FORM 10-K
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

             /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 033-78252
                            AMERICAN DRUG COMPANY
           (Exact name of registrant as specified in its character)


      Delaware                                  13-3729186
(State  of Incorporation)                                   (I.R.S. Employer
Identification No.)

1730 Rhode Island Ave. N.W. Washington, D.C.                20036
(Address of principle executive offices)                    (Zip code)

Registrant's telephone number, including area code:               (202)
833-9223

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

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

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

                        Yes    ___X___                No

Indicate  by  check  mark if  disclosure  of  delinquent  filers  to item 405 of
Regulation S-K is not contained herein,  and will not be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. /X/

As of March 3, 1997, the aggregate market value of the outstanding shares of the
Registrant's  Common Stock, par value $.01 per share, held by non-affiliates was
approximately  $1,373,478  based on the closing price of the Common Stock on the
OTC  Bulletin  Board,  which is operated by the NASDAQ  Stock Market on March 3,
1997.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.


Class                                           Outstanding at March 3, 1997
Common Stock, par value $.01 per share                            13,020,155
shares

DOCUMENTS INCORPORATED BY REFERENCE:                  None




<PAGE>



                              TABLE OF CONTENTS

PART I                                                         Page


Item 1. Business

      (a)   General Development of Business......................1

      (b)   Financial Information About
            Industry Segment.....................................1

      (c)   Narrative Description of Business....................1

      (d)   Financial Information About Foreign
            and Domestic Operations and Export Sales.............6

      Item 2. Properties.........................................6

      Item 3. Legal Proceedings..................................6

      Item 4. Submission of Matters to a Vote of Security Holders6

PART II
      Item 5. Market for the Registrant's Common
      Equity and Related Stockholder Matters.....................7

      Item 6. Selected Financial Data............................8

      Item 7...............Management's Discussion and Analysis of
      Financial Condition and Results of Operations..............9

      Item 8. Financial Statements and Supplementary Data.......12

      Item 9.....................Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure........38

PART III
      Item 10. Directors and Executive Officers of the Registrant38

      Item 11. Executive Compensation...........................43

      Item 12. Security Ownership of Certain Beneficial
      Owners and Management.....................................45

      Item 13. Certain Relationships and Related Transactions...47

PART IV
      Item 14. Exhibits, Financial Statement Schedules, and
      Reports on Form 8-K.......................................50


<PAGE>



18



                                    PART I

Item 1.     Business

(a)   General Development of Business

      American  Drug  Company  (the  "Company")  was  organized  in  1993,  as a
wholly-owned  subsidiary of National Patent Development  Corporation  ("National
Patent") to initiate marketing activities for generic pharmaceutical and medical
products in Russia and the Commonwealth of Independent  States (the "CIS").  NPD
Trading (USA) Inc. ("NPD  Trading") was formed in January 1990 as a wholly-owned
subsidiary  of  National  Patent to provide  services to Western  businesses  in
Russia and Eastern Europe.

      In August 1994,  National Patent entered into a Transfer and  Distribution
Agreement with the Company whereby  National  Patent  transferred to the Company
(the "Distribution")  immediately prior to the closing of the Distribution,  all
of its interest in NPD Trading and in two newly-formed, 50% owned joint ventures
in exchange for (i) the  issuance by the Company of  6,990,900  shares of Common
Stock to National  Patent (ii) the issuance of 6,017,775  shares of Common Stock
to be distributed  to National  Patent  stockholders,  and (iii) the issuance of
6,017,775  warrants to be  distributed  to National  Patent  stockholders.  Each
warrant  was  exercisable  for a period of two years  from  August 5, 1994 at an
exercise  price per  share of $1.00.  In  August  1996,  the Board of  Directors
approved an  extension  of the  Company's  warrants  until  August 5, 1998 and a
reduction  of the exercise  price to $.50 per share,  subject to  adjustment  in
certain  circumstances.  The  Distribution was at the rate of one share plus one
warrant to purchase  one share of common  stock for every four then  outstanding
shares of common stock of National Patent.  Upon completion of the Distribution,
the  Company  became a separate  public  company  from  National  Patent and NPD
Trading became a wholly-owned subsidiary of the Company.

      The Company's principal executive offices are located at 1730 Rhode Island
Avenue,   N.W.,   Washington  D.C.  20036.  The  Company  maintains  offices  in
Washington, D.C., New York, Prague and Moscow.

(b) Financial Information about Industry Segments

      This item is not applicable  because the Company has only a single line of
business.

(c) Narrative Description of Business

General and Background

      The Company develops and assists Western businesses to develop investment,
manufacturing and trade opportunities and business  relationships in Russia, the
Czech and Slovak  Republics,  and other  countries  of Eastern  Europe.  In this
regard,  it continues  and builds upon the 30-year  tradition  of its  principal
stockholder,  National  Patent,  of  licensing,  commercializing  and  marketing
technologies from this region.  The Company believes that its principal strength
lies  in the  quality  of its  established  relationships  with  scientists  and
commercial  organizations  both in the United  States  and in the former  Soviet
Union and Czech and Slovak Republics.

American-Made Generic Pharmaceutical Products

      A  generic   pharmaceutical   product  is  the  chemical  and  therapeutic
equivalent  of a  brand-name  pharmaceutical  or  over-the-counter  health  care
product as to which the patent and/or market  exclusivity has expired.  Generics
typically sell at prices substantially lower than the brand-name product.

The Company's Products and Operations. In 1993, the Company initiated activities
aimed at the export of American-made generic pharmaceutical  (prescription drugs
and  over-the-counter  personal care  products)  and other medical  products and
equipment to Russia and the CIS. Among the products  currently being sold by the
Company are toothpaste,  sanitary napkins,  antibiotic ointments,  vitamins, and
bandages.  The Company has  launched  marketing  operations  with major  Russian
distribution companies, individual Russian pharmacies, and hospitals and clinics
throughout Russia and the CIS. Sales of the Company's products began in 1995.

      The Company has  established a network of local  distributors  to sell its
products in major Russian cities, including Moscow, St. Petersburg, Vladivostok,
Rostovon-Don,  Kazan,  and in  Nizhnevartovsk.  In addition,  the Company  began
negotiations, and in early 1996 concluded arrangements, with an American-managed
bonded  warehouse  facility for the storage and distribution of its goods from a
central point in Moscow.

      As  of  March  1,  1997,  the  Company  had  completed   registration  for
approximately  25  products,  including  ADC "Shiny"  toothpaste,  ADC  "Aurora"
feminine products, ADC "Tobracin Tobramycin", "Triasept", "Acortine", "Proderm",
"Pramoxin",  "Diaderm"  antibiotic  creams and  ointments,  and ADC "Quick  Aid"
bandages and a line of "Revitalize"  vitamins. All of the Company's products are
bilingually labeled in Russian and English languages.

Generic  Products Supply  Agreements.  The Company believes that contracting for
the supply of its products enables it to avoid significant capital  expenditures
and the time and expense  associated with the U.S. Food and Drug  Administration
(the "FDA")  approval  process.  The Company has  entered  into  various  supply
agreements for healthcare  products and with pharmaceutical  manufacturers.  The
terms of each of these agreements may vary, but generally provide for the supply
to the Company of approximately five or six generic pharmaceutical  products, in
a variety of potency  levels,  for  marketing  and resale under the ADC label in
Russia  and  other  states  which  formerly  comprised  the  Soviet  Union.  The
agreements generally carry a five-year term with options to renew for successive
one-year  periods.  They prohibit  price  increases on products  supplied to the
Company during the first year of the agreement, unless a substantial increase in
the price of raw materials occurs.  The agreements also provide that the Company
will pay all foreign  registration fees and labeling costs and that the supplier
will undertake the labeling and packaging of all products sold to the Company in
accordance with federal regulations.  In addition,  the supplier represents that
products  will  be  manufactured  in  accordance  with  the  good  manufacturing
practices  established  by the FDA  and  that it will  name  the  Company  as an
additional insured on product liability policies providing sufficient coverage.

Consulting Services and Sales

      In its seven years of operation, NPD Trading has provided a broad range of
business  services  to a  number  of  American  and  Western  corporations.  The
Company's  employees  have  backgrounds  in  diverse  disciplines,  such as law,
engineering,  international trade and economics.  See "Business - Employees" and
"Management."  The  Company  is able  to  provide  the  contacts  necessary  for
interested  clients  to  locate  a  venture  partner  and  to  establish  viable
financing.  Recognizing  that successful  conclusion of project  negotiations in
this region often depends upon  financing,  the Company has worked  closely with
the U.S.  Exim-Bank,  OPIC,  the World Bank and its  affiliates,  including  the
European Bank for Reconstruction and Development,  as well as private commercial
banks.  Additionally,  the  Company  advises  its  clients  with  respect to new
commercial,  tax,  currency  and other laws of Eastern  Europe,  as well as U.S.
foreign  government  regulations  and policies  which directly  affect  business
operations.

Projects.  The Company has been instrumental in the successful conclusion of
a variety of projects.  Summarized below are examples of the type of projects
in which the Company has been involved.

Protocol  Systems.  The Company  began  distributing  Protocol  patient  monitor
systems in 1993. From 1993 to 1995, the Company successfully sold 81 monitors to
15 hospitals in 8 Russian  cities.  In 1996,  the Company sold an  additional 33
monitors and sold the first Acuity Central Monitoring system.

ICF Kaiser International. The Company's on-going efforts on behalf of ICF Kaiser
International  ("ICF") and their associated company,  Kaiser Engineers,  secured
for these companies  contracts to perform TDP-funded  feasibility studies in the
areas of hazardous  waste  management  and steel industry  modernization  in the
Czech  Republic.  The Company is providing  ICF with  technical  and  commercial
assistance  on a contract  for a $250  million  hot strip mini mill in the Czech
Republic.  Subject to  financing,  the  Company  expects to receive in excess of
$1,000,000  for services  provided to ICF and to date has received  $160,000 for
work associated with the mini-mill project.

Strategy

      The Company believes that the former Soviet Union and certain countries in
Eastern Europe present investment and export opportunities for American business
due to (i) the privatization of business in such countries and the corresponding
emergence of market economies and (ii) the fact that American goods and services
are in demand in the region.  The Company believes that it is well positioned to
take  advantage  of these  opportunities  given the  experience,  contracts  and
expertise  National  Patent has  developed in the region over the past 30 years.
The Company's strategy is to (A) focus sales on the top-selling over the counter
medical  products  to be  marketed  and sold in  Russia,  and to select the most
financially viable distribution channels for such products, including hospitals,
clinics and pharmacies in the former Soviet Union and (B) increase the number of
projects among its existing clients for which it renders consulting services and
attract additional clients.

Competition

      The  principal  competitive  factors  in the  Company's  markets  are  the
experience  and expertise of technical  personnel,  performance,  reputation and
price. Most of the Company's  competitors have greater financial,  technical and
marketing resources than the Company. Additionally, because financing from local
private  sources  and  regional or  international  public  sources is  extremely
limited and highly  competitive,  the Company's  projects  compete against other
ventures to obtain funds necessary for successful competition.

      The  Company's  generic  drug and  over-the-counter  products  at  present
compete  primarily  with similar  Russian and other  foreign  products and, to a
lesser   extent,   brand-name   versions   produced   by   major   international
pharmaceutical  corporations.  The Company  believes  that it has a  competitive
advantage in the Russian market,  however, since its products are generally more
effective  than  Russian  and  non-American  products  and less  expensive  than
American  brand-name  products.  While  there has been  limited  penetration  of
American generic products in the Russian market,  there can be no assurance that
other  companies will not attempt to market such products in the future and that
the Company will be able to maintain its competitive advantage.

Clients

      The Company  has  provided  financial  management  and general  consulting
support to a number of American and foreign  clients.  The Company's  clients to
date have been  principally in the energy,  healthcare,  environmental,  machine
tool and  computer  industries.  Because the  Company's  consulting  business is
project driven, rather than oriented toward on-going consultation, the Company's
major clients vary from year to year. In addition,  the successful completion of
a single  or a few large  projects  typically  accounts  for a  majority  of the
Company's revenues.

