development expenditures or product sales, the Company
believes that it has sufficient working capital to fund its requirements through
the fourth quarter 1998. The Company may seek additional debt or equity
financing, or other arrangements with strategic investors or partners. No
assurance can be given that such arrangements are available or can be negotiated
on terms favorable to the Company.

    The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934 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, including, without limitation, the
Company's ability to continue to complete development and clinical trials of its
products and ultimately to obtain approval for the sale of such products from
the FDA, neither of which is assured. Results actually achieved may differ
materially from expected results included in these statements as a result of
these or other factors.
                                       12
<PAGE>

PART II.  OTHER INFORMATION:

ITEM 1.    LEGAL PROCEEDINGS

           Incorporated by reference to "Notes to Financial Statements - Legal
Proceeding" in Part I of this Quarterly Report.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

           (a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT                  DESCRIPTION
-------                  -----------
   <S>     <C>
   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)
  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 September10, 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(a) 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)
  10.14(b) Amendment No. 1 dated May 15, 1996 to License Agreement dated October 28, 1994 by and between
                 Dr. Jed E. Rose, Dr. Edward D. Levin and Robert J. Schaap and the Registrant (5)
  10.15     Distribution and Supply Agreement for Transdermal Buspirone, dated August 28, 1996, between the
                 Registrant and Bristol-Myers Squibb Company (5)
  10.16     Letter agreement, dated May 8, 1995, between the Registrant and Pharmaceutical Resources, Inc. and PAR
                 Pharmaceutical, Inc. amending the PAR Agreement (5)
  10.17     Extension of Employment Agreement, dated October 24, 1996, between the Registrant and Charles Betlach (4)
  10.18     Extension of Employment Agreement, dated October 24, 1996, between the Registrant and Cheryl Gentile (4)
  10.19     Extension of Employment Agreement, dated October 24, 1996, between the Registrant and Jesus Miranda (4)
  10.20     Extension of Employment Agreement, dated October 24, 1996, between the Registrant and Joseph Gentile (4)
  10.21     Business Lease, dated September 11, 1996, between the Registrant and Sunbeam
                 Properties, Inc. (4)
  10.22     Lease Extension and Amendment, dated September 11, 1996, between the Registrant and Sunbeam
                 Properties, Inc. (3251 Corporate Way, Miramar, Florida property) (4)
  10.23     Lease Extension and Amendment dated September 11, 1996, between the Registrant and Sunbeam
               Properties, Inc. (3251 Corporate Way, Miramar, Florida property) (4)
  10.24     License Agreement dated July 9, 1997 between the Registrant and the Population Council, Inc. (6)
  10.25     Amended and Restated Distribution Agreement dated July 28, 1997 between the Registrant, Pharmaceutical
               Resources, Inc. and PAR Pharmaceuticals, Inc., (6)
  27.       Financial Data Schedule
</TABLE>
-----------------------------------------
(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.

                                       13
<PAGE>

PART II.  OTHER INFORMATION (CONTINUED):

(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 an identically numbered
           exhibit to the Company's Registration Statement on Form S-1, filed
           October 25, 1996.

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

(6)        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.

(b) REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the third quarter of 1997.

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
         <S>                                     <C>

                                                 By:           /s/ Reginald L. Hardy
                                                      -----------------------------------------
          Dated: November 13, 1997                               Reginald L. Hardy
                                                                     PRESIDENT
                                                           (PRINCIPAL EXECUTIVE OFFICER)

                                                 By:            /s/ Gerald S. Coombs
                                                      -----------------------------------------
          Dated: November 13, 1997                                Gerald S. Coombs
                                                              CHIEF FINANCIAL OFFICER
                                                        (PRINCIPAL FINANCIAL AND ACCOUNTING
                                                                       OFFICER)
</TABLE>
                                       14
<PAGE>
                                 EXHIBIT INDEX

EXHIBIT                       DESCRIPTION
-------                       -----------
10.25               Amended and Restated Distribution Agreement dated July 28,
                    1997 between the Registrant, Pharmaceutical Resources, Inc.
                    and PAR Pharmaceuticals, Inc.

10.26               License Agreement dated July 9, 1997 between the Registrant
                    and the Population Council, Inc.

27.                 Financial Data Schedule