CHRONIMED INC, 10-K405, 1996-09-12

CHRONIMED INC
10-K405, 1996-09-12
CATALOG & MAIL-ORDER HOUSES

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

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended Commission file number
June 28, 1996 0-19952

CHRONIMED INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)

Minnesota 41-1515691
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

13911 Ridgedale Drive, Minnetonka, Minnesota 55305
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code:
(612) 541-0239

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share

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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405) 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 ]

Aggregate market value of voting stock of registrant held by
non-affiliates as of close of business on September 6, 1996, was approximately
$144 million based on the closing price of $12.50 per share reported on the
NASDAQ Stock Market. The number of shares of Common Stock outstanding as of
September 6, 1996 is 12,515,643.

Portions of the registrant's 1996 Annual Report to Shareholders are
incorporated by reference in Parts II and IV of this Form 10-K. Portions of the
registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on November 13, 1996, to be filed with the Commission are
incorporated by reference in Part III of this Form 10-K.

PART I

ITEM 1. BUSINESS

GENERAL

Chronimed Inc. ("Chronimed" or the "Company") develops, markets and
distributes prescription drugs, medical products and educational materials by
mail and retail pharmacy to specific populations of patients with chronic
conditions. By focusing on specific chronic conditions, the Company believes it
is able to provide valuable services to: the patients affected by chronic
conditions; the insurance companies, health maintenance organizations, preferred
provider organizations, government agencies and other third-party payors
("Payors") that pay a large portion of the related health care costs; the
developers and manufacturers that produce the prescription drugs and other
products needed to manage chronic conditions; and the institutions, foundations
and health care providers working with these patients. The patient populations
for which the Company believes its services are most effective include patients
who:

* Require a costly regimen of maintenance prescription drugs or
other medical products over the course of their lives;

* Are treated by health care specialists; and

* Require a significant amount of self-management and on-going
education.

The Company is currently serving four such populations in the main: patients
with diabetes, patients who have had an organ transplant, patients with
HIV/AIDS, and patients who self- administer injectable medications. Starting
July 1996, Chronimed has increased its efforts in addressing the needs of
HIV/AIDS patients through the Company's acquisition of StatScript Management
Services, Inc., and its nine specialty HIV/AIDS pharmacies. The Company is
investigating programs for a variety of other chronic conditions.

Chronimed provides patients with a convenient, competitively-priced
source of prescription drugs, medical and clinical nutrition products and a
variety of educational materials designed to help patients achieve maximum
control over their chronic conditions. Often, the greater the effort a patient
makes to stabilize or control his or her chronic condition, the lower the
incidence of complications and the better the patient's quality of life.

Historically, the Company has obtained patients primarily through
referrals from health care providers and direct patient contacts. As employers
have attempted to control their escalating health care costs, Payors have
increasingly adopted various specialized managed care techniques in order to
limit the costs of health care. The specialty managed care industry has
developed principally in response to the demand from employers and Payors for
more effective control of cost increases in certain sectors, such as patients
with chronic conditions. In 1994, an estimated 63% of employees in the United
States who were covered by a healthcare plan were enrolled in a managed care
program, up from 53% in 1993. Chronimed seeks to adapt managed care techniques
or to develop new techniques to manage the particular delivery systems, cost
structures, and utilization characteristics of patients with chronic conditions.
As a result of the increasing role of managed care, coupled with the Company's
experience in managing specific patient groups, patient referrals are
increasingly coming from the Company's Payor programs.

The Company has developed relationships with certain treatment centers,
foundations and associations which specialize in the treatment or support of
patients with chronic conditions. These relationships provide the Company with
access to a large number of individuals with chronic conditions and to the
health care providers treating these conditions.

Chronimed believes that its system is well-suited for developers and
manufacturers of pharmaceutical and medical products designed for small or
hard-to-identify patient populations. Chronimed provides these companies with
assistance in the design and rapid introduction of their products, a cost
effective means for distributing these products to specific patient populations,
and a method for monitoring the use of these products as well as outcomes.

Chronimed has increased its emphasis on the development and licensing
of proprietary products suitable for distribution through its system. Through
its agreement with Orphan Medical, Inc., the Company has the right to sell a
number of proprietary drugs. Additionally, Chronimed has exchanged rights to
sell other Orphan Medical drugs for future royalties, some of which are expected
to be received in fiscal 1997. The Company is also developing an innovative
blood glucose monitor that uses a continuous membrane system. Pursuant to
exclusive distribution agreements, the Company currently markets
diabetes-related products, including the Supreme blood glucose monitor and
reagent strip, generic reagent strips, infusion sets and a lancing device.

MARKET AND GROWTH STRATEGY

The Company's strategy is to further develop and increase its
distribution of prescription drugs, medical products and educational materials
by increasing the number of patients served through its Payor programs;
increasing sales of proprietary and licensed products to new patients and
institutions by expanding sales of existing products and developing or licensing
new products; increasing special distribution programs with manufacturers; and
expanding its services to meet the special needs of persons with other chronic
conditions.

Chronimed serves primarily four patient populations: patients with
diabetes, patients who have had an organ transplant, patients with HIV/AIDS, and
patients who self-administer injectable medications.

DIABETES. Chronimed has long served the needs of patients with
diabetes, a chronic disease in which the body's metabolism of glucose
is ineffective due to inadequate or complete lack of insulin production
by the pancreas. Many complications can arise from the damage that
diabetes inflicts upon the body's vascular and neural systems,
including reduced vision or blindness, stroke, heart disease, kidney
failure, impotence and loss of circulation in the limbs, possibly
leading to amputation. In 1993, the National Institutes of Health
announced the results of a multi-year project, the Diabetes Control and
Complications Trial, which demonstrated that more frequent monitoring
of blood glucose levels and more frequent insulin injections, along
with a regimen of diet and exercise could reduce complications of
diabetes, such as blindness, loss of nerve sensation and amputation, by
as much as 60%. An estimated 1.5 million Americans have Type I
diabetes, in which the pancreas produces little or no insulin. A person
with Type I diabetes requires daily insulin injections for survival.
The Company believes that a person with Type I diabetes spends an
average of about $1,000 a year on required supplies.

ORGAN TRANSPLANT. In July 1990, the Company expanded its
services to patients who have had an organ transplant. These patients
face many long-term physical, financial and psychological challenges
due to the complicated drug regimens they are required to maintain.
According to a national transplantation study, there were approximately
151,000 transplant operations from 1984 through 1994, of which
approximately 18,000 were performed in 1994. There are approximately
275 transplant centers in the United States. The Company's transplant
patients typically require an average of about $8,000 of prescription
drugs during the first year following transplantation and about $5,000
of such drugs per year thereafter.

HIV/AIDS. Chronimed began to serve patients with HIV/AIDS
through its mail order pharmacy in 1994. With the July 1996 acquisition
of the nine StatScript specialty pharmacies, the Company has increased
its commitment to HIV/AIDS patients. Patients with AIDS, or acquired
immune deficiency syndrome, have a suppressed immune mechanism and a
high mortality rate. The cause of the suppression of the immune
mechanism is HIV, or human immunodeficiency virus. HIV results in
immunosuppression by attacking and destroying T cells that coordinate
much of the network of normal immune responses. Without normal immune
responses, patients are unable to fight and overcome the onset of
routine infections. These patients face many long-term physical,
financial and psychological challenges due to the often debilitating
nature of the disease. The Company's programs for these patients are
intended to assist them in gaining maximum control over their disease
in an effort to lower the incidence of complications and improve their
quality of life. In 1995, it was estimated that the total market for
HIV/AIDS therapeutics was $1.1 billion with the amount expected to
double by 1998 due to new drug discoveries. The Company's HIV/AIDS
patients served by the StatScript pharmacies currently require an
average of more than $4,000 a year of prescription drugs.

SELF-INJECTABLE MEDICATIONS. In late 1994, the Company began
serving the patients who self-administer injectable medications through
a pilot program with Prudential Pharmacy Management. Subsequent to the
fiscal 1995 year end, Prudential permitted the Company to offer the
injectable program to its entire HMO network. The Company has also
begun servicing patients under similar contracts with several large
Payors. Many conditions may be treated with self-administered
injectable medications, including growth hormone deficiency,
hemophilia, cancer, hepatitis B and C, and multiple sclerosis. The
Company's program for these patients cuts costs through reduced product
acquisition costs, efficient delivery systems and streamlined claims
and billing services. These cost savings can be passed on to Payors,
making the Company's program attractive to managed care groups. The
Company estimates that the market for self-administered injectable
medications in the United States is approximately $2 billion.

The Company is currently considering programs for patients with cancer,
cystic fibrosis, Crohn's disease, end stage renal disease, ophthalmic diseases,
asthma, cardiology and other chronic conditions. The Company has not generated
material revenues from any of these programs.

MAIL SERVICES

The Company provides prescription drugs, medical products and clinical
nutrition products through mail order to the patients it serves. The Company
believes that it can distribute these products at a cost competitive with local
and national retail and hospital pharmacies by providing economies of scale
through more efficient operations, automated systems and higher order amounts;
providing special order drugs at lower costs than most non-mail order pharmacies
due to the extra charges these pharmacies often incur to obtain and stock drugs
which they do not prescribe regularly; and reducing misuse or abuse of
prescription drugs. Patients also benefit from the convenience of having
products delivered directly to their homes and, in many cases, from lower
initial out-of-pocket costs for such items. Orders are generally received by
telephone and are shipped by UPS or Federal Express to insure prompt delivery.
The Company maintains toll-free telephone numbers which can be used to place
orders.

Much of the Company's mail services revenue is from immunosuppressant
drug sales to patients who have had an organ transplant. These patients may have
standard indemnity coverage, Medicare or Medicaid from most states. The Company
also derives significant mail services revenues from its Home Service Medical
Program, which serves more than 10,000 patients with Type I diabetes in the
United States. These patients generally have either standard indemnity or Blue
Cross/Blue Shield coverage, which enables the Company to accept assignment of
benefits. The Company currently accepts assignment of benefits from patients
covered by over 4,500 Payors. Prior to shipping an order, the Company verifies
insurance eligibility and collects the patient's co-payment.

PAYOR PROGRAMS

Health care costs have increased significantly in the United States in
recent years. According to authorities in the health care industry, national
health expenditures are expected to reach $1 trillion in 1995 (14.3% of GDP), up
from $838 billion in 1992 (14.0% of GDP). Employers bear a significant share of
this cost through payments for employee benefit plans. Industry surveys have
shown that health benefit costs per employee dropped slightly in 1994 to $3,741,
the first time in two decades inflation out-paced health care cost increases.
This coincides with the increase in use of managed care programs to control
benefits costs. Chronimed's Payor programs address this shift toward managed
care.

Chronimed offers Payors the following services through its Payor
programs:

* Cost savings through distribution of prescription drugs and
other products at a cost competitive with local and national
retail and hospital pharmacies.

* Review and monitoring of compliance with prescribed drug
regimens. By monitoring patient order patterns and drug use,
the Company can assist Payors and health care providers in
early identification of patients whose treatment outcomes may
be improved by more support or assistance in managing their
chronic condition.

* Patient counseling by pharmacists. By focusing on the needs of
specific patient populations, the Company's pharmacists become
expert in the requirements and treatment patterns for the
identified patient populations.

* Distribution of educational materials designed to help
patients achieve maximum control over their chronic
conditions.

* Ability to communicate with specific patient populations
regarding new treatment techniques.

* Assistance in the development of approved lists of covered
prescription drugs and medical products, or formularies, as
part of the design of a health care plan for specific chronic
conditions.

In 1986, the Company signed its first Payor agreement with Med Centers
Health Care, Inc. ("MCHC"), a Minnesota non-profit corporation managed by Aetna
Management Group, Inc., a subsidiary of Aetna Life and Casualty Insurance
Company. MCHC provides the Company with the names of MCHC's members who have
diabetes and who are insulin dependent and recommends to these members that they
purchase their medical products from the Company. The Company has worked with
Payors and manufacturers of certain diabetes-related products to develop
discount programs pursuant to which a manufacturer agrees to provide price
discounts for certain of its products, provided that the Payor authorizes
reimbursement only for that manufacturer's products. The manufacturer and Payor
can assure compliance with the program by designating Chronimed as the sole
source for the products for the Payor's plan members. The Company currently has
contracts with the following Payors to serve their members with diabetes: MCHC;
the Health Insurance Plan of Greater New York; the Health Insurance Plan of New
Jersey; Health Partners, Inc.; and Group Health, Inc.