International

      The political  situation in Russia,  where the Company expects to generate
most of its  revenues in the near  future,  has in recent years been in constant
transition.  Since the advent of the Yeltsin government in December 1991, Russia
has experienced a proliferation of political parties, an increase of nationalist
sentiment,  a  fragmentation  of its economic and political  institutions  and a
dramatic  increase in crime.  The viability of the Russian  government  has been
tested by various political  factions gaining strength and two unsuccessful coup
d'etats.  In 1996,  Presidential  elections  resulted in Yeltsin's  re-election;
however, his ongoing health problems contribute to political unease.

      Foreign firms'  operations in this region may be subject to numerous other
risks which are not present in domestic operations,  including political strife,
the   possibility  of   expropriation,   inadequate   distribution   facilities,
telecommunications  deficiencies,   restrictions  on  royalties,  dividends  and
currency remittances,  inflation,  fluctuations of foreign currencies,  high and
unpredictable  levels of taxation,  requirements for governmental  approvals for
new ventures and local  participation in operations.  Such problems could have a
material  adverse  effect on the  Company  by  affecting  the  Company's  direct
operations  abroad and by  discouraging  trade and  investment  by other western
businesses to whom the Company provides services.

Employees

      The  Company's  principal  resource is its  personnel.  The  Company's  19
employees  have  backgrounds  in diverse  disciplines,  such as  medicine,  law,
international  trade and economics,  and  engineering.  Several  officers of the
Company are also employed by National  Patent,  a principal  stockholder  of the
Company. Martin M. Pollak, the Company's President,  Chief Executive Officer and
a director,  is Executive Vice  President,  Treasurer and a director of National
Patent,  and will  devote  approximately  one-half  of his time to his duties at
National Patent;  Jerome I. Feldman,  Chairman of the Board of, and a consultant
to, the  Company,  is  President,  Chief  Executive  Officer  and a director  of
National  Patent;  and Scott N.  Greenberg,  Chief  Financial  Officer,  is Vice
President and Chief Financial Officer and a director of National Patent. Messrs.
Feldman and Greenberg will devote a portion of their time to the business of the
Company,  for which National  Patent will charge a management  fee. See "Certain
Relationships  and  Related   Transactions   Certain   Employment   Matters  and
Management".  The Company  believes  that its  relations  with its employees are
good. See "Management."

Foreign Regulation

      The  Company's   generic   pharmaceutical   products   (prescription   and
over-the-counter  formulas) require registration with the appropriate arm of the
Russian  government and the governments of the other countries of the CIS before
they may be marketed  and sold in such  regions.  Pursuant to an accord  reached
between the American and Russian  governments  on February 16, 1994, the Russian
Health Ministry has agreed to approve American-made, FDA-approved pharmaceutical
products within 90 days of submission of a request without requiring the lengthy
and expensive duplication of clinical studies inside Russia or the submission of
all U.S. - performed  test data in Russian,  as was  characteristic  of Russia's
previous  system.  The accord has ensured the Company did not bear the financial
burden of conducting clinical trials in Russia.  However,  the Company was still
required  to  gather  extensive  documentation  from  its  Suppliers,  including
stability reports,  final  specifications,  specifications on test methods,  and
other  reports.  These  documents  were  translated  by the Company into Russian
language,  and the  documents  were  presented  to two  Russian  committees  for
evaluation.  The  accord  does not cover the  registration  of  over-the-counter
products.

      At present,  Ukraine is  negotiating  a  bilateral  accord with the United
States of a similar  nature to the one  signed  between  Russia  and the  United
States in February 1994.  Other countries in the CIS require  registration  with
local Ministry of Health  authorities,  though in some cases,  registration  may
occur  simultaneously  with test marketing and the initiation of sales. The time
required  for  regulatory  approval  of any of the  Company's  products  in such
countries cannot be predicted.  There can be no assurance that problems will not
arise  which  could  delay or prevent  the  commercialization  of the  Company's
products or that such foreign regulatory  agencies will approve the marketing of
any of the Company's products.

(d) Financial Information about Foreign and Domestic Operations and Export
Sales.

      In 1996, export sales represented  approximately $842,000 of the Company's
revenue.

Item 2. Properties

      The following sets forth information with respect to the material physical
properties owned or leased by the Company and its subsidiaries.

      The Company leases its facilities in  Washington,  D.C., New York,  Prague
and Moscow,  which  collectively  cover  approximately  5,000 square  feet.  The
Washington, D.C. and Prague leases provide for original terms of three years and
two years,  respectively,  with annual  rental  expense of $71,000 and  $51,000,
respectively.  The Company's lease for its Moscow  offices,  under which it pays
$13,125 per  quarter,  has a term of two years.  The  Company's  New York office
space is provided to it by National Patent  pursuant to the Management  Services
Agreement.  See "Certain  Relationships  and Related  Transactions  - Management
Services  Agreement." The Company believes that its facilities are sufficient to
meet its needs for the foreseeable future.

Item 3. Legal Proceedings

      There are currently no legal proceedings pending to which the Company is a
party or to which any of its property is subject.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security  holders during the fourth
quarter of the fiscal year covered by this report.


<PAGE>


                                   Part II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters

      The following  table presents the high and low prices for the Common Stock
for 1995 and 1996. The Company's Common Stock,  $.01 par value, is quoted on the
OTC Bulletin Board, which is operated by the NASDAQ Stock Market.

            Quarter.....      High              Low

1995        First            $0.41             $0.25

            Second......     $0.41             $0.19

            Third.......     $0.41             $0.19

            Fourth......     $0.69             $0.25

1996        First            $0.63             $0.31

            Second......     $0.50             $0.25

            Third.......     $0.59             $0.28

            Fourth......     $0.56             $0.25

----------

      The number of  shareholders  of record of the Common  Stock as of March 1,
1997 was 4,795.  On March 3, 1997,  the  average  of the  closing  bid and asked
prices on the OTC Bulletin Board was $0.23 The Company has not declared any cash
dividends  during or since its two most recent fiscal years.  The current policy
of the Company's  Board of Directors is to retain  earnings,  if any, to finance
the operation of the Company's  business.  The payment of cash  dividends on the
Common  Stock in the future will  depend on the  Company's  earnings,  financial
condition  and  capital  needs  and on other  factors  deemed  pertinent  by the
Company's Board of Directors.



<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARY

Item 6.  Selected Financial Data

                     SELECTED CONSOLIDATED FINANCIAL DATA

                   (in thousands, except per share amounts)



                            Years Ended December 31,

                                      1996    1995    1994    1993   1992
                                      ----    ----    ----    ----   ----


Statement of Operations Data:

Revenue                             $1,104   $ 529   $ 799  $ 752    $ 461
Cost of goods sold                     496     155     456    -        -
General and administrative
 expenses                            1,674   1,690   1,355   838       751
Total expenses                       2,602   2,133   2,101   958       871
Net loss                            (1,498) (1,604) (1,302)  (206)    (410)
Net loss per share                   (.12)   (.12)   (.10)   (.02)   (.03)
Dividends                             -       -       -       -       -

                            Years Ended December 31,

                                      1996    1995    1994    1993   1992
                                      ----    ----    ----    ----   ----


Balance Sheet Data:

Current assets                      $1,018   $ 550   $  70   $ 474    $ 90
Current liabilities                    152     356      73     464      20
Working capital (deficiency)           866     194      (3)     10      70
Total assets                         1,088     602     161     512     126
Total stockholders' equity
 (deficiency)                       (3,803) (2,387)   (867)     48     106


<PAGE>


Item 7.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations

                            Results of Operations
Overview

      The Company  commenced  operations  in January 1990 as NPD Trading  (USA),
Inc., which is now its wholly-owned subsidiary. Since its inception, the Company
has focused on assisting  western business to develop trade,  manufacturing  and
investment  opportunities  in Russia,  the Czech and Slovak  Republics  and to a
lesser extent,  other  countries of the CIS. In late 1993, the Company began the
implementation of its plan for the export of American-made  generic prescription
drugs and  over-the-counter  healthcare products in both Russia and the CIS. The
Company received certain  regulatory  approvals in 1994, 1995 and 1996 to market
its products.

Liquidity and Capital Resources

      At December 31, 1996, the Company had cash of $586,000 and the Company had
borrowed  $2,500,000  pursuant to its  $2,500,000  loan  agreement from National
Patent (See Note 12 to the Consolidated  Financial  Statements).  These proceeds
were used as part of the Company's working capital.  The proceeds received under
the loan agreement  were derived from the sale of registered  shares of National
Patent Common Stock, which totaled approximately $453,000, and a cash loan. Such
borrowings  will bear  interest at the prime rate,  with  principal  and accrued
interest of $460,000 at December  31, 1996,  becoming due on August 5, 1999.  In
addition,  after the Company had  borrowed  the full  $2,500,000  under the loan
agreement  during the first quarter of 1996,  National Patent  continued to fund
the operating needs of the Company until July 1996.

      In July 1996,  the Company  issued 7%  convertible  notes in the principal
amount of $1,000,000 in a private offering; the net proceeds to the Company were
$950,000 (See Note 6 to the consolidated financial statements).  National Patent
has agreed to fund the Company through June 30, 1997, if necessary,  pursuant to
the same terms and conditions as the $2,500,000 loan agreement.  National Patent
will  evaluate  its future  funding  commitments  to the  Company on a quarterly
basis.  As of  December  31,  1996,  the Company had  borrowed  $3,739,000  from
National Patent. The indebtedness was comprised of (i) $2,500,000  pursuant to a
$2,500,000  loan  agreement  with National  Patent (see Note 12 to  Consolidated
Financial  Statements),   (ii)  cash  advances  from  National  Patent  totaling
$779,000,  and (iii) accrued interest at the prime rate totaling  $460,000.  The
Company is attempting to secure a bank credit facility, issue additional debt or
issue  additional  equity  securities to meet its working  capital needs. If the
Company  is unable  to raise  additional  capital,  it could be forced to delay,
scale back or eliminate certain activities.  In addition,  there is no assurance
that the terms of such transactions will be favorable to the Company.

      At December 31, 1996, the Company's  working capital increased to $866,000
from  $194,000 as of December  31,  1995,  primarily as a result of the proceeds
received from the 7% convertible  note. At December 31, 1996, the Company had no
additional   borrowing   capacity  available  under  the  National  Patent  Loan
Agreement.

      Historically,   the  Company's  revenues,  prior  to  1994,  were  derived
primarily  from the  consulting  fees and  commissions  of its  subsidiary,  NPD
Trading,  which had been earned principally on a contingency fee basis. Although
the contingency fee payment  structure has affected the Company's  liquidity and
results of operations  (because the Company became entitled to payment only upon
successful  completion  of a business  venture),  the Company is  attempting  to
offset  this  exposure   through  the  continued   development  of  its  generic
pharmaceutical  and health care product marketing  business and through sales of
medical equipment.

      The Company does not manufacture,  and does not anticipate  manufacturing,
any of its products.  As a  consequence,  the Company has not made, and does not
anticipate making, any major capital expenditures.

1996 Compared to 1995

Revenues.  In 1996,  the Company had revenues of  $1,104,000,  a net increase of
$575,000  over 1995.  This  revenue  consisted  of  $842,000 of sales of medical
equipment  and  generic  drugs in the  Commonwealth  of  Independent  States and
$262,000  of  consulting  fees in 1996 as compared  to  $342,000  and  $187,000,
respectively   in  1995.  The  increased   consulting   revenues  are  primarily
attributable  to a contract  between  ICF Kaiser,  Inc.  and the  Company's  NPD
Trading, Inc. subsidiary.

General and Administrative Expenses. General and Administrative expenses consist
primarily of office rent, salaries, travel and related costs and legal expenses.
Direct  costs  relating  to  consulting  revenues  are  included  in general and
administrative  expenses. The general and administrative expenses decreased from
$1,690,000 in 1995 to $1,674,000 in 1996 or a decrease of $16,000. This decrease
was primarily due to reduced marketing expenses and facility costs.

Net loss. The Company's net loss decreased from $1,604,000 in 1995 to $1,498,000
in 1996 as a result of increased  revenues generated and gross margin earned, as
well as reduced general and administrative expenses, offset in part by increased
interest expense, due to increased levels of long-term debt.

1995 Compared to 1994

Revenues. In 1995, the Company had revenues of $529,000, compared to $799,000 in
1994.  The decrease in revenues  from 1994 to 1995 was  primarily due to reduced
sales of medical equipment,  partially offset by increased  consulting  revenues
and the Company's sales of its generic  over-the-counter  healthcare products in
Russia and the CIS.