In 1993, the Company signed its first Payor agreement in the organ
transplant area with Travelers Health Network. Like the Payor programs for
diabetes patients, Payor programs for patients who have had an organ transplant
provide these patients with a convenient source of required pharmaceutical
products, as well as educational materials. Significant costs are often
associated with the treatment of organ rejection and other complications that
are likely to occur with patients who do not follow their prescribed drug
regimens. Therefore, an important element of the Company's Payor programs is the
Company's ability to monitor patient compliance with prescribed drug regimens
and to work with health care providers to assist them in providing continuity of
treatment and patient support following discharge from treatment centers.

Some Payors have established "Centers of Excellence" programs whereby
they require plan members who are seeking treatment for certain conditions, such
as organ transplantation, to obtain treatment at designated treatment centers
which have demonstrated expertise in the particular treatment procedure. Many of
the designated Centers of Excellence for organ transplants are the same centers
as those already being served by the Company's sales force. The Company believes
that its existing relationships with these treatment centers, together with the
increasing number of patients directed to these centers, will increase the
number of patients served by the Company.

The Company has also provided Payor programs for patients with
HIV/AIDS, cystic fibrosis, hemophilia, growth hormone deficiency and cancer.
These programs are similar, particularly in the emphasis on monitoring of
compliance with prescribed drug regimens and providing patient support, to
Chronimed's Payor programs for persons who have had an organ transplant. The
Company currently has contracts with the following Payors to provide various
specialty pharmacy services: Prudential Insurance Company; Aetna Life and
Casualty Insurance Company; Benefit Trust Life; BCS Insurance Company, an
affiliate of a number of Blue Cross and Blue Shield organizations; Provider
Networks of America; DPS; MetraHealth and United Resource Network, Inc.,
subsidiaries of United Healthcare, Inc.

MANUFACTURER DISTRIBUTION SERVICES

The Company offers specialized distribution programs for developers and
manufacturers of prescription drugs and medical and clinical nutrition products
for small or hard to identify patient populations. In 1994, Chronimed spun off
Orphan Medical, then a division responsible for pharmaceutical development. In
doing so, the Company retained the distribution rights to several of Orphan
Medical's initial products. The Company expects to see sales from this area in
fiscal 1997. The Company has since signed agreements with other manufactures
such as Ortho Biotech and Centeon to administer valuable patient assistance
programs and distribute their products. During fiscal 1995, the Company was
chosen as the exclusive distributor of Cystagon, a drug manufactured by Mylan
Pharmaceuticals, Inc. Cystagon is indicated for Nephropathic Cystinosis, a rare
genetic disorder. The Company believes these programs are evidence of how the
systems and relationships it has developed in serving specific patient
populations can be leveraged into new business opportunities.

DISTRIBUTION AGREEMENT WITH ORPHAN MEDICAL, INC.

Orphan Medical, Inc. ("OMI"), was incorporated in 1994 as a successor
to the business previously conducted by the Orphan Medical Division of Chronimed
Inc. OMI was "spun-off" in 1994 through a dividend distribution of its common
stock to the Company's shareholders. The Company initially retained the rights
to market and distribute in the United States and its territories those products
being developed by OMI at the time of the spinoff. The products under
development are for "orphan" drug populations where the population in the United
States expected to benefit from the drug is limited. The Company believes its
distribution systems are well suited to marketing these products. The Company
expects to receive initial revenue from the products for which it currently has
distribution rights after fiscal 1997.

Chronimed has determined that two of the products for which it had
initial rights, Elliotts B(TM) solution and Antizol-Vet(TM) , which have
applications for marketing approval pending before the FDA, can be more
effectively distributed by a hospital distribution company and a distributor of
veterinary products, respectively. OMI has, therefore, agreed to pay Chronimed a
royalty in consideration for releasing the Company from the provision in the
Marketing and Distribution Agreement which had granted Chronimed exclusive
domestic distribution rights with respect to these two products. In addition,
Chronimed and OMI are currently discussing Chronimed's distribution rights and
obligations relating to Cystadane(TM) , and may further amend the Marketing and
Distribution Agreement with respect to this product in order to provide for its
optimal distribution. Further, Chronimed and OMI will continue to evaluate the
distribution requirements for other products, including remaining products for
which Chronimed has exclusive domestic distribution rights.

PRODUCTS

The Company stocks over 3,000 brand name and generic prescription drugs
and medical products. Diabetes-related products include durable equipment such
as blood glucose monitors, and consumables such as insulin, syringes, reagent
strips, infusion sets, lancets and urinalysis products.

The Company provides immunosuppressant drugs, including Sandimmune(R),
and Neoral(R), primarily to patients who have had an organ transplant.
Approximately 44% and 55% of the Company's prescription drug sales, or 19% and
26% of its total revenues in the fiscal years ended June 28, 1996 and June 30,
1995, respectively, were derived from sales of Sandimmune(R) and Neoral(R).
Immunosuppressants are drugs which inhibit a person's natural immune system.
Transplant patients require immunosuppressant medication on a continuous basis
for the rest of their lives to avert organ rejection. The Company also provides
other prescription and non- prescription drugs that transplant patients may
require to alleviate the significant side effects of immunosuppressant therapy
or to treat other illnesses. Other drugs for organ transplant and other patients
serviced by the Company include Protropin(R), Neupogen(R), Intron(R)A,
Betaseron(R), Humatrope(R), Recombinate(R), Procrit(R) and Stimate(R).

In order to better control the prices it pays for products and to
improve its gross margins on product sales, the Company has increased its
emphasis on the licensing and development of proprietary products suitable for
distribution through its specialized marketing and distribution system.
Proprietary products represent a vital component of the Company's sales and
marketing strategy.

The Company presently distributes the Supreme blood glucose monitor and
reagent strip, generic reagent strips, infusion sets and a lancing device. The
arrangements pursuant to which these products are distributed generally require
minimum annual purchases or payments to maintain the exclusive distribution
rights within specified territories. Distribution territories for each of the
Company's current agreements include at least North America and are for terms
ranging from the life of the applicable patents in the case of the Supreme meter
and reagent strip to two years for the lancing device. The Company has various
arrangements with respect to the Supreme meter and reagent strip and generic
reagent strips for distribution of these products to markets not serviced by the
Company.

The Company believes that the Supreme blood glucose monitor is
well-suited for use in health care facilities, particularly long-term care
facilities, where the same monitor is used to test the blood glucose levels of
more than one patient. The Company has the rights to market and manufacture the
Supreme test strips in defined territories; the Company's production met all of
its sales requirements in fiscal 1996. Also, the Company is developing an
improved Supreme monitor expected to be available in fiscal 1997.

The Company also distributes under the Quick Check brand name a line of
generic reagent strips, including a strip for the Lifescan One Touch(R) monitor,
the most widely used blood glucose monitor. Lifescan, Inc., a subsidiary of
Johnson & Johnson, the maker of the monitor, commenced litigation in 1993
against the Company's distributor, seeking an injunction and unspecified damages
for the distribution of the strip based on the claim that its use was unsafe and
violated Lifescan's patent with respect to the use of strips with the monitor.
Subsequently, Lifescan sued the manufacturer of the strip. All parties to the
litigation reached an out-of-court settlement in December 1994. In January 1995,
the manufacturer of the strip placed a hold on its production while improvements
were made to the manufacturing process. Shipments did not resume until August
1995. The adverse revenue impact to the Company in fiscal 1995 was approximately
$4,000,000. Revenues from the sale of this strip in fiscal 1995 were
approximately $5,870,000. Revenues from the sale of this strip were
approximately $13,820,000 in fiscal 1996.

The Company is currently developing an innovative blood glucose monitor
that uses a continuous membrane system. Clinical testing of this product is
expected to commence in fiscal 1997, and the Company expects to begin selling
this product in fiscal 1998 assuming the development and testing is successful.

Since 1993, the Company has distributed clinical nutrition products for
persons suffering from various chronic conditions. Based on Chronimed's work
with chronic disease patients, the Company believes that the quality of life for
persons suffering from many chronic conditions can be significantly improved by
good nutrition and that its specialized marketing and distribution system is
well-suited for the distribution of such products. Although the Company's
revenues from clinical nutrition products have not been material to its total
revenues, the Company believes that its existing clinical nutrition products
support the marketing of other drugs and products through its mail distribution
channels.

The Company acquired the assets of StatScript Management Services, Inc.
and its associated nine specialty pharmacies on July 1, 1996 for $10,250,000 in
cash, plus a contingent payment of up to $2,250,000. StatScript provides
prescription drugs and specialty pharmacy services to patients with HIV and
AIDS. The acquisition of StatScript gives the Company a significant presence in
the HIV/AIDS pharmacy marketplace from which to grow revenues and profits.

RETAIL DIABETES SERVICE CENTERS

The Company operates three retail diabetes stores. While the Company
believes the continuation of its retail store program supports its diabetes
products distribution business, it does not expect to significantly expand its
retail diabetes operations.

PUBLISHING

The Company's publications feature health care themes including
nutrition, stress management and the physical, psychological and sociological
needs of patients with chronic conditions. The Company believes its magazine,
books and pamphlets are important to its overall strategy. These educational
materials assist individuals with chronic conditions to care for themselves,
provide the Company with favorable recognition from and access to health care
providers and assist the Company in the development of patient databases.

The Company currently publishes or distributes more than 80 books and
pamphlets. Chronimed's books have been translated into numerous languages and
are sold in more than 20 countries. Chronimed believes it is one of the largest
publishers of diabetes-related materials and nutrition information in the United
States.

The Company publishes for the American Dietetic Association, the
Juvenile Diabetes Foundation, the National Coalition for Cancer Survivorship,
Joslyn Diabetes Center, and distributes for the International Diabetes Center.

SALES AND MARKETING ACTIVITIES

Historically, the Company has obtained patients primarily through
referrals from health care providers and direct patient contacts. As a result of
Payors' increasing reliance upon managed care techniques to control their
escalating health care costs, the Company's patient referrals are increasingly
coming through its Payor programs. As a result of this change, the Company has
increased its marketing activities directed at Payors and at companies that
provide managed care services to Payors. The Company also markets its
prescription drugs, medical products and services nationally to Payors, case
managers and specific populations of patients with chronic conditions. Chronimed
believes that the establishment of working relationships with health care
providers, treatment centers, foundations and associations is an important
element of its sales and marketing strategy.

Sales activities are generally carried out through direct sales calls
on Payors, case managers, health care providers and treatment centers; direct
mail and distribution of magazines; and retail stores. The Company has over 20
sales representatives who sell certain of the Company's diabetes products to
health care institutions, primarily long-term care facilities, including one
selling to international customers; approximately 10 sales representatives who
promote the use of the Company's prescription products and systems to Payors and
the more than 250 largest hospitals and specialty clinics in the United States;
one sales representative who promotes the Company's distribution services to
manufacturers; and numerous independent sales representatives who promote the
Company's publications to the retail book trade. The Company's current business
plan includes adding sales representatives to each of these areas.

The Company is actively pursuing relationships with international
distributors for diabetes product sales. All international sales transactions
are in United States dollars to mitigate foreign currency risk.

SUPPLIERS

The Company purchases prescription drugs and medical products directly
from manufacturers and from wholesalers. The availability and prices of products
distributed by the Company are subject to market conditions. When available, the
Company takes advantage of special discounts offered by suppliers. The Company
stocks over 3,000 brand name and generic prescription drugs and medical
products. When the Company receives a prescription for a drug which it does not
have in inventory, it generally can obtain the required item from a wholesaler
by the next business day.

The Company currently purchases Sandimmune(R) and Neoral(R), the
primary immunosup pressive drugs used in the United States, from Sandoz, A.G.
which is the only manufacturer of Sandimmune(R) and Neoral(R). Sandimmune(R) and
Neoral(R) are generally available from several wholesale drug suppliers.
Approximately 44% and 55% of the Company's prescription drug sales, or 19% and
26% of its total revenues in the fiscal years ended June 28, 1996 and June 30,
1995, respectively, were derived from sales of Sandimmune(R) and Neoral(R). If
the Company were unable to purchase Sandimmune(R) and Neoral(R) and unable to
obtain a substitution, its revenues and profitability would be materially and
adversely affected.

The Company believes that a significant portion of its anticipated
future growth will be in connection with the expansion of its HIV/AIDS business,
its Payor programs, increases in special distribution programs for manufacturers
of prescription drugs and other medical products and increased sales of existing
or new proprietary and licensed medical products. Growth in the specialty
distribution programs and proprietary and licensed product areas and, to a
lesser extent, in the Payor programs and HIV/AIDS areas, will be dependent on
Chronimed's ability to develop and maintain arrangements for the distribution of
specific products which may be available from only one or a limited number of
manufacturers. As a result, the Company's business in the future may be
dependent upon its on-going arrangements with the manufacturers of various
products and their ability to satisfy the Company's requirements and pricing and
product criteria.

At times, production of the Supreme reagent strip and one of the Quick
Check reagent strips has been inadequate to meet the Company's market demands,
causing a significant order backlog for these products. In an attempt to ensure
adequate supplies of the Supreme reagent strip in the future, the Company began
manufacturing this product in-house in July 1995. Certain materials used in this
manufacturing process are only available from one or a limited number of
vendors. The Company's ability to manufacture the Supreme reagent strip will be
dependent on its ability to maintain adequate supplies of materials from its
vendors. In January 1995, the manufacturer of the Quick Check reagent strip
placed a hold on its production while improvements were made to the
manufacturing process. Shipments did not resume until August 1995. The adverse
revenue impact to the Company in fiscal 1995 was approximately $4,000,000.
However, in fiscal 1996, the Company experienced no production holds and reached
$13,800,000 in revenue.

REIMBURSEMENT

The Company has developed a significant level of expertise in managing
the reimbursement process. Generally, the Company contacts the Payor before
delivering products to determine the patient's health plan coverage and the
portion of costs that the Payor will reimburse. The Company's reimbursement
specialists review issues such as lifetime limits, preexisting condition clauses
and the availability of special state programs. The Company accepts assignment
of benefits from over 4,500 Payors, which substantially eliminates the claims
submission process for many patients.

The Company services a significant number of patients covered by
Medicaid and special state programs which tend to pay claims more slowly than
private Payors. Collection from these sources is generally more labor intensive
than collection from private Payors. These factors reduce the profitability of
sales to patients covered by Medicaid and special state programs in contrast to
patients with private Payor coverage. The Company expects the percentage of the
patients it services who have Medicaid or special state program coverage to
decrease in the foreseeable future.

Efforts by Payors to eliminate, contain or reduce costs through
coverage exclusions, lower reimbursement rates, greater claims scrutiny, claim
delays or denials and other similar measures could adversely affect the
Company's revenues, profitability and cash flow. In addition, the Company may be
required to maintain a licensed pharmacy in certain states in order to qualify
for reimbursement under state administered reimbursement plans. Certain Payors
set lifetime limits on the amount reimbursable to patients for medical costs.
Certain of the Company's patients may reach these limits because of the high
cost of their medical treatment and associated pharmaceutical regimens. To date,
the Company has not had significant experience with patients reaching lifetime
limits. Certain Payors may attempt to further control costs by selecting certain
firms to be their exclusive providers of pharmaceutical or other medical product
benefits. If any such arrangements were with the Company's competitors, the
Company would be unable to be reimbursed for purchases made by such patients.

INFORMATION SYSTEMS

The Company's operations include a fully-integrated computer system and
an automatic telephone call distribution system. The computer system provides
the Company's service representatives with all the on-line information needed to
service patients and other customers, including previous product purchase
histories, Payor billing and account balance information, inventory levels and
co-payment amounts for patients in Payor programs. The distribution sites are
on-line with inventory control, purchasing, shipping and receiving functions to
enhance order fulfillment. The telephone system has an automatic call
distribution capability which distributes incoming calls to the customer service
representatives. The Company's ability to manage growth in revenues is largely
dependent upon its ability to continue to expand, upgrade and develop its
information systems.

COMPETITION

The distribution of prescription drugs, medical products and clinical
nutrition products is a highly competitive business. The Company's principal
competitors consist of national mail-order pharmacies, local and national retail
and hospital pharmacies, cost containment and managed care companies and medical
equipment suppliers. Many of these companies have substantially greater
resources than the Company. Moreover, the health care industry generally and the
provider segment in particular has experienced and is expected to continue to
experience consolidation. This trend could produce additional competitors having
larger and substantially greater resources than the Company. Competitive
pressure could cause the Company to lose market share or experience significant
price erosion, which would have a material adverse effect upon the Company's
revenues and profitability. The Company competes on the basis of service,
convenience, product availability and price. The Company believes that it
currently has no significant, direct competitor which offers the same or a
similar combination of prescription drugs, medical and nutrition products and
educational materials and services to specific populations of patients with
chronic conditions.

LIABILITY INSURANCE

Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. The Company is further insured for product
liability under various policies of drug manufacturers. There can be no
assurance, however, that claims in excess of the Company's insurance coverage
will not arise. In addition, the Company's insurance policies must be renewed
annually. Although the Company has not experienced difficulty in obtaining
insurance coverage in the past, there can be no assurance that it will be able
to do so in the future on acceptable terms or at all.

GOVERNMENT REGULATION

The Company's business is subject to substantial governmental
regulation including laws governing the dispensing of prescription drugs and
laws prohibiting the payment of remuneration for patient referrals. Because
sanctions may be imposed for violations of these laws, compliance is a
significant operational requirement for the Company. Management believes that
the Company is in substantial compliance with all existing statutes and
regulations materially affecting the conduct of its business.

In general, the Company's pharmacy operations are regulated by the
statutes and regulations of Minnesota, where it is licensed as a retail pharmacy
and wholesale distributor of pharmaceuticals, as well as of Arizona, California,
Florida, Illinois, Missouri, Texas, and Utah, where it is licensed as a retail
pharmacy. In addition, the Company currently delivers prescription products from
its licensed pharmacies to patients in other states in which the Company does
not operate a pharmacy. Many of these states have laws or regulations requiring
out-of-state pharmacies to be licensed as a condition to the delivery of
prescription products to patients in such states. The Company believes that it
is in substantial compliance with such laws in substantially all relevant
jurisdictions.

Various federal and state pharmacy associations and some boards of
pharmacy have attempted to promote laws or regulations directed at restricting
the activities of mail service pharmacies to the economic benefit of retail
pharmacies. In addition, a number of states have laws or regulations which, if
successfully enforced, would effectively limit some of the financial incentives
available to third-party payors that offer managed care prescription drug
programs. To the extent such laws or regulations are found to be applicable to
the Company, there is no assurance the Company could comply, and noncompliance
could adversely affect the Company's integrated pharmacy service programs.

In addition to state regulations of pharmacies and pharmacists, federal
statutes and regulations establish standards for the labeling, packaging,
advertising and adulteration of prescription drugs and the dispensing of
"controlled" substances and prescription drugs. To the extent the Company uses
the federal postal service, Federal Trade Commission and United States Postal
Service regulations require mail order sellers to engage in truthful
advertising, to stock a reasonable supply of drugs, to fill mail orders within
thirty days and, if that is impossible, to inform the consumer of his or her
right to a refund. The Company believes that it is in substantial compliance
with the above requirements. Substantially all of the Company's products are
shipped by commercial delivery services.

As a health care company, Chronimed is subject to various federal laws
that regulate the relationship between providers of health care services and
physicians. These laws include the "fraud and abuse" provisions of the Social
Security Act, under which civil and criminal penalties can be imposed upon
persons who pay or receive remuneration in return for inducement of referrals of
patients who are eligible for reimbursement under the Medicare or Medicaid
programs. Violations of the law may result in civil and criminal penalties.
Civil penalties range from monetary fines that may be levied on a per violation
basis to temporary or permanent exclusion from these programs. In addition,
numerous states have laws or legislation pending prohibiting financial
arrangements among health care providers. Violations of these laws include civil
and criminal penalties, as well as the suspension or termination of a provider's
ability to continue to provide services in the state.

The federal prohibitions on inducements for referrals are so broadly
drafted that they may create liability in connection with a wide variety of
business transactions that have been traditional or commonplace in the health
care industry. Courts, the Department of Health and Human Services ("HHS"), and
officials of the Office of Inspector General have construed broadly the fraud
and abuse provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of business and financial relationships between health care
providers and practitioners. "Safe harbor" regulations define a narrow scope of
practices that will be exempted from prosecution or other enforcement action
under the illegal remuneration provisions of the fraud and abuse provisions of
the Social Security Act. Because of the narrow scope of the safe harbor
exemptions, these regulations do not eliminate this uncertainty. These
regulations may be followed by more aggressive enforcement of these provisions
with respect to relationships that do not fit within the specified safe harbor
rules. Similarly, state fraud and abuse laws, which vary from state to state,
are often vague and have rarely been interpreted by courts or regulatory
agencies.

Because of the potentially broad proscriptions contained in federal and
state laws, there can be no assurance that all of the Company's business
practices would be construed to comply with these laws in all respects. However,
in the situations where the Company purchases or provides services and products
or otherwise contracts with health care providers who may be in a position to
refer patients to the Company, the Company believes it has exercised care in an
effort to structure such arrangements to comply with existing federal and state
laws.

The Company's recent expansion of its proprietary and licensed product
activities subjects it to additional regulation by numerous governmental
authorities in the United States and other countries. The Federal Food, Drug and
Cosmetic Act ("FDC Act") governs the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of most
of the Company's proprietary and licensed products. Other federal regulations,
such as the Occupational Safety and Health Act, also affect the Company. Many
states have comparable laws. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.

All products subject to the FDC Act, including food and food
ingredients, are subject to the FDC Act's adulteration and misbranding
requirements, and certain food additives require premarket clearance from the
FDA. Clinical nutrition products are typically regulated by the FDA as foods for
special dietary use, although certain single ingredient nutrient formulations
are typically regulated as drugs. In October 1994, the Dietary Supplement Health
and Education Act of 1994 was signed into law. This Act amends the FDC Act to
establish standards with respect to the manufacture, labeling and introduction
of new dietary supplements. The Act also established the Commission on Dietary
Supplement Labels to conduct a study on the regulation of label claims and
statements for dietary supplements and to report recommendations for changes in
the regulation of dietary supplements by October 1996. No prediction can be made
as to the effect such new regulations, if enacted, may have on the Company's
operations or products.

The FDC Act requires pre-market clearance or pre-market approval by the
FDA prior to commercialization of medical devices. Pursuant to the FDC Act, the
FDA regulates the manufacture, distribution and production of medical devices in
the United States. Medical devices are classified into class I, II or III on the
basis of the controls necessary to reasonably ensure their safety and
effectiveness. The safety and effectiveness can be assured for class I devices
through general controls (e.g., labeling, pre-market notification and adherence
to GMP) and for class II devices through the use of special controls (e.g.,
performance standards, post-market surveillance, patient registries and FDA
guidelines). Generally, class III devices are those which must receive
pre-market approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life- supporting and implantable devices or new devices which
have been found not to be substantially equivalent to legally marketed devices).

Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) pre-market
notification or a pre-market approval application ("PMA"). A 510(k) clearance
will be granted if the submitted data establish that the proposed device is
"substantially equivalent" to a legally marketed class I or II medical device,
or to a class III medical device for which the FDA has not called for PMAs. The
PMA process can be expensive, uncertain and lengthy, frequently requiring from
one to several years from the date the PMA is accepted. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. The review time is often significantly extended by the FDA, which
may require more information or clarification of information already provided in
the submission. Delays in, or the failure to receive, pre-market clearance or
approval of any diagnostic products submitted by the Company could have an
adverse impact on the Company.

Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. A variety of new
approaches have been proposed, including mandated basic health care benefits,
controls on health care spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, and the creation
of large purchasing groups. In addition, some of the states in which the Company
operates have adopted or are considering various health care reform proposals.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery systems and payment methods
and that public debate of these issues will likely continue in the future.
Because of uncertainty regarding the ultimate features of reform initiatives and
their enactment and implementation, the Company cannot predict which, if any, of
such reform proposals will be adopted, when they may be adopted, or what impact
they may have on the Company.

SEGMENT INFORMATION

The Company operates in one major business segment -- health care
services. A description of the Company's business units and related revenues can
be found in the Company's 1996 Annual Report to Shareholders.

SEASONALITY

The Company has experienced a significant seasonal pattern in its
operating results. Historically, the Company has had higher revenues in its
second fiscal quarter (ending December) than in its third fiscal quarter (ending
March). The Company believes the seasonality of its revenues and earnings comes
from the acceleration of purchases of prescription drugs and medical products by
individuals prior to the beginning of a new calendar year (which is generally
when Payors impose new deductible calculations). As sales through Home Service
Medical (the mail order diabetes business) and Specialty Pharmacy (the organ
transplant business) become a less significant part of the Company's total
revenues, the Company believes its revenues and earnings will become less
seasonal.

EMPLOYEES

As of September 10, 1996, the Company employed approximately 280
full-time employees. None of the Company's employees is represented by a labor
union, and the Company believes that its employee relations are excellent.

ITEM 2. PROPERTIES

The Company's corporate offices and distribution facility are located
in Minnetonka, Minnesota, in approximately 31,000 square feet of space leased
for a term expiring July 31, 1997. The Company leases approximately 18,000
additional square feet for Supreme strip manufacturing and product distribution
in Eden Prairie, Minnesota, for a term expiring July 31, 1997. In addition to
the pharmacies in Minnesota, the Company operates pharmacies located in Mesa,
Arizona; South San Francisco, California; Ft. Lauderdale and Miami, Florida;
Chicago, Illinois; Kansas City, Missouri; Dallas and Houston, Texas; and Salt
Lake City, Utah. The leases for these properties expire over periods extending
to 1999. The Company also leases approximately 1,000 square feet of space for a
sales office in Aliso Viejo, California, with the lease expiring May 1, 1998.
The Company's retail diabetes service centers occupy premises leased for terms
ranging from month-to-month to five years.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages as of September 6,
1996, are as follows:

Name Age Position
---- --- --------

Maurice R. Taylor, II 50 Chairman of the Board of Directors, Chief
Executive Officer and President

Dennis C. Burton, Rph 40 Executive Vice President

Norman A. Cocke 51 Senior Vice President, Chief Financial
Officer, and Secretary

Steven A. Crees 42 Senior Vice President

Larry E. Niederkohr, Rph 45 Vice President

Patrick L. Taffe 44 Vice President

Mr. Taylor, a cofounder of the Company, has served as President, Chief
Executive Officer and a director of the Company since 1985. He has been the
Chairman of the Board of Directors since June 1994. From 1977 to 1984, Mr.
Taylor was Executive Vice President and Chief Operating Officer of Summit Gear,
Inc., a manufacturer of precision instruments for the aerospace industry. Before
his employment with Summit Gear, Inc., Mr. Taylor held various management
positions in companies whose principal activities were manufacturing,
distribution and international trade.

Mr. Burton joined the Company in April 1989 and was named a Vice
President in December 1989 and Executive Vice President in July 1994. From 1987
to 1989, he was General Manager of Pharmacy USA, the mail-order pharmacy
division of Rite-Aid Corporation, a national retail pharmacy company.

Mr. Cocke joined the Company in February 1995 in his current position.
From 1992 to 1994, he was Senior Vice President and Chief Financial Officer of
National Computer Systems, Inc., an information systems and services company.
From 1973 to 1991, he was employed by NCR Corporation in a variety of
capacities, most recently as Vice President, Administration of the United States
Group.

Mr. Crees joined the Company in January 1986 and was named a Vice
President in March 1987 and Senior Vice President in July 1994. From August 1982
to January 1986, he was a marketing representative for Baxter Travenol Corp., a
health-care product distribution company.

Mr. Niederkohr joined the Company in June 1994 and was named a Vice
President in September 1994. From 1988 to 1994, he was employed at Caremark Inc.
Prescription Services Division, the mail order pharmacy division of Caremark,
most recently as Director of Technical Services.

Mr. Taffe joined the Company in July 1996 as Vice President of
Information Systems. From 1992 to 1996, he was Vice President, Information
Systems and Operations with MedPower Information Systems, Inc., a business that
consults with companies implementing health care information systems and
processes. Previous employment included top MIS positions with Carlson Travel
Group, and Damark and CVN Companies, both of which were in the mail order
business.

PART II

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

The information in the section titled "Market for the Registrant's
Common Stock and Related Shareholder Matters" on page 30 of the Chronimed Inc.
1996 Annual Report to Shareholders is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information in the section titled "Selected Financial Data" on page
14 of the Chronimed Inc. 1996 Annual Report to Shareholders is incorporated
herein by reference.

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

The information in the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 15 through
18 of the Chronimed Inc. 1996 Annual Report to Shareholders is incorporated
herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Financial Statements and Financial
Statement Schedules on page F-1 of this Report and to each of the items referred
to therein, which information is incorporated herein by reference.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

See Item 4A of Part I of this Report for information with respect to
executive officers of the Company. Pursuant to General Instruction G(3),
reference is made to the pertinent information contained in the Company's
definitive proxy statement for its 1996 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission, which information is
incorporated herein.

ITEM 11. EXECUTIVE COMPENSATION

Pursuant to General Instruction G(3), reference is made to the
pertinent information contained in the Company's definitive proxy statement for
its 1996 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, which information is incorporated herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

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

(a) For Financial Statements and Financial Statement Schedules
filed as a part of this Report, reference is made to "Index to
Financial Statements and Financial Statement Schedules" on
page F-1 of this Report. For a list of Exhibits filed as a
part of this Report, see Exhibit Index on page 25 of this
Annual Report on Form 10-K.

(b) The registrant filed no report on Form 8-K during the last
quarter of the fiscal year ended June 28, 1996. However, the
registrant has filed a Form 8-K dated July 10, 1996, for the
acquisition of a business. Required financial statements will
be filed through an amended Form 8-K on or before September
16, 1996.

(d) See page F-1 of this Report for Financial Statements and
Financial Statement Schedules.

* * *

Portions of the 1996 definitive Proxy Statement are incorporated herein
by reference as set forth in Items 10, 11, 12, and 13 of this Report. Only those
portions directly responsive to the Items of Form 10-K shall be deemed filed
with the Commission.

EXHIBIT INDEX
-------------
EXHIBIT (FORM 10-K -- ITEM 14 (a) 3. AND ITEM 14 (c))
NUMBER
- ------

3.1 Articles of Incorporation of the Company, as amended.(1)

3.2 Bylaws of the Company.(1)

4.1 Specimen form of the Company's Common Stock certificate.(1)

10.1 Diabetes Center, Inc. Stock Option Plan.(1)/(2)

10.2 Diabetes Center, Inc. Stock Option Plan of 1986.(1)/(2)

10.3 Form of Incentive Stock Option Agreement.(1)/(2)

10.4 Form of Nonstatutory Stock Option Agreement.(1)/(2)

10.5 Employment Agreement effective July 1, 1996, between the Company and
Maurice R. Taylor, II. (2)

10.6 Lease dated January 16, 1995, between Blum Associates, a California
limited partnership, and the Company.(7)

10.7 Lease dated October 17, 1990, between The Travelers Insurance Company
and the Company, as amended November 12, 1991.(1)

10.8 Publishing Agreement dated as of January 1, 1989, between the Company
and Park Nicollet Medical Foundation.(1)

10.9 Book and Pamphlet License Agreement dated as of July 1, 1989, between
the Company and Park Nicollet Medical Foundation.(1)

10.10 Agreement to Provide Diabetes Services and Products dated December 7,
1990, between the Company and Group Health, Inc.(1)

10.11 Agreement to Provide Diabetic Services dated May 1, 1991, between the
Company and Health Insurance Plan of Greater New York.(1)

10.12 Referral Provider Agreement dated July 1, 1989, between the Company and
Med Centers Health Care, Inc.(1)

10.13 Agreement to Provide Specialty Pharmacy Services to The Travelers
Managed Care System dated March 3, 1993.(3)

10.14 Referral Provider Agreement between the Company and Medcenters Managed
Care, Inc. dated January 4, 1993.(3)

10.15 Revolving Line of Credit Agreement amended February 8, 1996, between
the Company and National City Bank of Minneapolis.

10.16 Marketing and Distribution Agreement between Orphan Medical, Inc. and
Chronimed Inc. effective as of July 2, 1994.(4)

10.17 Security Agreement between Orphan Medical, Inc. and Chronimed Inc.
effective as of July 2, 1994.(4)

10.18 Distribution Agreement between Diagnostic Solutions, Inc. and Chronimed
Inc. effective as of October 10, 1992.(4)

10.19 Distribution Agreement between Can-Am Care Corp. and Chronimed Inc.
effective as of October 19, 1992.(4)

10.20 Lease dated July 27, 1994, between the Company and Jorandcor, Inc.(4)

10.21 Pharmacy Services Agreement with Prudential Insurance Company of
America.(5)

10.22 Chronimed Inc. 1994 Stock Option Plan.(5)

10.23 Chronimed Inc. 1994 Stock Option Plan for Directors.(5)

10.24 Pharmacy Participation Agreement with Aetna Health Management, Inc.(7)

10.25 Agreement and Plan of Reorganization - British American Medical,
effective as of August 1, 1995.(7)

10.26 Acquisition Agreement - Statscript, effective as of July 1, 1996. (6)

10.27 Chronimed Inc. 1997 Stock Option Plan.

11.1 Computation of Earnings Per Share.

13.1 1996 Annual Report to Shareholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).

21.1 List of Subsidiaries

23.1 Consent of Ernst & Young LLP

27 Financial Data Schedule

99 Cautionary Statements for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act

- --------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45644), as amended.

(2) Management contract or compensatory plan or arrangement.

(3) Incorporated by reference to the Company's 1993 Annual Report on Form
10-K filed with The Commission on September 30, 1993, under file number
0-19952.

(4) Incorporated by reference to the Company's 1994 Annual Report on Form
10-K filed with The Commission on September 29, 1994, under file number
0-19952.

(5) Incorporated by reference to the Company's quarterly report on Form
10-Q filed with The Commission on January 31, 1995, under file number
0-19952.

(6) Incorporated by reference to the Company's report on Form 8-K filed
with The Commission on July 10, 1996, under file number 0-19952.

(7) Incorporated by reference to the Company's 1995 Annual Report on Form
10-K filed with The Commission on September 28, 1995, under file number
0-19952.

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.

CHRONIMED INC.

Dated: September 11, 1996
By /s/ Maurice R. Taylor, II
--------------------------------------
Maurice R. Taylor, II
President, Chief Executive Officer and
Chairman of the Board of Directors

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.

/s/ Maurice R. Taylor, II September 11, 1996
- -----------------------------------------
Maurice R. Taylor, II - President
(Principal Executive Officer and
Chairman of the Board of Directors)

/s/ Norman A. Cocke September 11, 1996
- -----------------------------------------
Norman A. Cocke - Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)

/s/ John Howell Bullion
- ----------------------------------------- September 11, 1996
John Howell Bullion (Director)

/s/ Donnell D. Etzwiler, M.D. September 11, 1996
- -----------------------------------------
Donnell D. Etzwiler, M.D. (Director)

/s/ Charles V. Owens, Jr. September 11, 1996
- -----------------------------------------
Charles V. Owens, Jr. (Director)

/s/ Lawrence C. Weaver, Ph.D. September 11, 1996
- -----------------------------------------
Lawrence C. Weaver, Ph.D. (Director)

/s/ Henry F. Blissenbach September 11, 1996
- -----------------------------------------
Henry F. Blissenbach (Director)

INDEX TO EXHIBITS FILED WITH THIS REPORT
----------------------------------------

See pages 22 and 23 of this Report for a list of all exhibits that are
part of the Report.