General and  Administrative  Expenses.  The Company's general and administrative
expenses  increased by 25% in 1995 to $1,690,000  from  $1,355,000 in 1994.  The
increase in general and administrative expenses in 1995 was primarily due to the
costs incurred for a full year relating to the operations of the Moscow office.

Interest  expense.  Interest  expense,  which relates to a loan  agreement  with
National  Patent,  was $168,000 for the year ended December 31, 1995 as compared
to $15,000 for the year ended December 31, 1994. The increased  interest expense
accrued was the result of the increased loan balance due to National  Patent for
the year ended  December 31, 1995, as compared to the 1994  balance,  which only
accrued interest from August through December 1994.

Net  Loss.  The  Company's  net loss  increased  to  $1,604,000  for  1995  from
$1,302,000  incurred  for  1994  due to the  decreased  revenues  and  increased
interest and general and  administrative  expenses,  partially offset by reduced
shareholder expenses related to the distribution of shares in 1994.

Recent tax and accounting developments

      Effective  January 1, 1996,  the Company  adopted  Statement  of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  Under SFAS 123, the Company may elect either a "fair value" based method
or the  "intrinsic  value" based method of accounting  prescribed by APB No. 25,
"Accounting  for Stock Issued to Employees,"  for its  stock-based  compensation
arrangements.  Under the "intrinsic value" based method, the Company is required
to disclose in the footnotes to the consolidated financial statements net income
and earnings per share computed under the "fair value" based method. The Company
has elected to continue  accounting for  stock-based  compensation  arrangements
using the "intrinsic  value" based method;  therefore,  the adoption of SFAS 123
did not impact the Company's results of operations or financial condition.

Forward-Looking   Statements.   This  report  contains  certain  forward-looking
statements  reflecting  management's current views with respect to future events
and  financial  performance.  These  forward-looking  statements  are subject to
certain  risks and  uncertainties  that  could  cause  actual  results to differ
materially  from those in the  forward-looking  statements,  including,  but not
limited to,  ability to reverse its history of the Company's  operating  losses;
the Company's  dependence on its subsidiaries and its investments as its primary
source to service outstanding debt and to fund its operations; and the Company's
ability to comply with  financial  covenants  in  connection  with  various loan
agreements.

Inflation

      Inflation is not expected to have a  significant  impact on the  Company's
business.


<PAGE>



Item 8.     Financial Statements and Supplementary Data



                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                        Page
Independent Auditors' Report                                            13

Financial Statements:

      Consolidated Balance Sheets - December 31, 1996 and
        1995                                                            14

      Consolidated Statements of Operations - Years ended
        December 31, 1996, 1995 and 1994                                16

      Consolidated Statements of Changes in Stockholders'
        Equity (Deficiency) - Years ended December 31,
        1996, 1995 and 1994                                             17

      Consolidated Statements of Cash Flows - Years ended
        December 31, 1996, 1995 and 1994                                18

      Notes to Consolidated Financial Statements                        20




<PAGE>


                         INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
American Drug Company:


We have audited the  consolidated  balance  sheets of American  Drug Company and
subsidiary  as of  December  31,  1996 and 1995,  and the  related  consolidated
statements of operations,  changes in stockholders' equity (deficiency) and cash
flows for each of the years in the  three-year  period ended  December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of American  Drug
Company and  subsidiary at December 31, 1996 and 1995,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from  operations and has an  accumulated  deficit that raise  substantial  doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these  matters are also  described  in Note 3 to the  consolidated  financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


                                          KPMG Peat Marwick LLP


New York, New York
March 21, 1997


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARY

                         CONSOLIDATED BALANCE SHEETS

           (in thousands, except shares and per share information)


                                           December 31,     December 31,
                                           1996                 1995
                 ASSETS

Current assets

Cash                                        $   586           $   66
Accounts receivable, trade, less allowance
 for doubtful accounts of $60 and $20
 in 1996 and 1995                                84              104
Inventory                                       326              329
Prepaid expenses and other current assets        22               51
                                           --------          -------

Total current assets                          1,018              550
                                            -------           ------

Machinery and equipment, at cost                113              108
Less accumulated depreciation                  (103)             (86)
                                           --------          -------
                                                 10               22
                                          ---------          -------

Organization costs
 (net of accumulated amortization
 of $37 and $21 in 1996 and 1995)                13               29
                                          ---------          -------

Deferred finance costs                           46            _____
                                          ---------

Other assets                                      1                1
                                         ----------         --------
                                            $ 1,088           $  602
                                            =======           ======






       See accompanying notes to the consolidated financial statements.


<PAGE>



                     AMERICAN DRUG COMPANY AND SUBSIDIARY


                   CONSOLIDATED BALANCE SHEETS (Continued)

           (in thousands, except shares and per share information)


                                            December 31,    December 31,
                                                1996           1995


LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities

Customers' deposits                        $     28        $     236
Accounts payable                                 60               84
Accrued expenses                                 64               36
                                          ---------        ---------

Total current liabilities                       152              356
                                           --------         --------

7% convertible notes                          1,000

Long-term debt to National Patent             3,739            2,633

Stockholders' deficiency

Common stock, authorized 30,000,000 shares,
 par value $.01 per share; issued
 13,020,155 shares                              130              130
Capital in excess of par value                1,682            1,682
Deficit                                      (5,615)          (4,117)
Deferred compensation                                            (82)
                                       ------------       ----------

Total stockholders' deficiency               (3,803)          (2,387)
                                           --------         --------
                                           $  1,088        $     602
                                           ========        =========






       See accompanying notes to the consolidated financial statements.



<PAGE>

                     AMERICAN DRUG COMPANY AND SUBSIDIARY

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                 (in thousands, except per share information)




                                                         Year Ended December 31,

                                                  1996       1995         1994
                                                --------   ---------     -------
Revenues
  Sales ....................................   $    842    $    342    $    700
  Consulting fees and commissions
   (including $25, $45 and $13 for 1996,
   1995 and 1994 from an affiliate) ........        262         187          99
                                               --------    --------    --------
Total revenues .............................      1,104         529         799
                                               --------    --------    --------

Expenses
  Cost of goods sold .......................        496         155         456
  General and administrative expenses ......      1,674       1,690       1,355
  Registration as a public company and
   related expenses ........................        155
  Management fee to National Patent ........        120         120         120
  Interest expense .........................        312         168          15
                                               --------    --------    --------
  Total expenses ...........................      2,602       2,133       2,101
                                               --------    --------    --------

Net loss ...................................   $ (1,498)   $ (1,604)   $ (1,302)
                                               ========    ========    ========

Net loss per share .........................   $   (.12)   $   (.12)   $   (.10)
                                               ========    ========    ========
  Average number of outstanding
   shares ..................................     13,020      13,020      13,018
                                               ========    ========    ========





       See accompanying notes to the consolidated financial statements.


<PAGE>



                      AMERICAN DRUG COMPANY AND SUBSIDIARY

<TABLE>

               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'


                               EQUITY (DEFICIENCY)
                  Years Ended December 31, 1996, 1995 and 1994
                     (in thousands, except number of shares)

<CAPTION>
                                                Shares of                    Capital in                                      Total
                                             Common Stock         Common      Excess of           Deferred            Stockholders'
                                              Outstanding          Stock      Par Value  Deficit  Compensation  Equity(Deficiency)

<S>                 <C> <C>                       <C>             <C>         <C>        <C>           <C>
Balance at December 31, 1993 ...............      13,017,775      $  130      $    1,129 $(1,211)      $         $             48

Net loss ..................................                                                           (1,302)              (1,302)
Amortization of deferred compensation .....                                                              84                    84
Exercise of warrants ......................         1,826
Capital contribution by National
 Patent
  Cash ....................................                                         303                                       303
  Options issued to chairman ..............                                         125                (125)
Issuance of Options to chairman ...........                                         125                (125)

Balance at December 31, 1994 ..............    13,019,601            130          1,682   (2,513)      (166)                 (867)

Net loss ..................................                                               (1,604)                          (1,604)
Exercise of warrants ......................           554
Amortization of deferred compensation .....                                                              84                    84

Balance at December 31, 1995 ..............    13,020,155            130          1,682   (4,117)       (82)               (2,387)

Net loss ..................................                                               (1,498)                          (1,498)
Amortization of deferred compensation .....                                                              82                    82

Balance at December 31, 1996 ..............    13,020,155    $       130    $     1,682   $5,615)    $              $      (3,803)



     See accompanying notes to the consolidated financial statements.

</TABLE>

<PAGE>






                      AMERICAN DRUG COMPANY AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                  Years Ended December 31,
                                                1996       1995      1994
Cash flows provided by (used in) operations:
Net loss                                     $(1,498)   $(1,604)  $(1,302)
Adjustments to reconcile net loss
  to net cash used in operating activities:
Depreciation and amortization                     37         42        29
Deferred compensation                             82         84        84

Changes in other operating items:
Accounts receivable                               20       (104)
Inventory                                          3       (329)
Receivable from National Patent                                       335
Prepaid expenses and other assets                 29        (39)
Organization costs                                                    (50)
Customers' deposits                             (208)       236      (444)
Accounts payable and accrued expenses              4         47        53
                                             -------   --------- ---------

Net cash used in operations                   (1,531)    (1,667)   (1,295)
                                             -------    -------   -------

Cash flows from financing activities:
Net proceeds from issuance of 7% convertible
  notes                                          950
Loans from National Patent                     1,106      1,678       955
Capital contributions from National
 Patent                                                               303
                                          ----------   ---------- -------
Net cash provided by financing activities      2,056      1,678     1,258
                                             -------    -------    ------

Cash flows from investing activities:
Additions to machinery and equipment              (5)        (5)      (32)
                                           ---------   ---------  --------
Net cash used in investing activities             (5)        (5)      (32)
                                           ---------   ---------  --------

Net increase (decrease) in cash                  520          6       (69)
Cash at beginning of period                       66         60       129
                                            --------    -------   -------
Cash at end of period                        $   586    $    66   $    60
                                             =======    ========  =======



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                 (in thousands)

                            Years Ended December 31,
                                 1996 1995 1994

Supplemented disclosures of cash flow information:

Non-cash financing and investing activities:
Issuance of options as deferred
 compensation by National Patent
 and by the Company                       $            $            $  (250)
                                          =========    ========     =======











       See accompanying notes to the consolidated financial statements.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


1.    Organization and business

      (a)   Business

            American  Drug Company (the  "Company")  was organized in 1993, as a
            wholly-owned  subsidiary of National Patent Development  Corporation
            ("National  Patent") to initiate  marketing  activities for American
            generic  pharmaceutical  and  medical  products  in  Russia  and the
            Commonwealth  of  Independent  States  (the  "CIS").  The  Company's
            predecessor,  NPD Trading (USA), Inc. ("NPD Trading"), was formed in
            January  1990 as a  wholly-owned  subsidiary  of National  Patent to
            provide  consulting  services  to Western  businesses  in Russia and
            Eastern Europe.  NPD Trading develops and assists Western businesses
            to develop  investment,  manufacturing  and trade  opportunities and
            business  relationships in Russia,  the Czech and Slovak  Republics,
            and other countries of Eastern Europe.

            In 1993,  the Company  initiated  activities  aimed at the export of
            American-made   generic   pharmaceutical   (prescription  drugs  and
            over-the-counter  personal care products) and other medical products
            and  equipment to Russia and the CIS.  Among the products  currently
            being  sold  by  the  Company  are  toothpaste,   sanitary  napkins,
            antibiotic ointments, vitamins, bandages and medical equipment.