Exhibit No. 10.5 Employment Agreement effective July 1, 1996, between
the Company and Maurice R. Taylor, II.

Exhibit No. 10.15 Revolving Line of Credit Agreement amended February 8,
1996, between the Company and National City Bank of
Minneapolis

Exhibit No. 10.27 Chronimed Inc. 1997 Stock Option Plan

Exhibit No. 11.1 Computation of Earnings Per Share

Exhibit No. 13.1 Portions of the 1996 Annual Report to Shareholders

Exhibit No. 21.1 List of Subsidiaries

Exhibit No. 23.1 Consent of Ernst & Young LLP

Exhibit No. 27 Financial Data Schedule

Exhibit No. 99 Cautionary Statements for purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
---------------------------------------------------------------

(FORM 10-K--ITEM 14(a)(1.) and (2.) and ITEM 14(d))

The following financial statements of Chronimed Inc. are incorporated
in Part II, Item 8, and Part IV, Item 14(a) of this Report by reference to the
Registrant's Annual Report to Shareholders for the year ended June 28, 1996:

<TABLE>
<CAPTION>
Pages in
Annual Report
-------------
<S> <C>
Audited Financial Statements:
Consolidated Balance Sheets--June 28, 1996 and June 30, 1995............................. 19
Consolidated Statements of Income--Years Ended June 28, 1996,
June 30, 1995, and July 1, 1994....................................................... 20
Consolidated Statements of Shareholders' Equity--Years Ended June 28, 1996,
June 30, 1995, and July 1, 1994....................................................... 21
Consolidated Statements of Cash Flows--Years Ended June 28, 1996,
June 30, 1995, and July 1, 1994....................................................... 22

Notes to Financial Statements............................................................. 23-29

Report of Independent Auditors............................................................ 30
</TABLE>

The following financial statement schedules should be read in conjunction
with the financial statements referred to above.

Financial Statement Schedules:

Years Ended June 28, 1996, June 30, 1995, and July 1, 1994

Schedule Page
- -------- ----

II Valuation and Qualifying Accounts and Reserves . . . . . . . . . F-2

Financial statement schedules not included in this Report have been
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.

CHRONIMED INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

COL. A COL. B COL. C COL. D COL. E
Additions
Balance at Deductions -- Balance at
Description Beginning of Describe End of Period
Period
- ----------------------------------------------- -------------------------------------------------- ----------------- -------------
Charged to Charged to
Costs and Other
Expenses Accounts --
Describe
----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended June 28, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $725,000 $1,099,063 $ -- $964,063(1) $860,000
======== ========== ============ =========== ========

Year ended June 30, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $675,000 $1,003,870 $ -- $953,870(1) $725,000
======== ========== ============ =========== ========

Year ended July 1, 1994:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $360,000 $ 837,236 $ -- $522,236(1) $675,000
======== ========== ============ =========== ========

(1) Uncollectible accounts written off, net of recoveries.
</TABLE>

EXHIBIT 10.5

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made effective as of the 1st day of July, 1996, by
and between CHRONIMED, INC., a Minnesota Corporation (the "Corporation"), and
MAURICE R. TAYLOR, II, of Hennepin County, Minnesota, (hereinafter called
"Employee"),

W I T N E S S E T H:

WHEREAS, Employee is presently serving as President/CEO of the
Corporation; and

WHEREAS, the Corporation desires to continue to employ the
Employee as its President/CEO in accordance with the following terms, conditions
and provisions; and

WHEREAS, the Employee desires to perform such services for the
Corporation, all in accordance with the following terms, conditions and
provisions;
NOW, THEREFORE, in consideration of the mutual convenants herein
contained, it is agreed as follows:

SECTION 1. EMPLOYMENT AND DUTIES. The Corporation hereby continues
Employee's employment, and Employee hereby accepts such employment, as the
Corporation's President/CEO, to perform the duties of managing the Corporation,
subject always to the control and direction of the Board of Directors of the
Corporation (the "Board of Directors"). Employee shall devote his full time and
best efforts to the performance of services hereunder and to the advancement of
the Corporation's business and affairs.

1.1 Employee shall also perform such other duties, including
administrative duties, in connection with the Corporation's business as shall
from time to time be assigned to him by the Board of Directors.

1.2 Employee, as President/CEO, shall hire, terminate and set the
terms of employment for all personnel of the Corporation, except other
Officers.

1.3 Employee, as President/CEO, shall select marketing strategy,
including, but not limited to, establishing and expanding marketing and sales of
the Corporation's products and services and setting prices and discounts to
customers.

1.4 Employee, as President/CEO, shall, subject to review and
approval by the Board of Directors, supervise and make recommendations to the
Board of Directors with respect to the financial affairs of the Corporation,
including, but not limited to, designating the bank or depository of the
Corporation's funds and the borrowing of money. An annual budget and business
plan, including a cash flow and capital expenditure plan, will be prepared under
Employee's supervision and submitted to the Board of Directors prior to the
beginning of each fiscal year for the Board's review and approval.

1.5 Employee, as President/CEO, shall establish and maintain
operating procedures, including, but not limited to, setting policies and
procedures for the development of the Corporation's products and services,
establishing working hours and establishing policy and procedures for other
personnel matters and establishing policy and procedures for the sale of the
Corporation's product.

SECTION 2. COMPENSATION. Employee shall receive as compensation
for the full and faithful performance of his obligations hereunder, including
the performance of services as an officer, director or member of any committee
of the Board of Directors, a salary for the time periods and in the amounts as
follows:

Time Period Full Year's Compensation
----------- ------------------------

7/1/96 - 6/30/97 $290,000
(minimum for 3 year contract duration)

7/1/97 - 6/30/99 To be determined, based upon corporation
performance and employee performance.

In addition to the base salary for the designated time periods,
employee will be eligible to earn an annual cash incentive and an annual stock
option grant under the provisions of the incentive programs in place at the time
of the salary adjustments.

SECTION 3. TERM. This Agreement shall commence and become
effective as of July 1, 1996, and, unless sooner terminated as provided in
Section 11, shall terminate as of June 30, 1999, the end of the Corporation's
fiscal year; provided, however, that the bonus, if any, payable to Employee with
respect to the Corporation's fiscal year ending June 30, 1999, shall be paid
after the end of such fiscal year as provided herein.

SECTION 4. EXPENSES. The Corporation will reimburse Employee for
reasonable expenses incurred by Employee in connection with the business of the
Corporation according to policies promulgated from time to time by the Board of
Directors upon presentation by Employee of appropriate substantiation for such
expenses. During the term of his Employment, Employee shall receive an
automobile allowance of $500.00 per month.

SECTION 5. EMPLOYEE BENEFIT PLANS. During the term of his
employment, Employee shall be entitled to participate in any employee benefit
plan or plans established and maintained by the Corporation for its employees,
in accordance with the eligibility requirements and other terms and provisions
of such plan or plans. Employee acknowledges and agrees that the Corporation is
under no obligation to Employee to establish or maintain any employee benefit
plan in which Employee may participate, and that the terms and provisions of any
employee benefit plan of the Corporation are matters solely within the exclusive
province of the Board of Directors.

SECTION 6. VACATION AND TIME OFF. Employee shall be entitled to
three (3) weeks of vacation in each year of employment under the terms of this
Agreement without reduction of salary. Unused vacation time may be carried over
to future years of employment with a maximum accrual of 160 hours at any point
in time. In addition, the Employee shall be entitled to such additional time off
from work, without loss of compensation, for attendance at professional
meetings, conventions and educational courses in accordance with the
Corporation's general policy in this regard, as from time to time determined by
its Board of Directors.

SECTION 7. INSURANCE. Employee agrees that the Corporation, in the
discretion of its Board of Directors, may apply for and procure on its own
behalf, life insurance on the life of Employee, for the purpose of protecting
the Corporation against loss caused by the death of the Employee. Employee
agrees to submit to medical examination and to execute or deliver any
documentation reasonably required by the Corporation's insurer in order to
effectuate such insurance.

Additionally, the Corporation shall, during each year of
employment, apply for and procure on behalf of Employee, life insurance in the
amount of $200,000 on the life of Employee, for the purpose of protecting
Employee's designated beneficiaries in the event of Employee's death.

SECTION 8. MEDICAL AND DENTAL COVERAGE. During his employment,
Employee shall be entitled to medical and dental coverage provided by the
Corporation, as it is offered to other employees of the Corporation.

SECTION 9. LEAVE OF ABSENCE. The Board of Directors may, from time
to time, grant a leave of absence to Employee. The Employee shall have no right
under this Agreement to any compensation during such period of leave of absence,
unless the Board of Directors fixes and determines an amount of compensation to
be paid to Employee during a period of leave of absence. If Employee fails to
return to active employment with Employer within fifteen (15) days after
termination of a leave of absence, Employee shall be deemed to have breached
this Agreement as of the end of said period of leave of absence.

SECTION 10. SICK LEAVE AND DISABILITY.

10.1 The Employee shall be entitled to ten (10) calendar days of
sick leave in each year of employment hereunder without loss of compensation.
Unused sick leave shall not be carried over to future years of employment under
this Agreement.

10.2 Notwithstanding any other provision of this Agreement, if
Employee is "totally disabled" (as that term is defined in Section 13) for an
aggregate of 180 calendar days in any one calendar year of employment under the
terms of this Agreement, then the Corporation shall not be obligated to pay to
Employee the compensation provided in this Agreement for any period of "total
disability" during such year in excess of 120 days. In such event, Employee's
salary under Section 2 shall be prorated for such year of employment in the same
manner as if this Agreement had been terminated at the end of said 120th day.

SECTION 11. TERMINATION. This Agreement, including the
Corporation's obligation pursuant to Section 2 hereof to pay compensation to the
Employee, shall be terminated upon the happening of any one of the following
events:

(a) At any time by mutual agreement in writing between
the Corporation and the Employee;

(b) Upon the death of the Employee;

(c) At the Corporation's option, if Employee shall be
"totally disabled" for a continuous period of time
in excess of nine (9) months under the term of this
Agreement. The Corporation's said option shall be
exercised by giving at least thirty (30) days prior
written notice thereof to Employee.

(d) At the option of either party hereunder after thirty
(30) days prior written notice given to the other
party, in the event of a breach of any term or
provision of this Agreement by the other party which
has not been cured within said thirty-day period.

(e) At the option of either party, without cause, by one
year's advance notice to the other party.

For the purposes of subparagraph (d) above, Employee shall be in
breach of a term or provision of this Agreement if (i) Employee fails or refuses
to perform his employment duties hereunder after reasonable request by the Board
of Directors, (ii) Employee willfully engages in conduct injurious to the
Corporation, monetary or otherwise; (iii) Employee is convicted of a felony or
convicted of a misdemeanor which materially impairs Employee's ability to
perform Employee's duties with the Corporation, or (iv) Employee breaches
Employee's other covenants hereunder.

In the event that the Corporation terminates Employee for any
reason other than those set forth in subparagraphs (a) through (d) above,
including a termination without cause pursuant to subparagraph (e), then:

(a) For so long as the Corporation continues Employee's
employment on the same terms and conditions, in all
material respects, as before notice of termination
is received, Employee shall be entitled to all the
payments and benefits specified hereunder; and

(b) If the Corporation requires Employee to cease
performing services in accordance with this
Agreement before one year has passed from the date
(the "Notice Date") the Employee receives notice of
his termination, then, for the balance of said
one-year period (the "Severance Period"), Employee
shall be entitled (i) to be paid his salary at the
rate in effect when he ceased performing service,
(ii) to payment of a bonus equal to the minimum
bonus which would be payable for the fiscal year or
years in which the Termination Period falls
(prorated for the minimum bonuses over two fiscal
years if the Severance Period spans two fiscal
years, and also prorated if the Severance Period is
less than 12 months), and (iii) to receive the other
benefits specified hereunder, including the
automobile allowance, life insurance coverage,
medical and dental coverage and participation in
other employee benefit plans to the extent
applicable. Employee shall have no duty to mitigate
during the Severance Period and shall be entitled to
the foregoing payments and benefits regardless of
whether Employee obtains other employment.