<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

1.    Organization and business (Continued)

      (b)   Reorganization and distribution agreement

            In August 1994,  National Patent's Board of Directors entered into a
            Transfer and Distribution Agreement (" the Distribution  Agreement")
            with the Company whereby National Patent transferred to the Company,
            immediately  prior to the  closing of the  Distribution,  all of its
            interest in NPD Trading and in two newly-formed, 50%-owned corporate
            joint  ventures,  International  Anco  Corp.  and  General  Approach
            Corporation,  in exchange for shares of the Company's  common stock.
            Under  the  distribution  agreement,  shares  were to be  issued  to
            National  Patent and shares  were to be issued for  distribution  to
            National Patent  shareholders.  Shareholders of National Patent were
            to  receive  one share and one  warrant  for  every  four  shares of
            National  Patent common stock owned on the record date, and National
            Patent  was to  receive  additional  shares of  common  stock of the
            Company,  such that National Patent's equity interest in the Company
            after the distribution  would be  approximately  54%, without taking
            into   account   outstanding   options   and   warrants.   Upon  the
            distribution,  the  Company  issued (i)  6,999,900  shares of Common
            Stock to National  Patent;  (ii) 6,017,775 shares of Common Stock to
            be distributed to National Patent stockholders,  and (iii) 6,017,775
            warrants to be distributed  to National  Patent  stockholders.  Each
            warrant was exercisable  through August 5, 1996 at an exercise price
            per share of $1.00.

            In August  1996,  the Company  extended the  expiration  date of the
            warrants  through  August 5, 1998 and reduced the exercise  price to
            $.50 per share, subject to adjustment in certain circumstances.  The
            Company has the right to cancel the warrants if the closing price of
            the  Company's  common  stock as  quoted by the OTC  Bulletin  Board
            during any ten consecutive  trading days shall equal or exceed $1.00
            per share.



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

1.    Organization and business (Continued)

      (b)   Reorganization and distribution agreement (Continued)

            Upon  consummation  of this  reorganization,  NPD  Trading  became a
            wholly-owned  subsidiary of the Company,  and each of  International
            Anco Corp.  and  General  Approach  Corporation  became a  50%-owned
            affiliate of the Company.  The transaction has been accounted for as
            a reorganization of entities under common control;  accordingly, the
            accompanying  financial  statements  have  been  presented  based on
            historical amounts in a manner similar to a pooling of interests.

      (c)   Concentrations of credit risk

            Financial  instruments  that  potentially  subject  the  Company  to
            significant  concentrations  of credit risk consist  principally  of
            cash  investments  and accounts  receivable.  The Company places its
            cash  and  cash   equivalents   with  major   banks  and   financial
            institutions,  and  therefore  limits  its  credit  exposure.  As of
            December 31, 1996, the Company had uncollateralized  receivables due
            from two  retail  distributors  totaling  $42,000,  which  represent
            approximately  29% of the Company's trade accounts  balance.  Credit
            risk is also  manifested  in the fact that the  Company's  sales are
            concentrated  in Russia and the former Eastern bloc  countries,  and
            are concentrated in the generic medical and health care industries.

2.    Summary of significant accounting policies

      (a)   Revenue recognition

            Consulting  fees and commission  revenue are recorded by the Company
            when all material  terms and  conditions  of an agreement  have been
            met.  Direct costs  relating to consulting  revenues are included in
            general and  administrative  expenses.  Sales of equipment and other
            products are recorded when title passes.

      (b)   Principles of consolidation

            The consolidated  financial  statements  include the accounts of the
            Company and its wholly-owned subsidiary, NPD Trading. Investments in
            50%-owned  affiliates  in which the Company  does not have  control,
            including International Anco Corp. and General Approach Corporation,
            which have had no significant  activities to date, are accounted for
            on an  equity  basis.  All  significant  intercompany  balances  and
            transactions have been eliminated in consolidation.

                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

2.    Summary of significant accounting policies (Continued)

      (c)   Inventories

            Inventories  are valued at the lower of cost or market,  principally
            using the first-in, first-out (FIFO) method.

      (d)   Machinery and equipment

            Machinery  and  equipment  are  carried  at  cost.  Depreciation  is
            computed using the straight-line  method. When assets are retired or
            otherwise disposed of, the cost and related accumulated depreciation
            are removed from the  accounts,  and any  resulting  gain or loss is
            reflected  in income for the  period.  The cost of  maintenance  and
            repairs  is  charged  to income  as  incurred,  whereas  significant
            renewals and betterments are capitalized.

      (e)   Organization and deferred finance costs

            The Company  capitalized  costs relating to the  organization of the
            Company which are being amortized over a period of three years.  The
            Company also  capitalized  costs  incurred to obtain  long-term debt
            financing. Such costs are amortized on an effective yield basis over
            the term of the related debt and such  amortization is classified as
            interest expense in the Consolidated Statements of Operations.

      (f)   Income taxes

            Statement of Financial Accounting Standards No. 109, "Accounting for
            Income  Taxes"  (SFAS  No.  109),  requires  use  of the  asset  and
            liability method of accounting for income taxes. Under the asset and
            liability   method  of  SFAS  No.  109,   deferred  tax  assets  and
            liabilities are recognized for the estimated future tax consequences
            attributable to differences between the financial statement carrying
            amounts of existing assets and liabilities and their  respective tax
            bases.

            Deferred tax assets and  liabilities  are measured using enacted tax
            rates in effect for the year in which  those  temporary  differences
            are  expected to be  recovered  or settled.  Under SFAS No. 109, the
            effect on  deferred  tax assets and  liabilities  of a change in tax
            rates is  recognized  in  income in the  period  that  includes  the
            enactment date.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

2.    Summary of significant accounting policies (Continued)

      (g)   Statement of cash flows

            For purposes of the statement of cash flows,  the Company  considers
            all liquid  investments with original  maturities of three months or
            less to be cash equivalents.

      (h)   Foreign currency transactions

            The Company conducts its business primarily in U.S. dollars.

      (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 these estimates.

      (j)   Financial instruments

            The carrying amounts of financial  instruments including cash, trade
            accounts  receivable and trade accounts  payable  approximated  fair
            value as of  December  31,  1996  because  of the  relatively  short
            maturity of these instruments. The carrying amount of long-term debt
            to  National  Patent  approximated  fair value  because  interest is
            charged at market rates.  In addition,  the carrying value of the 7%
            Convertible  Notes (See Note 6)  approximated  fair value because of
            the conversion feature.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

2.    Summary of significant accounting policies (Continued)

      (k)   Stock option plan

            Prior to January 1, 1996, the Company accounted for its stock option
            plan in accordance  with the  provisions  of  Accounting  Principles
            Board  ("APB")  Opinion  No.  25,  Accounting  for  Stock  Issued to
            Employees,  and  related  interpretations.   As  such,  compensation
            expense  would be  recorded on the date of grant only if the current
            market price of the underlying stock exceeded the exercise price. On
            January 1, 1996,  the Company  adopted SFAS No. 123,  Accounting for
            Stock-Based  Compensation,  which  permits  entities to recognize as
            expense  over the vesting  period the fair value of all  stock-based
            awards on the date of grant. Alternatively, SFAS No. 123 also allows
            entities to continue to apply the  provisions  of APB Opinion No. 25
            and  provide pro forma net income and pro forma  earnings  per share
            disclosures for employee stock option grants made in 1995 and future
            years as if the fair-value-based  method defined in SFAS No. 123 had
            been  applied.  The  Company  has  elected to  continue to apply the
            provisions  of  APB  Opinion  No.  25  and  provide  the  pro  forma
            disclosure provisions of SFAS No. 123.

3.    Liquidity

            The Company has incurred losses since inception, and at December 31,
            1996 had a capital  deficiency of $3,803,000.  At December 31, 1996,
            the  Company  had  $586,000  of cash,  and had  borrowed  $2,500,000
            pursuant to its $2,500,000  loan agreement with National Patent (See
            Note 12). The  Company's  cash position is the result of issuance of
            7% Convertible  Notes in July 1996,  which generated net proceeds of
            $950,000  (See Note 6).  National  Patent  has  agreed  to  continue
            funding the Company through June 30, 1997 pursuant to same terms and
            conditions as the  aforementioned  loan  agreement.  National Patent
            will  evaluate its future  funding  commitments  to the Company on a
            quarterly  basis.  As of December 31, 1996, the Company had borrowed
            $3,739,000 from National  Patent.  The indebtedness was comprised of
            (i) $2,500,000 pursuant to a $2,500,000 loan agreement with National
            Patent  (see  Note 12),  (ii) cash  advances  from  National  Patent
            totaling  $779,000,  and (iii) accrued interest at the prime rate of
            $460,000.  The  Company  is  attempting  to  secure  a  bank  credit
            facility,   issue  additional  debt  or  issue   additional   equity
            securities to meet its working  capital needs.  Although the Company
            is  attempting  to  secure  additional  financing,  there  can be no
            assurance that the Company will be able to raise additional  capital
            to continue its  operations at its current level of activity or that
            the terms of any such transactions will be favorable.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

4.    Pensions

      The Company's  employees are included in the National  Patent  Development
      Corporation  401(K) pension plan. The Company pays its allocable  share of
      costs as they accrue. Such costs amounted to approximately $3,000, $10,000
      and  $3,000  for the  years  ended  December  31,  1996,  1995  and  1994,
      respectively.

5.    Machinery and equipment

      Major  classes of machinery  and  equipment  consist of the  following (in
      thousands):

                                        December 31,        Estimated
                                    1996          1995      useful lives
                                    ----          ----      ------------

      Machinery and equipment    $    16    $    16         3 years
      Furniture and fixtures          97         92         5 years
                                            -------         -------
                                     113        108

      Less accumulated depreciation (103)       (86)
                                   -----     ------
                                 $    10    $    22
                                 =======    =======

      Depreciation  expense for the years ended December 31, 1996, 1995 and 1994
      was $17,000, $26,000 and $24,000, respectively.

6.    Long-term debt

      In July 1996,  the Company issued  convertible  notes (the "Notes") in the
      principal amount of $1,000,000 in a private offering (the "Offering"). The
      Company  received net proceeds of $950,000  from the  Offering.  The Notes
      mature on June 30, 2001,  bear  interest at the rate of 7% per annum,  and
      are convertible into shares of common stock of the Company at a conversion
      price of $.25 per share. In connection with the Offering,  National Patent
      issued  warrants  to purchase an  aggregate  of 82,306  shares of National
      Patent common stock,  exercisable at a price of $12.15 per share, provided
      that the warrants may only be exercised  utilizing  the Note. In the event
      that the  closing  price of the  common  stock of the  Company is at least
      $1.00 per share for at least 20 consecutive  trading days, the Notes shall
      be subject to redemption  at the election of the Company,  at a redemption
      price of 100% of the principal amount called for redemption, together with
      accrued interest.



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

6.    Long-term debt (Continued)

      The Company and National Patent have agreed that (i) if the Notes are used
      to exercise the warrants prior to a default on the Notes,  National Patent
      will  receive  from the  Company,  in exchange for the Notes shares of the
      Company's  common stock at a price equal to 60% of its then current market
      value,  and (ii) if the Notes are used to exercise  the  warrants  after a
      default on the Notes,  National  Patent will receive from the Company,  in
      exchange  for the Notes  shares of the  Company's  common stock at a price
      equal to 25% of its then current market value.

7.    Transactions with affiliates

      Transactions with National Patent and its  subsidiaries,  other than loans
      and  capital  contributions   received,  as  disclosed  elsewhere  in  the
      financial statements,  during the years ended December 31, 1996, 1995, and
      1994 are summarized below (in thousands):

                                                  December 31,
                                        1996         1995      1994

      Consulting fees from affiliate    $  25       $  45     $   13
                                        =====       =====     ======

      Transactions with National Patent
            Management fees              $120        $120       $120
            Interest expense              277         168         15
            Options issued by parent                             125


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

7.    Transactions with affiliates (Continued)

      Since  inception,  the Company has been  financed by National  Patent,  by
      means of capital contributions,  short-term  non-interest bearing advances
      and currently  long-term  interest bearing  obligations.  During the first
      quarter of 1994,  National Patent issued options valued at $125,000 to the
      Company's  Chairman,  who is also the  President  of National  Patent,  to
      acquire  250,000  shares of the  Company's  common stock owned by National
      Patent. This issuance, which was in consideration of services rendered and
      to be rendered on behalf of the Company,  has been recorded by the Company
      as a contribution by National Patent to the Company's capital in excess of
      par value, and as deferred  compensation.  The Company received $2,500,000
      under its $2,500,000 loan agreement with National Patent,  plus additional
      funding totaling $779,000 through December 31, 1996 (See Note 12). Accrued
      interest on this loan amounts to $460,000 at December 31, 1996.

      The  management  fee  charged to the  Company by  National  Patent  covers
      services  provided by  National  Patent such as  management,  legal,  tax,
      accounting, insurance and employee benefit administration services.