During any such Severance Period, the Covenant Not to Compete set
forth in Section 13 hereof shall be effective without the Corporation being
required to make any payments in addition to those specified above. In addition,
the Corporation shall be entitled to extend the Covenant Not to Compete for an
additional period of one year after the end of the Severance Period by making
the payments as described in Section 13.

The foregoing provisions shall apply, and the Corporation shall be
deemed to have terminated Employee and required Employee to cease providing
services in accordance with this Agreement, if the Corporation makes a material
adverse change in the nature or scope of Employee's authority, office, powers,
functions and duties or responsibilities or any other material aspect of his
employment.

SECTION 12. TOTAL DISABILITY. For purpose of this Agreement,
Employee shall be considered to be "totally disabled" when he is considered to
be totally disabled by any insurance company used by the Corporation to provide
disability benefits for the Employee, and Employee shall continue to be
considered "totally disabled" until such insurance company ceases to recognize
his as "totally disabled" for purposes of disability benefits. If no such
disability insurance policies are in force for the benefit of Employee, or if
for any reason an insurance company fails to make a determination of the
question of whether Employee is "totally disabled", Employee shall be considered
to be "totally disabled" if, because of mental or physical illness or other
cause, he is unable to perform the majority of his usual duties on behalf of the
Corporation. The existence of "total disability" of Employee, the date it
commenced, and the date it ceases, shall be determined by the Board of Directors
and the Employee. If, however, the parties cannot agree, then any such
determination shall be made after examination of Employee by a medical doctor
selected by the Board of Directors, and a medical doctor selected by the
Employee. If the medical doctors cannot agree, a third medical doctor shall be
selected by the two doctors and the conclusion of a majority of said doctors
shall be final and binding on the parties.

SECTION 13. COVENANT NOT TO COMPETE. Employee hereby covenants and
agrees that during the initial term of this Agreement, any renewal thereof, and,
if the Corporation makes the election and payments specified below, for a period
of one (1) year after termination of Employee's employment (or the Severance
Period, if applicable), he shall not be engaged within the United States, either
directly or indirectly, in any manner or capacity, whether as an adviser,
principal, agent, partner, officer, director, employee, member of an
association, or otherwise, in any business or activity, or own beneficially, or
of record, five percent (5%) or more of the outstanding stock of any class of
equity securities in any corporation, in competition with the business then
being conducted by the Corporation.

13.1 The foregoing covenant shall also apply during the Severance
Period as defined in Section 11 above, provided the Corporation is making the
payments required during the Severance Period.

Within ten (10) days after Employee's termination of employment,
or the expiration of the Severance Period, if the Corporation has complied with
its obligations during the Severance Period, the Corporation may give written
notice to Employee that it wishes to extend the foregoing Covenant Not to
Compete for an additional period of one (1) year. By giving any such Notice, the
Corporation agrees that during said one-year period it will pay Employee monthly
payments at the salary level in effect for Employee on the date of his
termination of employment with the Corporation. Said amount shall be paid in
equal monthly installments, in advance, provided that the first payment shall be
made no later than the date on which said written notice is delivered by the
Corporation.

Failure to give the aforesaid notice before the expiration of said
ten-day period shall constitute a waiver of any right to extension of the
Covenant Not to Compete. Once the Corporation delivers such notice, it shall be
obligated to make the payments for the entire 12-month period.

13.2 It is understood that if Employee should breach the aforesaid
covenant of noncompetition, the Corporation would suffer irreparable harm for
which a recovery of money damages would be an inadequate remedy. If is therefore
agreed that the Corporation shall be entitled, as a matter of right, in any
court of competent jurisdiction, to a mandatory injunction restraining and
enjoining Employee, pending litigation, as well as upon final determination
thereof, from attempting to violate or violating the aforesaid covenant of
noncompetition; and it is further agreed that the Corporation's right to such
injunctive relief shall be cumulative with and in addition to any other rights,
remedies or actions which the Corporation may have against Employee.

SECTION 14. CONFIDENTIALITY.

14.1 Employee will in the course of his employment by the
Corporation have access to confidential or proprietary data or information of
the Corporation. Employee will not at any time divulge or communicate to any
person (other than to a person bound by confidentiality obligations to the
Corporation similar to those contained in this Agreement) or use to the
detriment of the Corporation or for the benefit of any other person of such data
or information. The provisions of this Section 14.1 shall survive Employee's
employment hereunder whether by the normal expiration of that employment or
otherwise. The term "confidential or proprietary data or information" as used in
this Agreement shall mean information not generally available to the public
including, without limitation, personnel information, financial information,
customer lists, supplier lists, trade secretes, secret processes, know-how,
computer data and programs, pricing, marketing and advertising data. The
Employee acknowledges and agrees that any confidential or proprietary data or
information that Employee has heretofore acquired was received in confidence and
as a fiduciary with respect to the business of the Corporation.

14.2 All written materials, records and documents made by Employee
or coming into Employee's possession during the term of employment concerning
any products, processes, information or services used, developed, investigated
or considered by the Corporation, or otherwise concerning the business or
affairs of the Corporation, shall be the sole property of the Corporation and
upon termination of Employee's employment, or upon request by the Board of
Directors during Employee's employment, Employee shall promptly deliver the same
to the Corporation. In addition, upon termination of Employee's employment, or
upon request of the Board of Directors during Employee's employment, Employee
shall deliver to the Corporation all other property of the Corporation in
Employee's possession or under Employee's control including, but not limited to,
financial statements, marketing and sales data and other documents and all
Employer credit cards.

SECTION 15. OTHER BUSINESS ACTIVITIES OF EMPLOYEE.

15.1 Employee will not serve as an officer of another company --
including positions, such as treasurer or secretary, which involve significant
duties -- without the prior consent of the Board of the Corporation.

15.2 Employee may serve on the Boards of companies other than the
Corporation, or in similar capacities with other companies, provided that such
companies are not in competition with the Corporation with the Corporation and
provided that Employee's service in such capacity does not materially interfere
with his performance of his duties hereunder.

SECTION 16. NOTICE. Any notice or other communication required or
desired to be sent pursuant to this Agreement shall be in writing, and shall be
deemed to have been duly given when delivered personally or when deposited in
the mails, certified or registered, return receipt required, and with the proper
postage prepaid, addressed as follows:

If to the Corporation:

Chronimed, Inc.
Suite 250, Ridgedale Office Center
13911 Ridgedale Drive
Minnetonka, Minnesota 55305

If to the Employee:

Maurice R. Taylor, II
550 East Long Lake Road
Wayzata, Minnesota 55391

or such other address as either party hereto may designate for itself or written
notice given to the other party from time to time in the manner herein and above
provided.

SECTION 17. WAIVER. This Agreement shall not be modified or
amended except by a further written document signed by Employee and approved by
the Board of Directors. No provisions hereof may be waived except by an
Agreement in writing signed by the waiving party. A waiver of any term or
provision shall not be construed as a waiver of any other term or provision.

SECTION 18. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall constitute one and the same
instrument.

SECTION 19. ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties relating to the employment of Maurice R.
Taylor, II by the Corporation, and shall not be modified or amended except in
writing signed by both of the parties hereto.

SECTION 20. APPLICABLE LAW. This Agreement shall be subject to and
governed by the laws of the State of Minnesota, and all questions concerning the
meaning and intention of the terms of this Agreement and concerning the validity
hereof and questions relating to performance hereunder shall be adjudged and
resolved in accordance with the laws of that state.

SECTION 21. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefits of the parties hereto, and their respective heirs,
successors, legal representatives and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the 22nd day of April, 1996.

CHRONIMED, INC.

By /s/ Norman A. Cocke
-----------------------------------
Its Sr. Vice President/CFO

And /s/ Charles V. Owens, Jr.
----------------------------------
Its Chairman, Compensation Committee

EMPLOYEE

/s/ Maurice R. Taylor, II
- --------------------------------------
Maurice R. Taylor, II

EXHIBIT 10.15

February 8, 1996

Chronimed Inc.
13911 Ridgedale Drive
Minnetonka, MN 55305

Attention: Mr. Norman A. Cocke

Dear Mr. Cocke:

We refer to the Letter Loan Agreement dated as of December 16, 1992, as
amended to date (the "Agreement"; capitalized terms not defined herein being
used herein as therein defined), by and between Chronimed Inc. (the "Borrower")
and us.

On the "Effective Date" (as defined below), we hereby agree with the
Borrower to amend the Agreement as follows:

a. Section 2(a) is amended by changing the date "December
31,1995" appearing therein to the date "December 31, 1996";

b. Section 6(a) is amended in its entirety to read as follows:

"(a) Furnish to the Bank:

(i) as soon as available and in any
event within 90 days after the end of each
of the Borrower's fiscal years, a copy of
the Borrower's annual report, including
balance sheet and related statements of
earnings, and stockholders' equity and cash
flow for such fiscal year, with comparative
figures for the preceding fiscal year,
prepared in accordance with GAAP and
certified without qualification or exception
by Ernst & Young or other independent public
accountants satisfactory to the Bank and
accompanied by the management letter, if
any, delivered by such independent public
accountants to the Borrower and the
Borrower's response thereto;

(ii) as soon as available and in
any event within 45 days after the end of
each quarter of the Borrower's fiscal year,
a copy of the Borrower's internally prepared
financial statements, consisting of a
balance sheet as of the close of such
quarter and related statements of earnings
for such quarter and from the beginning of
such fiscal year to the end of such quarter
prepared in accordance with GAAP; subject,
however, to year-end adjustments which, in
the aggregate, are not materially adverse
and the omission of footnotes and certified
as accurate by the Borrower's chief
financial officer or treasurer;

(iii) promptly after the sending or
filing thereof, copies of all regularly
prepared reports (including, without
limitation, Forms 10-K and 10- Q or any
successor reports) that the Borrower files
with the Securities and Exchange Commission
or sends to any of its security holders; and

(iv) such other financial or other
information or certification as the Bank may
reasonably request.";

c. Section 6(i) shall be deleted in its entirety;

d. Section 6(j) shall be deleted in its entirety;

e. Section 7(a) is amended in its entirety to read as follows:

"(a) create security interests or mortgages
encumbering any of its assets except: (i) security
interests in favor of the Bank; (ii) other security
interests created after the date of this Agreement in
connection with the incurrance of capitalized lease
obligations or other purchase money indebtedness
permitted by this Agreement but only to the extent
that: (A) such security interest attaches only to the
fixed assets then being acquired by the Borrower; (2)
does not attach to the Borrower's Current Assets; (3)
does not secure any other Indebtedness; and (4) the
aggregate outstanding principal amount of such
secured indebtedness does not exceed $500,000.00 at
any time; and (c) at the time such security interest
is granted, the Borrower is in full compliance with
the terms of this Agreement and the other Loan
Documents; or (iii) other security interests
described on Schedule B attached hereto and
incorporated herein by reference;";

f. Section 7(b) is amended in its entirety to read as follows:

"(b) create, incur, assume or suffer to
exist any interest-bearing indebtedness other than:
(i) the indebtedness under this Agreement or any
other Loan Document; (ii) capitalized lease
obligations created or purchase money indebtedness
incurred after the date of this Agreement in
connection with the acquisition of fixed assets so
long as the aggregate outstanding principal amount of
such indebtedness does not exceed $500,000.00 at any
time; (iii) other indebtedness described on Schedule
C attached hereto and incorporated herein by
reference; or (iv) other indebtedness so long as the
aggregate outstanding principal amount of such
secured indebtedness does not exceed $2,500,000.00 at
any time; provided, however, that, after the
aggregate outstanding principal amount of all such
indebtedness exceeds $500,000.00 (or would exceed
$500,000.00 after giving effect to such indebtedness)
the Borrower must provide the Bank with 30 days prior
written notice of its intent to incur such
indebtedness;";

g. Section 7(d) is amended in its entirety to read as follows:

"(d) either: (i) consolidate with or merge
into or with any other entity or entities; or (ii)
acquire all or any material portion of the assets or
a material portion of the business of any other
entity or entities (whether in one or a series of
related transactions) where, for purposes of this
section, "material" shall mean assets or businesses
requiring the payment of at least $5,000,000.00 of
consideration in all related transactions; provided,
however, that the Borrower must provide the Bank with
30 days prior written notice of its intent to acquire
the assets or business of any other entity or
entities (whether in one or a series of related
transactions or whether such acquisition involves a
material amount of the assets of such entity or a
material portion of such entity's business);";

h. Section 7(e) is amended in its entirety to read as follows:

"(e) declare or pay any dividends (except
for stock dividends), purchase, redeem, retire, or
otherwise acquire for value any of its capital stock
(or any warrant or option to purchase any such stock)
now or hereafter outstanding, return any capital to
its stockholders as such, or make any distribution of
assets to its stockholders as such (any such payment,
redemption, retirement, acquisition or other
restricted transaction being a 'Restricted Payment')
except that the Borrower may make Restricted Payments
so long as: (i) no Default or Event of Default has
occurred and is continuing at the time of any
Restricted Payment or would result therefrom; or (ii)
the aggregate amount of Restricted Payments, after
giving effect to the proposed Restricted Payment,
made during any four fiscal quarter period does not
exceed 25% of the Borrower's after-tax net income
during such four fiscal quarter period determined in
accordance with GAAP where such net income is
adjusted to exclude the amount of non-operating
income or gain included in such net income;"; and

i. Section 7(i) amended in its entirety to read as follows:

"(i) permit the direct or indirect transfer,
distribution or payment of any of its funds, assets
or property to any officer, director, shareholder or
Affiliate or to any member of any such person's
immediately family, if the fair market value of the
relevant funds, assets or property involved in any
single transaction (and its related transactions)
exceeds an aggregate amount of $250,000.00 or if the
fair market value of the relevant funds, assets or
property involved in all transactions exceeds an
aggregate amount of $500,000.00 during any fiscal
year, regardless of whether such transfer,
distribution or payment occurs by means of a loan or
advance, an investment in (by capital contribution or
otherwise) or a purchase or repurchase of any stock
or indebtedness or any assets or properties, a sale
or lease of assets or properties, a guarantee,
assumption, endorsement or other transaction where
the Borrower agrees to discharge or assume (directly
or indirectly, through the purchase of goods,
supplies or services or otherwise) the indebtedness,
performance, capability, obligations, dividends or
agreement for the furnishing of funds of any such
person or otherwise; provided, however, that
aggregate outstanding principal amount of all loans
and advances to any or all of such persons shall not
exceed $500,000.00.".

This letter amendment shall be effective (the "Effective Date") as of
the date first above written when we receive copies of this letter amendment
executed by the Borrower together with the following:

a. A Replacement Demand Revolving Credit Note (the
"Replacement Note") in a form provided by us appropriately completed
and duly executed by the Borrower; and

b. Such other documents, instruments or certificates as we may
request.

By executing this letter amendment, the Borrower further agrees with us
that:

a. upon the Effective Date, each reference in: (i) the
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import referring to the Agreement, and each reference to the
"Loan Agreement," "thereunder," "thereof," "therein" or words of like
import referring to the Loan Agreement in any other Loan Document shall
mean and be a reference to the Agreement as amended hereby; and (ii)
each reference in any Loan Document to "the Note," "thereunder,"
"thereof," "therein" or words of like import referring to the Note
shall mean and be a reference to the Replacement Note;

b. except as specifically amended by the terms hereof, the
Agreement remains in full force and effect and is hereby ratified and
confirmed.

To induce us to enter into this letter amendment, the Borrower
represents and warrants to us that:

a. The execution, delivery and performance by the Borrower of
this letter amendment, the Replacement Note and each other document
executed or delivered by the Borrower in connection herewith have been
duly authorized by all necessary corporate action, do not require any
approval or consent of, or any registration, qualification or filing
with, any governmental agency or authority or any approval or consent
of any other person (including, without limitation, any stockholder),
do not and will not conflict with, result in any violation of or
constitute any default under, any provision of the Borrower's articles
of incorporation or bylaws, any agreement binding on or applicable to
the Borrower or any of its property, or any law or governmental
regulation or court decree or order, binding upon or applicable to the
Borrower or of any of its property and will not result in the creation
or imposition of any security interest or other lien or encumbrance in
or on any of the Borrower's property pursuant to the provisions of any
agreement applicable to the Borrower or any of its property;

b. The representations and warranties contained in Section 5
of the Agreement are true and correct as of the date hereof as though
made on that date after giving effect to this letter amendment except
that the representations and warranties set forth in Section 5(i) of
the Agreement to the financial statements of the Borrower shall be
deemed a reference to the audited and unaudited financial statements of
the Borrower then most recently delivered to us pursuant to Section
6(a) of the Agreement;

c. The Agreement as amended by this letter amendment, the
Replacement Note and each other Loan Document are the legal, valid and
binding obligations of the Borrower and are enforceable in accordance
with their respective terms, subject only to bankruptcy, insolvency,
reorganization, moratorium or similar laws, rulings or decisions at the
time in effect affecting the enforceability of rights of creditors
generally and to general equitable principles which may limit the right
to obtain equitable remedies; and

d. No Default or Event of Default has occurred and is
continuing as of the date hereof after giving effect to this letter
amendment.

By executing this letter amendment, the Borrower agrees to pay on
demand all of our costs and expenses incurred in connection with the
preparation, reproduction, execution and delivery of this letter amendment and
the other documents to be delivered hereunder including our reasonable
attorneys' fees and legal expenses.

This letter amendment shall be governed by and construed in accordance
with the laws of the State of Minnesota.

On the Effective Date, we agree with the Borrower that our security
interest in the Borrower's now existing or hereafter arising "Inventory",
"Equipment" and "General Intangibles" (each quoted term in this paragraph is
being used as defined in the Security Agreement) is terminated and released and
that, promptly after the occurrence of the Effective Date, we will file
appropriate amendments to our financing statements terminating our security
interest in such Collateral. The Borrower acknowledges and reaffirms our
continuing security interest in the Borrower's now existing or hereafter arising
"Accounts and Other Rights to Payment" and the proceeds thereof as provided in
the Security Agreement.

Very truly yours,

NATIONAL CITY BANK OF MINNEAPOLIS

By
---------------------------------
Its

Accepted and agreed to as of this ____ day of February, 1996.

CHRONIMED INC.

By
---------------------------------
Its

REPLACEMENT DEMAND REVOLVING CREDIT NOTE

$2,500,000.00 MINNEAPOLIS, MINNESOTA
FEBRUARY 8, 1996

FOR VALUE RECEIVED, ON DEMAND, or, if no earlier demand is made, on
December 31, 1996, the undersigned, Chronimed Inc., a Minnesota corporation (the
"Borrower"), promises to pay to the order of National City Bank of Minneapolis
(the "Bank") the principal sum of Two Million Five Hundred Thousand and
No/l00ths Dollars (U.S. $2,500,000.00) or, if less, the aggregate unpaid
principal amount of all Advances (as hereinafter defined) made by the Bank to
the Borrower pursuant to the Loan Agreement (as hereinafter defined).

Each Advance shall be made and maintained as a Eurodollar Advance or a
Base Rate Advance (each of which is a type of Advance) as agreed upon between
the Borrower and the Bank in accordance with the terms hereof. The amount, type,
last day of each applicable Interest Period and rate of interest (unless a Base
Rate Advance) of each Advance shall be recorded by the Bank in its records,
which records shall be rebuttably presumptive evidence of such amount, type,
last day of Interest Period and rate.

The unpaid principal amount of the Advances shall bear interest at the
following rates determined as provided hereinafter (each computed on the basis
of the actual number of days elapsed in a year consisting of 360 days):

(a) On each Base Rate Advance at the Base Rate in
effect from time to time per annum;

(b) On each Eurodollar Advance, at the applicable
Eurodollar Rate plus 2.00% per annum; and

(c) On any Advance (of any type) which is not paid
when due, at the Base Rate in effect from time to time plus
2.00% per annum but at no time less than 2.00% in excess of
the rate applicable on such Advance on the day due.

Interest accrued during a month shall be due and payable on the last day of such
month, commencing on February 29, 1996 and continuing through, to and including,
the maturity hereof and interest accruing after the maturity hereof shall be
payable on demand.

Both principal and interest are payable in lawful money of the United
States of America to the Bank at Minneapolis, Minnesota (or other location
specified by the Bank) in immediately available funds.

For purposes of this Note, in addition to terms defined elsewhere:

"Authorized Officer" means any officer, employee or agent of
the Borrower designated as such by the Borrower from time to time in a
written resolution, which resolution shall become effective when
received by the Bank.

"Banking Day" means any day on which the Bank is open for
business at its principal office in Minneapolis, Minnesota, and, with
respect to Eurodollar Advances, on which dealings in Dollars may be
carried on by the Bank in the interbank Eurodollar market.

"Base Rate" means the rate publicly announced by the Bank from
time to time as its reference rate. The Bank may lend to its customers
at rates that are at, above, or below the reference rate.

"Eurodollar Rate" means a rate per annum (rounded upward, if
necessary, to the nearest 1/16 of 1%) determined pursuant to the
following formula:

[LIBO Rate]
Eurodollar Rate = [ ]
----------------------------------------
[1.00 - Eurocurrency Reserve Percentage]

In such formula, (i) "Eurocurrency Reserve Percentage" means the
average daily percentage (expressed as a decimal) during the applicable
Interest Period prescribed by the Board of Governors of the Federal
Reserve System (or any successor) for determining reserve requirements
applicable to "Eurocurrency liabilities" pursuant to Regulation D or
any other applicable regulation of the Board of Governors which
prescribes such reserve requirements, and any Eurodollar Advance shall
be deemed to be a "Eurocurrency liability" as defined in Regulation D,
and (ii) "LIBO Rate" means the offered rate for deposits in United
States Dollars (rounded upwards, if necessary, to the nearest 1/16 of
1%), for delivery of such deposits on the first day of such Interest
Period, for the number of days comprised therein, which appears on the
Reuters Screen LIBO Page as of 11:00 a.m., London time, on the day that
is two Banking Days preceding the date of such Eurodollar Advance. If
at least two rates appear on the Reuters Screen LIBO Page, the rate for
an Interest Period, the rate for such Interest Period shall be the
arithmetic mean of such rates (rounded as provided above). If fewer
than two rates appear, the rate for such Interest Period shall be
determined y the Bank based on rates offered to the Bank for United
States Dollar deposits in the interbank Eurodollar market. "Reuters
Screen LIBO Page" means the display designated as page "LIBO" on the
Reuter Monitor Money Rates Service (or such other page as may replace
the LIBO Page on that service for the purpose of displaying London
interbank offered rates of major banks for United States Dollar
deposits).

"Interest Period" means, for any Eurodollar Advance, a
one-month, two-month or three-month period as selected by the Borrower
in accordance with the terms hereof commencing on the date of the
making of such Eurodollar Advance provided, however, that:

(a) any Interest Period that would otherwise end on a day
which is not a Banking Day shall end on the next
following Banking Day (unless, in the case of a
Eurodollar Advance, such next following Banking Day
is the first Banking Day of a calendar month, in
which case such Interest Period shall end on the next
preceding Banking Day); and

(b) no Interest Period may end later than December 31,
1996.