      The Company provided  services to GSES Systems,  Inc. (GSES), an affiliate
      of National  Patent,  in assisting  that affiliate to obtain a contract to
      provide the Temelin  Nuclear  Power Plant and the St.  Petersburg  Nuclear
      Power Plant with full scope  simulators.  GSES is a  successor  to General
      Physics International Engineering and Simulation,  Inc. Revenues from this
      affiliate amounted to $25,000, $45,000 and $13,000,  respectively, for the
      years ended December 31, 1996, 1995, and 1994.

      In 1994 the Company  commenced paying $150,000 annually as compensation to
      an officer of National Patent, in  view  of the  additional  time
      allocated by this officer to the Company, particularly in the development
      of the Company's generic drug business.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

7.    Transactions with affiliates (Continued)

      As of January 1, 1994,  the Company and  National  Patent  entered  into a
      three-year  Management Services Agreement pursuant to which certain direct
      and indirect  services will be provided to the Company by National Patent.
      The  services  to be  provided  by National  Patent  include  legal,  tax,
      accounting,  insurance and employee benefit  administration  services. The
      Company  has  agreed to pay  National  Patent a fee of  $10,000  per month
      during the first year of the  agreement,  and to negotiate  with  National
      Patent a mutually agreeable fee thereafter. The Agreement is automatically
      renewable for successive one-year terms unless one of the parties notifies
      the other in writing at least six months  prior to the end of the  initial
      term of any renewal thereof.

8.    Income taxes

      On August 5, 1994,  National  Patent made a distribution  of the Company's
      common stock to  shareholders  of National  Patent.  As a result,  on that
      date, the Company ceased to be included in National Patent's  consolidated
      Federal  income tax return,  as its equity  interest  in the Company  fell
      below 80%. For periods subsequent to August 5, 1994, the Company files its
      own  consolidated  Federal income tax return,  including its  wholly-owned
      subsidiary.

      The Company's  tax net  operating  loss for the first eight months of 1994
      was  included in the  consolidated  Federal  income tax return of National
      Patent,  as was the Company's loss for 1993. The policy of National Patent
      is to  allocate a portion of the  Federal  tax  liability,  if any, of the
      consolidated group to the various subsidiaries.

      For the year ended  December  31,  1993 and through  the  distribution  of
      shares in August  1994,  the  consolidated  group was not in a tax  paying
      position for Federal income tax purposes, and accordingly, no income taxes
      were  allocated  to the  Company.  Under SFAS No. 109,  the Company  would
      record  income taxes if it had earnings on a stand-alone  basis,  although
      the  consolidated  group was not in a tax  paying  position.  Because  the
      Company and its subsidiary have had net losses since inception, no Federal
      or state income taxes have been provided for any year.



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

8.    Income taxes (Continued)

      Under SFAS No. 109, a  valuation  allowance  is  provided  when it is more
      likely  than not that some  portion of  deferred  tax  assets  will not be
      realized. The Company has determined,  based upon the Company's history of
      operating losses, that 100% valuation reserves are required as of December
      31, 1996 and 1995.

      As of December 31, 1996 and 1995, the Company had approximately $1,417,000
      and  $860,000,  respectively,  of deferred  tax assets and no deferred tax
      liabilities.  The tax effects that gave rise to these  deferred tax assets
      and the valuation allowance consist of the following (in thousands):


                                                 December 31,  December 31,
                                                     1996        1995
      Deferred tax assets

      Organization costs                         $        6     $
      Allowance for doubtful accounts                    23           8
      Net operating loss carryforwards                1,287         778
      Machinery and equipment                             6          10
      Deferred compensation                              95          64
                                                   --------     -------
                                                      1,417         860

      Deferred tax liabilities
      Net deferred tax assets                         1,417         860

      Valuation allowance                            (1,417)       (860)
                                                    -------      ------

      Net deferred tax assets after
       valuation allowance                        $             $
                                                  ==========    =========

      The change in the  valuation  allowance  for the years ended  December 31,
      1996  and  1995   amounted  to  an  increase  of  $557,000  and  $595,000,
      respectively, primarily attributable to the net operating losses.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

8.    Income taxes (Continued)

      From  January  29,  1990  through  August 5, 1994,  the  Company  reported
      approximately  $2,100,000  in net  operating  losses in National  Patent's
      consolidated Federal Income Tax Return. As a result of the loss allocation
      rules contained in the Federal income tax consolidated return regulations,
      approximately  $263,000 of net operating loss  carryforwards are allocable
      to  the  Company  upon  ceasing  to  be  a  member  of  National  Patent's
      consolidated  return  group.  As agreed  between  National  Patent and the
      Company,  National  Patent will not  compensate the Company for any use by
      the National Patent Group of the net operating losses of the Company.

      For the five months ended  December 31, 1994,  for which the Company filed
      its own  consolidated  Federal  Income Tax  Return,  the Company had a net
      operating  loss of $306,000.  For the year ended  December  31, 1995,  the
      Company had a net operating loss of approximately $1,466,000. For the year
      ended  December  31,  1996,  the  Company  had a  net  operating  loss  of
      approximately  $1,352,000.  At  December  31,  1996,  the  Company has net
      operating  loss  carryforwards  of  approximately  $3,387,000.   The  loss
      carryforwards expire at various dates through 2011.

9.    Employment and consulting agreement

      (a)   Employment agreement

      As of January 1, 1994,  the Company  entered into an employment  agreement
      with its President and Chief Executive Officer. Pursuant to the Employment
      Agreement,  the officer will devote approximately  one-half of his time to
      serve  as  the  Company's  Chief  Executive  Officer  and  President.  The
      agreement  has a  three-year  term with an option to renew for  successive
      one-year periods. It provides that the officer will receive, in connection
      with  services  rendered  to the  Company,  a base salary in the amount of
      $150,000, subject to adjustment by the Compensation Committee of the Board
      of Directors.  In addition,  the officer  received  options to purchase an
      aggregate of 500,000 shares of Common Stock at an exercise price per share
      of $.50 under the Company's Stock Option Plan.

      Upon  termination  by the Company  other than "for cause,"  disability  or
      retirement,  or by the officer "for good  reason," the officer is entitled
      to receive as severance pay an amount equal to his full base salary at the
      rate then in effect,  multiplied by the greater of (i) the number of years
      remaining in the employment term, or (ii) three. In addition,  the officer
      would receive an amount in cash equal to the aggregate  difference between
      the exercise price of his unexercised options and the closing price of the
      Common Stock on the date of termination.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

9.    Employment and consulting agreement (Continued)

      (b)   Consulting agreement

      As of January 1, 1994,  the Company  entered into a  consulting  agreement
      with its Chairman of the Board.  Pursuant to the  agreement,  the Chairman
      will serve as a consultant to the Company for a period of three years.  In
      lieu of  consulting  fees or  other  payments,  the  Company  granted  the
      Chairman  options to purchase  an  aggregate  of 250,000  shares of Common
      Stock at an exercise price per share of $.50,  which options vest in equal
      installments over a three year period commencing August 5, 1994.

      These  options,  which  are  non-transferable,  expire  by their  terms in
      January 2004 or on such earlier date as the Chairman shall cease to render
      services to the Company. In addition,  the Chairman,  who is the President
      of National  Patent,  has been granted  options to purchase an  additional
      250,000  shares of Common  Stock from  National  Patent,  pursuant  to the
      National Patent American Drug Company Stock Option Plan, on the same terms
      and subject to the same conditions as those granted to him by the Company.
      The  consulting  agreement may be renewed at the option of the Company for
      successive one year periods. The consulting agreement has been renewed for
      an additional one year term with no additional compensation.

      The  Company  believes  the  estimated  fair value of the  services of the
      Chairman to be  approximately  $250,000.  The Company  has  estimated  the
      intrinsic fair value of the options granted to the Chairman by the Company
      and by National Patent to be approximately $250,000 in the aggregate. Such
      amount,  which includes the $125,000  reflected as a capital  contribution
      from  National  Patent  (see  Note  7),  has  been  recorded  as  deferred
      compensation  and  as  capital  in  excess  of  par  value.  The  deferred
      compensation  is being amortized over the three year vesting period of the
      options. Amortization for the years ended December 31, 1996, 1995 and 1994
      amounted to $82,000, $84,000 and $84,000, respectively, and is included in
      general and administrative  expenses.  The unamortized balance of deferred
      compensation was reflected as a deduction from stockholders' equity.

10.   Major customers and customers' deposits

      Several  customers  each  accounted  for more  than  10% of the  Company's
revenues as follows:

      1996  One customer accounted for 18% of revenue.
      1995  Two customers accounted for 15% and 10% of revenues, respectively.
      1994  One customer accounted for 79% of revenue.

<PAGE>

                     AMERICAN DRUG COMPANY AND SUBSIDIARY

            Notes to Consolidated Financial Statements (Continued)

10.   Major customers and customers' deposits (Continued)

      Of the  aforementioned  customers,  GSES, an affiliate of National Patent,
      accounted for 2%, 9% and 2%,  respectively,  of revenue in 1996,  1995 and
      1994.

      Export sales represented approximately $842,000,  $342,000 and $700,000 of
      the Company's revenues in 1996, 1995 and 1994.

11.   Stock options and warrants

      (a)   Stock option plan

      On January 1, 1994, the Company's Board of Directors and sole  stockholder
      adopted  the  American  Drug  Company  1994 Stock  Option Plan (the "Stock
      Option  Plan"),  which became  effective  August 5, 1994.  Under the Stock
      Option  Plan,  a total of  2,000,000  shares  of  Common  Stock  have been
      reserved for issuance, subject to adjustment in the event of stock splits,
      stock  dividends,  recapitalizations,  reclassifications  or other capital
      adjustments.  Unless  designated as "incentive stock options"  intended to
      qualify  under  Section 422 of the Code,  options  granted under the Stock
      Option  Plan are  intended  to be  nonqualified  options.  Options  may be
      granted to any director,  officer or other key employee of the Company and
      its  subsidiary,  and  to  consultants  and  other  individuals  providing
      services to the Company.

      The  Compensation  Committee of the Board of Directors will administer the
      Stock Option Plan and will determine,  among other things,  the persons to
      be granted options, the number of shares to be subject to each option, the
      exercise price and vesting schedule of each option,  whether to accelerate
      the exercise  date of the option for any reason,  and whether to cause the
      Company to make loans which enable an optionee to pay the  purchase  price
      of any option.  No options are  transferable by the optionee other than by
      will.



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

11.   Stock options and warrants (Continued)

      (a)   Stock option plan (Continued)

      The term of any option granted under the Stock Option Plan will not exceed
      ten years  from the date of the grant of the  option  and,  in the case of
      incentive  stock options  granted to a 10% or greater  holder in the total
      voting  stock of the  Company,  three  years  from the date of grant.  The
      exercise  price of any option will not be less than the fair market  value
      of the  Common  Stock on the date of grant  or,  in the case of  incentive
      stock  options  granted  to a 10% or  greater  holder in the total  voting
      stock, 110% of such fair market value.

      At December 31, 1996, the per share  weighted-average  fair value of stock
      options  granted  during  1996 was $.40 on the  date of  grant  using  the
      modified   Black   Scholes   option-pricing   model  with  the   following
      weighted-average assumptions: 1996 - expected dividend yield 0%, risk-free
      interest rate of 6.6%, expected volatility of 105.6%, and an expected life
      of 5 years.

      The Company  applies APB  Opinion No. 25 in  accounting  for its Plan and,
      accordingly,  no  compensation  cost has  been  recognized  for its  stock
      options  in  the  financial   statements.   Had  the  Company   determined
      compensation  cost based on the fair value at the grant date for its stock
      options  under  SFAS No.  123,  the  Company's  net loss  would  have been
      increased to the pro forma amounts indicated below:

                                                       1996            1995
                                                       ----            ----

      Net loss          As reported                $(1,498)            $(1,604)
                        Pro forma                   (1,510)             (1,604)

      Loss per share    As reported                   (.12)              (.12)
                        Pro forma                     (.12)              (.12)



<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

11.   Stock options and warrants (Continued)

      Pro forma net  income  reflects  only  options  granted  in 1996 and 1995.
      Therefore,  the full  impact of  calculating  compensation  cost for stock
      options  under SFAS No. 123 is not  reflected  in the pro forma net income
      amounts  presented above because  compensation  cost is reflected over the
      options'  vesting  period of 5 years  and  compensation  cost for  options
      granted prior to January 1, 1995 is not considered.

      Stock option activity during the periods indicated is as follows:

                                       Number of           Weighted-Average
                                           Shares          Exercise Price

            Granted April 1, 1994     1,620,000                    $.50
                                      ---------
      Balance at December 31, 1994    1,620,000                     .50
            Granted
            Exercised
            Forfeited                   110,000                     .50
            Expired

      Balance at December 31, 1995    1,510,000                     .50
            Granted                      90,000                     .50
            Exercised
            Forfeited
            Expired

      Balance at December 31, 1996    1,600,000                     .50
                                      =========

      At December 31, 1996,  the range of exercise  prices and  weighted-average
      remaining  contractual  life of outstanding  options was $.50 and 4 years,
      respectively.

      At  December  31,  1996 and 1995,  the number of options  exercisable  was
      1,539,999 and 1,006,652,  respectively,  and the weighted-average exercise
      price of those options was $.50 and $.50, respectively.

      (b)   Warrants to purchase common stock

      Each  warrant  issued in  connection  with the  Distribution  entitled the
      holder to purchase one share of Common  Stock at $1.00 per share,  subject
      to adjustment  upon the  occurrence of certain  events for a period of two
      years from August 5,1994.

<PAGE>

                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

11.   Stock options and warrants (Continued)

      In connection  with the  Distribution,  6,017,775  warrants were issued to
      shareholders  of  National  Patent.  During  1995 and  1994,  warrants  to
      purchase 554 and 1,826 shares,  respectively,  were exercised. At December
      31, 1996,  there were 6,015,395 shares reserved for issuance to permit the
      exercise in full of all outstanding warrants.

      In August 1996, the Company  extended the expiration  date of the warrants
      through  August 5, 1998 and reduced the exercise  price to $.50 per share,
      subject to adjustment in certain circumstances.  The Company has the right
      to cancel the warrants if the closing price of the Company's  common stock
      as quoted by the OTC  Bulletin  Board during any ten  consecutive  trading
      days shall equal or exceed $1.00 per share.

12.   Loans and advances from National Patent

      In August 1994, National Patent entered into a $2.5 million loan agreement
      with NPD  Trading,  under which  National  Patent would fund the loan with
      either securities or cash, at its option.  NPD Trading purchased  National
      Patent common stock from time to time by issuing a note to National Patent
      (the "Note"). Borrowings under the Note were made from time to time by NPD
      Trading as it purchased  shares of the  securities,  and the principal and
      accrued  interest  thereon will be due on August 5, 1999. NPD Trading sold
      all securities immediately after the purchase and advanced the proceeds of
      such sales to the Company for use as working  capital.  Although  National
      Patent registered shares of its common stock, which can be used in partial
      satisfaction of its obligations under the loan agreement,  National Patent
      elected to make all cash advances to the Company during 1994.  During 1996
      and 1995, National Patent partially satisfied its funding obligations from
      proceeds from sales of 28,400 and 21,000 shares of National  Patent common
      stock on behalf of the Company in the  aggregate  amount of  $259,000  and
      $194,000, respectively. At December 31, 1996, the Company had borrowed the
      full  $2,500,000  under  its  loan  agreement  with  National  Patent  and
      therefore had no remaining  borrowing  availability  under this agreement.
      During 1996, National Patent advanced additional funds to the Company, and
      the total amount due to National  Patent,  including  accrued  interest of
      $460,000,  totaled  $3,739,000 at December 31, 1996. Such amount is due on
      August 5, 1999.


<PAGE>


                      AMERICAN DRUG COMPANY AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Continued)

13.   Commitments and contingencies

      The Company has several  noncancellable  leases which cover real  property
      and machinery and  equipment.  Such leases expire at various dates through
      1998 and, in some cases, contain options to extend their terms.

      Minimum rentals under long-term operating leases are as follows:

                                   Real     Machinery &
      (in thousands)           property      equipment    Total
      ---------------------------------------------------------
      1997                         $132            $21     $153
      ---------------------------------------------------------
      1998                           49              2       51
      ---------------------------------------------------------
      Total                        $181            $23     $204
      ---------------------------------------------------------


      During 1996, 1995 and 1994, the Company  incurred  $164,000,  $207,000 and
      $105,000, respectively, of rental expenses.

      The Company has entered into an agreement  with a consultant,  pursuant to
      which  the   consultant   will  help  the  Company   secure  a  supply  of
      pharmaceutical   products  for  resale  outside  the  United  States.   In
      connection  with services  rendered to the Company,  the  consultant  will
      receive  a  consulting  fee of  approximately  $4,166  per  month,  plus a
      commission  of 2 1/2% of the net sales price of all products  manufactured
      by manufacturers introduced by him during the term of the Agreement to the
      Company, and sold by the Company to parties outside the U.S. or to parties
      which intend to resell the products  outside the U.S. The consultant shall
      continue to receive  commissions  on all such products for a period of ten
      years  following  the date as to which the  Company  shall  have  received
      $5,000 from the sale of the commissionable  product. The Agreement expired
      on August 31, 1996.



<PAGE>


Item 9.     Changes in and Disagreements with Accountants and
            Financial Disclosure.

      There have been no reports on Form 8-K filed within 24 months prior to the
date of the most recent financial  statements  reporting a change of accountants
and/or  reporting a  disagreement  on any  matters of  accounting  principle  or
financial disclosure.

                                    PART III

Item 10.      Directors and Executive Officers of the Registrant

Management

Directors and Executive Officers

The following  table sets forth  certain  information  concerning  directors and
executive officers of the Company.

Name                          Age         Position

Martin M. Pollak              69          Chief Executive Officer,
                                          President and Director

Jerome I. Feldman             68          Chairman of the Board

Scott N. Greenberg            40          Chief Financial Officer

Donald J. Hasfurther          47          Vice President - Washington

Cameron Fae Bushnell          43          Vice President - Operations

Miroslav Vejmelka             49          General Manager - Prague

Sergey Efuni, M.D., Ph. D.    36          Managing Director - Moscow

Edward Dunay                  70          Director

John D. Scanlan               68          Director

Arthur T. Downey              59          Director


<PAGE>


Martin M. Pollak. Mr. Pollak serves as Chief Executive Officer,  President and a
director of the Company and has served as Executive  Vice  President,  Treasurer
and a director of National Patent, the company which he co-founded,  since 1959.
He has been involved in business in Eastern Europe and the Soviet Union for over
30 years.  He has been a director of Interferon  Sciences,  Inc.  since 1981 and
Chairman of the Board from 1981 to  November  1996;  a director of GTS  Duratek,
Inc.  from 1983 to  September  1996; a director of General  Physics  Corporation
since 1987 and  Chairman of the Board since 1988;  and  Chairman of the Board of
SGLG, Inc. (formerly GPS Technologies, Inc.) since 1991. He has complemented his
business  activities by chairing the U.S.  section of the  U.S.-Czech and Slovak
Economic Council for the past seven years and has been a trustee on the Board of
Trustees of the Worcester Foundation for Experimental Biology and was a director
of Brandon Systems Corporation from 1986 to 1996.

Jerome I.  Feldman.  Mr.  Feldman  serves  as  Chairman  of the Board of,  and a
consultant  to the  Company  and has  served as  President  and Chief  Executive
Officer of National Patent, the company which he co-founded,  since 1959. He has
been a director since 1981 and Chairman of the Executive Committee of Interferon
Sciences, Inc. from 1981 to September 1996; a director of GTS Duratek, Inc. from
1981 to November 1996;  President of General Physics  Corporation  from November
1994 to February 1997; a director of General Physics  Corporation since 1987 and
Chairman of the Executive Committee and a director of SGLG, Inc. since 1991. Mr.
Feldman  also  serves as Trustee of the New  England  Colleges  Fund and of Bard
College.

Scott N. Greenberg. Mr. Greenberg has been the Company's Chief Financial Officer
since its inception.  He has been Vice President and Chief Financial  Officer of
National  Patent  since  1989,  a director  since  1987 ; a director  of General
Physics  Corporation  since 1987;  a director of SGLG,  Inc.  since 1991;  and a
director of Interferon Sciences, Inc. since 1996.

Donald J. Hasfurther. Mr. Hasfurther has served as Vice President of the Company
since 1990. Prior to joining the Company,  Mr. Hasfurther served as director for
East/West Trade at the U.S. Chamber of Commerce for 13 years,  during which time
he was Executive  Director for four  bilateral  economic  councils with Hungary,
Poland,  Romania  and  Czechoslovakia.  Prior to working at the U.S.  Chamber of
Commerce,  he served as an international  economist with the Bureau of East/West
Trade at the U.S.  Department of Commerce.  Mr.  Hasfurther and Ms. Bushnell are
married.

Cameron Fae Bushnell.  Ms. Bushnell has been Vice President - Operations for the
Company  since  June 1994 and was  Director  of  International  Finance  for the
Company from 1990 to 1995. She brings direct export  operations  experience from
her  eight  years  (from  1979 to 1987) at NIKE  International  Headquarters  in
Beaverton,  Oregon.  For  NIKE,  Ms.  Bushnell  handled  a wide  array of export
finance, transportation,  and sales and marketing issues for European, Asian and
Latin  customers.  From 1987 to 1990, Ms. Bushnell  served in the  International
Division of the U.S.  Chamber of Commerce.  Ms. Bushnell and Mr.  Hasfurther are
married.

Miroslav  Vejmelka.  Mr.  Vejmelka  joined the Company in 1994 and has served as
general  manager of the Prague office since 1996.  Prior to joining the Company,
he served as  Commercial  Counselor in the Embassy of the Czech  Republic in New
Delhi,  India. From 1990-1993,  he held the position of Czechoslovak  Commercial
Counselor  in Colombo,  Sri Lanka.  Prior to this  period,  Mr.  Vejmelka was an
employee  of the foreign  trade  company  Investa,  serving in Prague and in the
Philippines.

Sergey Efuni.,  Ph.D. Dr. Efuni joined the Company in 1994. From 1992 to 1994 he
served as  Representative of Lederle  International  with  responsibilities  for
developing that company's sales network in Russia, Kazakahstan and Uzbekistan. A
medical doctor by training, Dr. Efuni has also provided consulting and marketing
assistance to Sanofi of France and  established  two Russian  trading  companies
dealing  with  pharmaceuticals  from 1991 to 1992.  Dr.  Efuni  served as Senior
Scientific  Researcher  at the  Institute of  Immunology  in Moscow from 1989 to
1992.

Edward  Dunay.  Mr. Dunay became  director of the Company in 1994.  In 1979,  he
formed Edward Dunay Associates,  Ltd., an investment  advisory firm, of which he
is still President. Mr. Dunay also served as President of the City Athletic Club
from 1991 to 1996.  From 1984 to 1992 he was  director of Hamilton  Savings Bank
and served as Vice Chairman of its Audit Committee. From 1974 to 1979, Mr. Dunay
served as President of Ladenberg, Thallmann & Co., members of the New York Stock
Exchange.

John D. Scanlan.  Ambassador  Scanlan  became a director of the Company in 1994.
His diplomatic  career of 35 years was  concentrated in Soviet and East European
affairs. He served in Moscow,  Warsaw, Poznan and Belgrade, was Deputy Assistant
Secretary of State with  responsibility  for the Soviet Union and Eastern Europe
from  1981 to 1982,  Ambassador-designate  to  Poland  from  1982 to  1985,  and
Ambassador  to  Yugoslavia  from  1985 to 1989.  Since  June  1991,  he has been
employed by ICN Pharmaceutical,  Inc. first as Vice President for Eastern Europe
and since April 1994 as a Senior  Consultant.  Ambassador Scanlan is a member of
the  Council on Ethnic  Accord and an advisory  board  member of the Central and
East European Law Initiative of the American Bar Association.

Arthur T. Downey.  Mr.  Downey  became a director of the Company in 1996.  He is
Vice  President  and Counsel of Baker Hughes  Incorporated,  a Houston  based $3
billion industrial equipment manufacturer,  and he manages the Washington office
of Baker  Hughes.  For fifteen  years prior to joining  Baker  Hughes,  he was a
partner in two large national firms, representing domestic and foreign companies
in the  international  trade and investment  area. Mr. Downey also served during
most of that time as Adjunct Professor at Georgetown University Law Center where
he taught  international  law and  business  transactions.  Mr.  Downey also had
governmental service prior to his corporate and law firm activity.  He served as
Deputy  Assistant  Secretary of Commerce for  East-West  Trade,  and also on the
White House National Security Council staff. He began his career with service at
the State Department (in Washington and Berlin).

      The Company's Board of Directors contains three independent  members.  The
Board of  Directors  held two  meetings in 1996,  at which all of the  directors
attended at least 75% of the  meetings.  All members  hold office until the next
annual meeting of  stockholders  or until their  successors are duly elected and
qualified. Executive officers serve at the pleasure of the Board of Directors.

Committees of the Board of Directors

      The Compensation  Committee  consists of Messrs.  Pollak and Feldman.  The
Compensation  Committee  reviews and recommends  remuneration  arrangements  for
executive   officers  and  for  members  of  the  Board  of  Directors,   adopts
compensation  plans in which  officers and directors are eligible to participate
and grants stock  options under the  Company's  Stock Option Plan.  During 1996,
Messrs.  Pollak  and  Feldman  participated  in  deliberations  of the  Board of
Directors concerning compensation of executive officers.

      The Executive Committee consisting of Messrs.  Pollak and Feldman meets on
call and has  authority to act on most matters  during  intervals  between board
meetings.

      The Audit Committee  reviews the internal  controls of the Company and the
objectivity  of its  financial  reporting.  It meets  with  appropriate  Company
financial personnel and the Company's  independent  certified public accountants
in connection  with these reviews.  This  committee  recommends to the Board the
appointment of the independent certified public accountants to serve as auditors
for the following  year in examining  the books and records of the Company.  The
Audit Committee currently consists John D. Scanlan, Edward Dunay and Arthur T.
Downey.

Director's Compensation

      The Company pays each  director  who is not an employee of, or  consultant
to,  the  Company a fee of $1,000  for each  meeting  of the Board of  Directors
attended,  and reimburses each such director for out-of-pocket expenses incurred
in attending such meetings.

Employment Agreement

      As of January 1, 1994,  the Company  entered into an employment  agreement
with its President and Chief Executive  Officer,  Martin M. Pollak.  Pursuant to
the Employment Agreement,  Mr. Pollak will devote approximately  one-half of his
time to serve as the  Company's  Chief  Executive  Officer  and  President.  The
agreement had an initial three-year term, which was automatically renewed for an
additional  one-year.  It provides that Mr.  Pollak will receive,  in connection
with services rendered to the Company,  a base salary in the amount of $150,000,
subject to adjustment by the  Compensation  Committee of the Board of Directors.
In addition,  Mr. Pollak has options to purchase an aggregate of 500,000  shares
of Common  Stock at an  exercise  price per share of $.50,  under the  Company's
Stock Option Plan.  These options vest in equal  installments  over a three-year
period which commenced on August 5, 1994, and will expire in January 2004, or on
such earlier date as Mr.  Pollak  leaves the  employment  of the Company for any
reason.   They  are  intended  to  be   non-qualified   stock  options  and  are
non-transferable.

      Mr.  Pollak's  Employment  Agreement  provides  that his  employment  will
terminate  upon his death,  physical or mental  disability  or  retirement,  and
permits the Company to terminate his employment  "for cause" (i.e.,  he fails to
perform required duties or engages in gross misconduct). In addition, Mr. Pollak
may  voluntarily  terminate his employment  "for good reason" which involves his
good faith determination that due to a "change in control" of the Company, he is
not able to effectively discharge his duties. A "change in control" includes (i)
the acquisition of beneficial  ownership of 30% or more of the Company's  voting
securities  by any person  other than Mr.  Pollak or  National  Patent,  or (ii)
certain changes in the composition of the Board of Directors of the Company.

      Upon  termination  by the  Company  "for  cause," all  obligations  of the
Company under the Employment  Agreement  cease.  Upon termination by the Company
other than "for Cause,"  disability  or  retirement,  or by Mr. Pollak "for good
reason," Mr.  Pollak is entitled to receive as severance  pay an amount equal to
his full base  salary at the rate then in effect,  multiplied  by the greater of
(i) the number of years  remaining in the  employment  term,  or (ii) three.  In
addition,  Mr.  Pollak  would  receive an amount in cash equal to the  aggregate
difference between the exercise price of his unexercised options and the closing
price of the Common Stock on the date of termination.

Consulting Agreements

      As of January 1, 1994,  the Company  entered into a  consulting  agreement
with its Chairman of the Board,  Jerome I. Feldman.  Pursuant to the  agreement,
Mr.  Feldman  will serve as a  consultant  to the  Company for a period of three
years. The Consulting Agreement was renewed by the Company for an additional one
year  term,  with no  additional  compensation  to be paid  to Mr.  Feldman.  In
connection  with  services  rendered  and to be rendered  by Mr.  Feldman to the
Company,  which the Company  values at  approximately  $250,000,  and in lieu of
consulting fees or other  payments,  Mr. Feldman was granted options to purchase
(i) an aggregate of 250,000  shares of Common  Stock under the  Company's  Stock
Option Plan at an exercise price per share of $.50,  which options vest in equal
installments over a three year period which commenced on August 5, 1994 and (ii)
an additional  250,000 shares of Common Stock from National Patent,  pursuant to
the National  Patent  American Drug Company Stock Option Plan, on the same terms
as those  granted to him by the  Company.  All such options will expire by their
terms in January  2004 or on such  earlier  date as Mr.  Feldman  shall cease to
render services to the Company.  They are non-transferable by him. Mr. Feldman's
consulting  agreement may be renewed at the option of the Company for successive
one year periods.


<PAGE>



Item 11. Executive Compensation

      The  following  table and notes  sets  forth  information  concerning  the
compensation paid or awarded to the Chief Executive Officer for 1996:


                           SUMMARY COMPENSATION TABLE
                            Annual
                      Compensation
                                             Long Term   All Other
Name and                   Salary     Bonus  Awards      Compensation
Principal         Year       ($)       ($)   Options         ($)
Position
-------------------------------------------------------------------
Martin M.
Pollak
President and
Chief Executive   1996   $310,731(1)   -0-     -0-         $3,500(2)
Officer           1995   $314,376(1)   -0-     -0-         $3,500(2)
                  1994   $314,759(1)   -0-   500,000       $3,696(2)

(1) For 1994, 1995 and 1996,  $150,000,  or  approximately  50%, of Mr. Pollak's
compensation  was paid by National  Patent,  as a consequence  of his service to
both companies. See "Management - Employment Agreement."

(2) Constitutes  matching  contributions made by National Patent and the Company
equally on behalf of Mr. Pollak  pursuant to National  Patent's  401(k)  Savings
Plan which became effective on March 1, 1992.


<PAGE>



The  following  table and notes set forth  information  for the named  executive
officers  regarding  the exercise of stock options  during 1996 and  unexercised
options held at the end of 1996.



<TABLE>



                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1996
                           AND YEAR-END OPTION VALUES



<CAPTION>
                                                                                      Number of Unexercised    Value of Unexercised
                                                                                      options at December 31,  In-the-Money Options
                                                                                             1996 (#)        at December 31, 1996($)
                                                    Shares Acquired                        Exercisable/             Exercisable/
Name(#)(1)                                          on Exercise      Value Realized($)     Unexercisable          Unexercisable(2)


<S>                                                        <C>                <C>           <C>      <C>                   <C>
Martin M. Pollak .............................            -0-                -0-            500,000/-0-                   -0-




(1) None of the named  executive  officers  exercised any stock  options  during
1996.

(2) Calculated based on the closing price of the Common Stock ($.25) as reported
by the OTC  Bulletin  Board on December 31,  1996.  The  exercise  price of such
option is $.50.

</TABLE>

<PAGE>







Item 12.  Security Ownership of Certain Beneficial Owners and Management.

                             PRINCIPAL STOCKHOLDERS

      The following  table sets forth certain  information  as of March 1, 1997,
with respect to shares of Common Stock which are beneficially  owned by (a) each
person who owns more than 5% of the Company's Common Stock, (b) each director of
the Company, (c) each of the persons named in the Summary Compensation Table and
(d) all officers and directors of the Company as a group.

                              Beneficial Ownership

                                          Number of         Percentage
      Name and Address                    Common Shares     of Class (1)
      ----------------                    -------------     ------------

National Patent Development
    Corporation (2)                          6,971,750        53.5%

Martin M. Pollak (3)(6)(7)(8)                7,564,322        55.9

Jerome I. Feldman (4)(6)(7)(8)               7,566,386        57.0

Scott N. Greenberg (5)(6)                       79,150           *

Donald J. Hasfurther (5)(6)                    100,000           *

Edward Dunay (5)(9)                             50,000           *

John D. Scanlan (5)(9)                          50,000           *

Arthur T. Downey (5)(9)                         16,665           *

All directors and officers
as a group (10 persons)                      1,618,023        11.4

*The number of shares owned is less than one percent of the  outstanding  shares
of Common Stock.

(1) Based upon  13,020,155  shares of Common  Stock  outstanding  as of March 1,
1997.

(2)  National  Patent  has  entered  into a Voting  Agreement  which  limits its
ability,  to a certain  degree,  to  control  the  affairs of the  Company.  See
"Certain  Relationships  and Related  Transactions - National  Patent's  Capital
Stock Interest."

(3) Includes (i) 6,971,750 shares of Common Stock beneficially owned by National
Patent,  (ii)  85,204  shares of Common  Stock held by Mr.  Pollak,  (iii) 5,751
shares of Common Stock held by Mr.  Pollak's  wife (iv) 1,617,  shares of Common
Stock for a foundation of which Mr.  Pollak is a trustee and (v) 500,000  shares
of Common Stock  issuable upon exercise of currently  exercisable  stock options
held by Mr.  Pollak.  Mr. Pollak  disclaims  beneficial  ownership of the shares
owned by National Patent and his wife.

(4) Includes (i) 6,971,750 shares of Common Stock beneficially owned by National
Patent,  (ii) 93,463  shares of Common Stock held by Mr.  Feldman  (iii),  1,173
shares of Common Stock which are held by certain members of Mr. Feldman's family
and (iv) 500,000  shares of Common  Stock  issuable  upon  exercise of currently
exercisable stock options held by Mr. Feldman.  Mr. Feldman disclaims beneficial
ownership of the shares owned by National Patent and his family.

(5)  Includes  4,150 shares of Common  Stock held by Mr.  Greenberg  and 75,000,
100,000,   50,000,  50,000  and  16,665  shares  each  for  Messrs.   Greenberg,
Hasfurther,  Dunay, Scanlan and Downey, respectively,  issuable upon exercise of
currently exercisable stock options.

(6) Of the  directors  and  executive  officers of the  Company,  the  following
beneficially  own the  number  of  shares of  common  stock of  National  Patent
indicated:  Scott N. Greenberg (75,000, of which 48,875 shares are issuable upon
exercise of currently  exercisable  stock options and 24,975 shares which he has
the right to acquire through the conversion of shares of National Patent Class B
Capital  Stock into  shares of common  stock)  (.01%)  and Donald J.  Hasfurther
(5,000 shares, all of which are issuable upon exercise of currently  exercisable
stock options).  Martin M. Pollak and Jerome I. Feldman beneficially own 673,546
(6.0%) and 673,610 (6.0%) shares of National Patent Common Stock,  respectively,
which include (i) currently  exercisable options to purchase 295,042 and 292,542
shares of common  stock,  respectively;  (ii)  options  held by each to purchase
285,325  shares of Class B Capital  Stock which are  convertible  into shares of
National Patent Common Stock on a one-for-one  basis; and (iii) 31,250 shares of
Class B Capital Stock  beneficially  held by each,  which are  convertible  into
shares of National Patent Common Stock on a one-for-one basis. Also included are
1,618 shares for a foundation of which Mr.  Pollak is a trustee,  604 shares for
Mr. Pollak,  1,107 shares for Mr. Feldman and 1,711 shares for all directors and
executive officers as a group, issuable upon the conversion of National Patent's
12% Subordinated  Debentures Due 1997. Mr. Pollak disclaims beneficial ownership
of 5,752 shares held by his wife which are also included.  Mr. Feldman disclaims
beneficial  ownership of the 604 shares  issuable  upon the  conversion of bonds
pursuant to the Debentures, and 1,173 shares held by his wife and children which
are  also  included.  All  directors  and  executive  officers  of  the  Company
(exclusive  of Messrs.  Pollak and Feldman) as a group  beneficially  own 76,063
shares of  common  stock of NPDC,  of which  71,913  shares  are  issuable  upon
exercise of currently  exercisable stock options.  All of such persons have sole
voting and investment power as to all shares except as indicated.

(7)   Member of the Executive Committee.

(8)   Member of the Compensation Committee.

(9)   Member of the Audit Committee.

Item 13.    Certain Relationships and Related Transactions

Management Services Agreement

      As of January 1, 1994,  the Company and  National  Patent  entered  into a
three-year  Management  Services  Agreement pursuant to which certain direct and
indirect  services  will be provided to the  Company by National  Patent,  which
agreement  was  automatically  extended for an additional  one year period.  The
services to be  provided by National  Patent  include  management,  legal,  tax,
accounting,  insurance and employee benefit administrative services. The Company
paid $10,000 per month to National Patent in 1996. The Company believes that the
terms of this  agreement are  comparable to those  available  from  unaffiliated
third parties. The Agreement is automatically  renewable for successive one-year
terms unless one of the parties notifies the other in writing that the Agreement
is terminated.  In such event,  the Company will be required to hire  additional
employees to perform these services or to contract with third parties to do so.

Loans and Advances from National Patent

      As of December 31, 1996, the Company's long-term  indebtedness to National
Patent totaled  $3,739,000.  The  indebtedness was comprised of (i) $2.5 million
pursuant to a $2.5 million loan agreement  with National  Patent (see Note 12 to
Consolidated  Financial  Statements),  (ii) cash advances  from National  Patent
totaling  $779,000,  and (iii)  accrued  interest at the prime rate of $460,000.
These proceeds were used to fund the Company's working capital needs.

      In July 1996,  the Company  issued a convertible  note (the "Note") in the
principal amount of $1,000,000 in a private offering (the "Offering")(See Note 6
to  Consolidated  Financial  Statements).  The Company  received net proceeds of
$950,000 from the Offering. The Note matures on June 30, 2001, bears interest at
the rate of 7% per annum,  and is convertible into shares of common stock of the
Company  at a  conversion  price  of $.25  per  share.  In  connection  with the
Offering,  National  Patent  issued  warrants to purchase an aggregate of 82,306
shares of National  Patent  Common Stock,  exercisable  at a price of $12.15 per
share,  provided that the warrants may only be exercised  utilizing the Note. In
the event that the closing  price of the common stock of the Company is at least
$1.00 per share for at least 20  consecutive  trading  days,  the Notes shall be
subject to redemption at the election of the Company,  at a redemption  price of
100% of the  principal  amount  called for  redemption,  together  with  accrued
interest.

      The Company and National Patent have agreed that (i) if the Notes are used
to exercise the warrants prior to a default on the Notes,  National  Patent will
receive  from the Company,  in exchange  for the Notes  shares of the  Company's
common stock at a price equal to 60% of its then current market value,  and (ii)
if the Notes are used to  exercise  the  warrants  after a default on the Notes,
National Patent will receive from the Company,  in exchange for the Notes shares
of the Company's Common Stock at a price equal to 25% of its then current market
value.

      National  Patent has agreed to fund the Company  through June 30, 1997, if
necessary, pursuant to the same terms and conditions as the National Patent Loan
Agreement  described  above and will evaluate its future funding  commitments to
the Company on a quarterly basis. See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."

National Patent's Capital Stock Interest

      Upon completion of the  Distribution,  National Patent held  approximately
6,990,900 shares of Common Stock,  representing  approximately 54% of the Common
Stock  issued and  outstanding  on August 5, 1994  (without  taking into account
outstanding  options and  warrants).  The  Company's  by-laws do not provide for
cumulative voting.  National Patent has entered into a Voting Agreement pursuant
to which it has agreed that,  for a period of three years from August 5, 1994 it
will  vote its  shares  of  Common  Stock (i) such that not more than 50% of the
Company's  directors will be officers or directors of National Patent;  and (ii)
on all matters  presented to a vote of stockholders,  other than the election of
directors,  in the same  manner  and in the  same  proportion  as the  remaining
stockholders of the Company vote. National Patent, nevertheless, will be able to
influence   substantially   the   affairs  of  the   Company.   See   "Principal
Stockholders."

Certain Employment Matters

      Several  officers and  directors  of the Company  also render  services to
National Patent. Mr. Martin M. Pollak, President,  Chief Executive Officer and a
director of the Company,  is Executive Vice President,  Treasurer and a director
of  National  Patent.  Mr.  Jerome I.  Feldman,  Chairman  of the Board of,  and
consultant to the Company,  serves as President,  Chief Executive  Officer and a
director of National  Patent.  Finally,  Mr. Scott N.  Greenberg,  the Company's
Chief Financial Officer serves as Vice President and Chief Financial Officer and
a director of National Patent. See "Management."

Tax Allocation Agreement

      In connection with the Distribution,  National Patent and the Company have
entered  into a tax  allocation  agreement,  dated as of August 5, 1994,  which,
among other things,  provides for the allocation between National Patent and the
Company of (i)  responsibility for the preparation and filing of tax returns and
the payment of tax liabilities and (ii) entitlement to tax refunds.

      In general,  the tax allocation  agreement  provides that National  Patent
will  indemnify  and hold  harmless  the  Company  and its  present  and  future
affiliates,  including NPD Trading  (collectively,  the "ADC Group") against tax
liabilities of National Patent or any of its affiliates or subsidiaries  that is
not a member of the ADC Group (the "National Patent Group") and (ii) all federal
income tax  liabilities  of the ADC Group,  except  deferred tax  liabilities as
recorded under generally accepted accounting  principals,  until August 5, 1994.
The Company will  indemnify and hold National  Patent  harmless  against (i) all
federal income tax  liabilities of the ADC Group for all periods after August 5,
1994 and (ii) all tax liabilities of the ADC Group other than federal income tax
liabilities.

      From  January  29,  1990  through  August 5, 1994,  the  Company  reported
approximately   $2,100,000  in  net  operating   losses  in  National   Patent's
consolidated Federal Income Tax Return. As a result of the loss allocation rules
contained  in  the  Federal   income  tax   consolidated   return   regulations,
approximately  $263,000 of net operating loss carryforwards are allowable to the
Company upon  ceasing to be a member of National  Patent's  consolidated  return
group. As agreed between  National Patent and the Company,  National Patent will
not compensate  the Company for any use by the National  Patent Group of the net
operating losses of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      Mr. Pollak,  the Company's  President and Chief Executive  Officer and Mr.
Feldman,  the  Company's  Chairman of the Board and a consultant to the Company,
served on the  Compensation  Committee  of the Company for the past year.  Other
than the foregoing,  no director or executive officer of the Company served as a
director or executive  officer of any other  corporation  that has a director or
executive  officer  who is also a director  or a board  committee  member of the
Company.


<PAGE>


                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

            (a)(1) The following  financial  statements are included in Part II,
            Item 8:
                                      Page

                  Independent Auditors' Report..................13

                  Financial Statements:

                  Consolidated Balance Sheets -
                  December 31, 1996 and 1995....................14

                  Consolidated Statements of
                  Operations - Years ended
                  December 31, 1996, 1995 and 1994..............16

                  Consolidated  Statements  of  Changes  in  Stockholders'Equity
                  (Deficiency)-   Years  ended  December  31,  1996,  1995,  and
                  1994.......17

                  Consolidated Statements of Cash Flows
                  Years ended December 31, 1996, 1995 and 1994..18

                  Notes to Consolidated Financial Statements....20

(a)(2)      Schedules have been omitted because they are not required or are not
            applicable,  or the required  information  has been  included in the
            financial statements or the notes thereto.

(a)(3)      See accompanying Index to Exhibits

(b)   There were no Reports on Form 8-K filed by the Registrant  during the last
      quarter of the period covered by this report.


<PAGE>


                                   SIGNATURES

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

                                    AMERICAN DRUG COMPANY

                                    BY:   Martin M. Pollak, President
                                         and Chief Executive Officer
Dated:      March 27, 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


Martin M. Pollak..            President, Chief Executive Officer and Director
            ......            (Principal Executive and Operating Officer)

Jerome I. Feldman.            Chairman of the Board


Scott N. Greenberg                  Chief Financial Officer and (Principal
            ......            Financial and Accounting Officer)

Edward Dunay......            Director


John D. Scanlan...            Director


Arthur T. Downey..            Director



<PAGE>







                                INDEX TO EXHIBITS


Exhibit No. ......Document                                              Page
-----------       --------                                              ----



3.          ......Amended Certificate of Incorporation of the Registrant.*

3.1         ......By-laws of the Registrant. Incorporated herein by
            ......reference to Exhibit 3.2 of the Registrant's
            ......Registration Statement on Form S-1 filed on
            ......July 22, 1994, Registration Statement No. 33-78252.

10.         ......1994 Stock Option Plan of the Registrant.
            ......Incorporated herein by reference to Exhibit 10.1 of
            ......the Registrant's Registration Statement on Form S-1
            ......filed on July 22, 1994, Registration Statement
            ......No. 33-78252.

10.1        ......Transfer and Distribution Agreement. Incorporated
            ......herein by reference to Exhibit 2.1 of the Registrant's
            ......Registration Statement on Form S-1 filed on July 22,
            ......1994, Registration Statement No. 33-78252.

10.2        ......Management Services Agreement, dated as of
            ......August 5, 1994, between National Patent Development
            ......Corporation and the Registrant.  Incorporated herein
            ......by reference to Exhibit 10.3 of the Registrant's
            ......Registration Statement on Form S-1 filed on July 22,
            ......1994, Registration Statement No. 33-78252.

10.3        ......Employment Agreement, dated as of January 1, 1994,
            ......between Martin M. Pollak and the Registrant.
            ......Incorporated herein by reference to Exhibit 10.4
            ......of the Registrant's Registration Statement on
            ......Form S-1 filed on July 22, 1994, Registration
            ......Statement No. 33-78252.

10.4        ......Consulting Agreement, dated as of January 1, 1994,
            ......between Jerome I. Feldman and the Registrant.
            ......Incorporated herein by reference to Exhibit 10.5
            ......of the Registrant's Registration Statement on
            ......Form S-1 filed on July 22, 1994, Registration
            ......Statement No. 33-78252.

10.5        ......Form of Generic Pharmaceutical Products Supply
            ......Agreement.  Incorporated herein by reference to
            ......Exhibit 10.7 of the Registrant's Registration
            ......Statement on Form S-1 filed on July 22, 1994,
            ......Registration Statement No. 33-78252.

10.6        ......Form of Warrant Agreement, dated as of
            ......August 5, 1994, between the Registrant,
            ......The Harris Trust Company of New York, as Warrant
            ......Agent, and the holder of Warrants from time to time.
            ......Incorporated herein by reference to Exhibit 10.8 of
            ......the Registrant's Registration Statement on Form S-1
            ......filed on July 22, 1994, Registration Statement
            ......No. 33-78252.

10.7        ......Tax Allocation Agreement, dated as of August 5, 1994,
            ......between National Patent Development Corporation and
            ......the Registrant. Incorporated herein by reference to
            ......Exhibit 10.9 of the Registrant's Registration
            ......Statement on Form S-1 filed on July 22, 1994,
            ......Registration Statement No. 33-78252.

10.8        ......Voting Agreement, dated as of August 5, 1994, from
            ......National Patent Development Corporation to the
            ......Registrant. Incorporated herein by reference to
            ......Exhibit 10.10 of the Registrant's Registration
            ......Statement on Form S-1 filed on July 22, 1994,
            ......Registration Statement No. 33-78252.

10.9        ......Stock Purchase and Loan Agreement, dated as of
            ......August 5, 1994 between National Patent Development
            ......Corporation and the Registrant. Incorporated herein
            ......by reference to Exhibit 10.11 of the Registrant's
            ......Registration Statement on Form S-1 filed on
            ......July 22, 1994, Registration Statement No. 33-78252.

21          ......Subsidiaries*

*Filed herewith.