An Authorized Officer may elect to: (i) designate an Advance (subject
to guidelines set forth below) as a Base Rate Advance and/or Eurodollar Advance;
(ii) continue any outstanding Eurodollar Advance from one Interest Period into a
subsequent Interest Period to begin on the last day of the earlier Interest
Period; or (iii) convert any outstanding type of Advance into another type of
Advance (but only on the last day of the applicable Interest Period for a
Eurodollar Advance), by giving the Bank notice in writing, or by telephone
promptly confirmed in writing if requested by the Bank, given so as to be
received by the Bank not later than 11:00 a.m., Minneapolis time, on: (A) the
Banking Day of the requested Advance if it is to be made as a Base Rate Advance
or the date of the requested continuation or conversion of an Advance if the
Advance is to be continued as, or converted into, a Base Rate Advance; or (B)
the third Banking Day prior to the day of the requested Advance if the Advance
is to be made as a Eurodollar Advance or any Advance is to be continued as, or
converted into, a Eurodollar Advance; provided, however, that: (1) no Advance
shall be made as a Eurodollar Advance and no Eurodollar Advance shall be
continued as such type of Advance and no Base Rate Advance shall be converted
into a Eurodollar Advance unless the resulting Eurodollar Advance is at least
$100,000.00; and (2) no more than SIX (6) Eurodollar Advances shall be
outstanding at any time. Each such notice of designation, continuation or
conversion of an Advance shall specify: (1) the effective date of the
designation, continuation or conversion (which shall be a Banking Day); (2) the
amount and the type or types of Advances following such designation,
continuation or conversion; and (3) the Interest Period for the designation,
continuation as, or conversion into, a Eurodollar Advance. Absent timely notice
of designation, continuation or conversion, each Advance shall be made as a Base
Rate Advance and each Eurodollar Advance shall automatically be converted into a
Base Rate Advance on the last day of its Interest Period unless paid in full on
such last day. No Eurodollar Advance shall be continued as, and no type of
Advance shall be converted into, a Eurodollar Advance if a Default or Event of
Default shall exist.

The Borrower hereby authorizes the Bank to rely upon the telephone or
written instructions of any person identifying himself as an Authorized Officer
and upon any signature which the Bank believes to be genuine, and the Borrower
shall be bound thereby in the same manner as if such person were authorized of
such signature were genuine. If requested by the Bank, an Authorized Officer
shall sign and mail to the Bank a confirmation listing the date, amount and type
of each such Advance. Failure by the Borrower to deliver such confirmation shall
not affect the obligations of the Borrower hereunder.

If the Bank determines (which determination shall be conclusive and
binding on the parties hereto) that:

(a) deposits of the necessary amount for the relevant Interest
Period for any Eurodollar Advance are not available to the Bank in the
relevant market or that, by reason of circumstances affecting such
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period;

(b) the Eurodollar Rate will not adequately and fairly reflect
the cost to such Bank of making or funding the Eurodollar Advance for
its relevant Interest Period; or

(c) the making or funding of any Eurodollar Advance has become
impracticable as a result of any event occurring after the date of the
Loan Agreement or this Note which, in the opinion of such Bank,
materially and adversely affects such Eurodollar Advance or the Bank's
commitment to make such Eurodollar Advance or the relevant market; the
Bank shall promptly give notice of such determination to the Borrower,
and (A) all Eurodollar Advances made by the Bank shall accrue interest
as Base Rate Advances during the period on and after the date of the
Bank's notice through the date on which the Bank determines that the
circumstances giving rise to the Bank's determination under subsection
(a), (b) or (c) no longer exists; (B) (1) any notice of a new
Eurodollar Advance previously given by the Borrower and not yet
borrowed or converted shall be deemed to be a notice to make a Base
Rate Advance and (2) the Borrower shall be obligated to either prepay
in full any outstanding Eurodollar Advances without premium or penalty
other than any amount required by the following paragraph on the last
day of the current Interest Period with respect thereto or convert any
such Eurodollar Advance to a Base Rate Advance or, in either case, on
such earlier date as may be required by applicable law. Any prepayment
of any Eurodollar Advance prior to the end of its Interest Period shall
be accompanied by any payment required by the following paragraph.

Upon demand, the Borrower will indemnify (any payment under this
paragraph being a "Make-Whole Payment") and hold the Bank free and harmless from
all reasonable losses, costs and expenses which the Bank may sustain or incur
(including, without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund or maintain any Eurodollar Advance) to the extent not otherwise compensated
for under the Loan Agreement or this Note and not mitigated by the redeployment
of such deposits or other funds as a result of: (a) a default by the Borrower in
payment when due of the principal of or interest on any Eurodollar Advance; (b)
the Borrower's failure (other than a failure attributable to a default by the
Bank) to make a borrowing, conversion or refunding with respect to a Eurodollar
Advance after making a request therefor in accordance with the terms of this
Note; (c) a prepayment (whether mandatory or otherwise) of a Eurodollar Advance
before the expiration of the related Interest Period; and (d) any Event of
Default by the Borrower under the Loan Documents and a demand for payment of a
Eurodollar Advance by the Bank before the expiration of the related Interest
Period. A certificate as to any such loss, cost or expense shall be submitted by
the Bank to the Borrower together with the Bank's request for indemnification
(which requests shall set forth the basis for requesting such amounts) and
shall, in the absence of manifest error or error proven by the Borrower, be
conclusive and binding as to the amount thereof.

The Borrower agrees to reimburse the Bank upon demand in the event any
applicable law, rule or regulation shall impose, modify or deem applicable any
tax (other than on the overall net income of the Bank by the United States of
America or the State of Minnesota), duty, reserve (including, without
limitation, any such item imposed by the Board of Governors of the Federal
Reserve System) or similar requirement against the Bank, its assets or any
deposits or credit extended by or to the Bank on the interbank eurodollar
market.

If at any time due to the adoption of any law, rule, regulation, treaty
or directive, or any change therein, or in the interpretation or administration
thereof by any court, central bank, governmental authority, agency or
instrumentality, or comparable agency charged with the interpretation or
administration thereof, or for any other reason arising subsequent to the date
of this Note, it shall become unlawful or impossible for the Bank to make or
fund any Eurodollar Advance, the obligation of the Bank to provide such
Eurodollar Advance shall, upon the happening of such event, forthwith be
suspended for the duration of such illegality or impossibility. If any such
event shall make it unlawful or impossible for the Bank to continue any
Eurodollar Advance previously made by it hereunder, the Bank shall, upon the
happening of such event, notify the Borrower in writing, and the Borrower shall,
at the time notified by the Bank, either convert each such unlawful Eurodollar
Advance to a Base Advance or repay such Eurodollar Advance in full, together
with accrued interest thereon and any Make-Whole Payment required by this Note.

Notwithstanding any provision of the Loan Agreement or this Note to the
contrary, the Bank shall be entitled to fund and maintain its funding of all or
any part of the Loan in any manner it elects; it being understood, however, that
for purposes of the Loan Agreement and this Note, all determinations hereunder
shall be made as if the Bank had actually funded and maintained each Eurodollar
Advance during the Interest Period for such Advance through the purchase of
deposits having a term corresponding to such Interest Period and bearing an
interest rate equal to the Eurodollar Rate.

This Note is the Revolving Credit Note referred to in, and is entitled
to the benefits of, the Letter Loan Agreement dated as of December 16, 1992 (the
Letter Loan Agreement as amended, modified, supplemented or restated from time
to time being the "Loan Agreement;" capitalized terms not otherwise defined
herein being used herein as therein defined) between the Borrower and the Bank.
The Loan Agreement, among other things, (i) provides for the making of Advances
(the "Advances") by the Bank to the Borrower from time to time in an aggregate
amount not to exceed at any time outstanding the dollar amount first above
mentioned, the indebtedness of the Borrower resulting from each such Advance
being evidenced by this Note; (ii) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events prior to the
maturity hereof upon the terms and conditions therein specified; (iii) contains
provisions for the mandatory prepayment hereof upon certain conditions; and (iv)
permits the voluntary prepayment hereof, without premium or penalty, upon
certain conditions.

Presentment and demand for payment, notice of dishonor, protest and
notice of protest are hereby waived. In the event of default, the Borrower
agrees to pay costs of collection and reasonable attorneys' fees reasonably
incurred by the Bank (whether or not suit is commenced), including, without
limitation, attorneys' fees and legal expenses reasonably incurred in connection
with any appeal of a lower court's judgment or order.

This Note is being delivered in replacement of, but not in payment of,
that certain Replacement Demand Revolving Credit Note dated as of December 22,
1994 made by the Borrower payable to the order of the Bank in the principal
amount of $2,500,000.00.

CHRONIMED INC.

By:
------------------------------------
Its:

EXHIBIT 10.27

CHRONIMED INC.
1997 STOCK OPTION PLAN

Article I. Establishment and Purpose

1.1 Establishment. Chronimed Inc., a Minnesota Corporation ("Company"),
hereby establishes a stock option plan for employees and others providing
services to the Company, as described herein, which shall be known as the "1997
STOCK OPTION PLAN" ("Plan"). The Plan permits the granting of Nonstatutory Stock
Options and Incentive Stock Options.

1.2 Purpose. The purposes of this Plan are to enhance shareholder
investment by attracting, retaining, and motivating employees and consultants of
the Company and to encourage stock ownership by such employees and consultants
by providing them with a means to acquire a proprietary interest in the
Company's success.

Article II. Definitions

2.1 Definitions. Unless the context clearly requires otherwise, the
following terms shall have the respective meanings set forth below, and when
said meaning is intended, the term shall be capitalized.

(a) "Board" means the Board of Directors of the Company.

(b) "Code" means the Internal Revenue Code of 1986, as amended.

(c) "Committee" shall mean the Committee, as specified in Article
IV hereof, appointed by the Board to administer the Plan.

(d) "Company" means Chronimed Inc., a Minnesota corporation
(including any and all subsidiaries).

(e) "Consultant" means any person or entity, including an officer
or director of the company who provides services (other than
as an Employee) to the Company.

(f) "Date of Exercise" means the date the Company receives notice
by an Optionee of the exercise of an Option pursuant to
section 8.1 of this Plan. Such notice shall indicate the
number of shares of Stock as to which the Optionee intends to
exercise an Option.

(g) "Employee" means any person, including an officer or director
of the Company, who is employed by the Company.

(h) "Exchange Act" means the Securities and Exchange Act of 1934,
as amended.

(i) "Fair Market Value" means the closing price of the Stock as
reported by NASDAQ on the applicable day, or if there has been
no sale on that date, on the last preceding date on which a
sale occurred, or such other value of the Stock as shall be
specified by the Board.

(j) "Incentive Stock Option" means an Option granted under this
Plan which is designated as an Incentive Stock Option and is
intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code.

(k) "Insider" means a person who is, at the time of an Option
grant hereunder, an officer, director or holder of more than
ten percent of the outstanding shares of the Stock, as defined
in Section 16 of the Exchange Act.

(l) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Except as
otherwise specified herein, Nonstatutory Options may be
granted at such times and subject to such restrictions as the
Board shall determine without conforming to the statutory
rules of Section 422 of the Code applicable to incentive stock
options.

(m) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified
period of time. For purposes of this Plan, an Option may be
either an Incentive Stock Option or a Nonstatutory Option.

(n) "Optionee" means a person to whom an Option has been granted
under the Plan.

(o) "Parent Corporation" shall have the meaning set forth in
Section 424(e) of the Code with the Company being treated as
the employer corporation for purposes of this definition.

(p) "Subsidiary Corporation" shall have the meaning set forth in
Section 424(f) of the Code with the Company being treated as
the employer corporation for purposes of this definition.

(q) "Significant Shareholder" means an individual who, within the
meaning of Section 422(b)(6)of the Code, owns Stock possessing
more than ten percent of the total combined voting power of
all classes of stock of the Company or of any Parent
Corporation or Subsidiary Corporation of the Company. In
determining whether an individual is a Significant
Shareholder, an individual shall be treated as owning Stock
owned by certain relatives of the individual and certain Stock
owned by corporations in which the individual is a
shareholder, partnerships in which the individual is a
partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 424(d) of the Code.

(r) "Stock" means the common stock of the Company.

2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the feminine
gender, and the definition of any term herein in the singular also shall include
the plural.

2.3 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

Article III. Eligibility and Participation

3.1 Eligibility. All Employees are eligible to participate in this Plan
and receive Incentive Stock Options and/or Nonstatutory Options hereunder. All
Consultants are eligible to participate in this Plan and receive Nonstatutory
Options hereunder.

3.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all Employees and Consultants
those to whom Options shall be granted and shall determine the nature of and
number of shares of Stock subject to each such Option.

Article IV. Administration

4.1 The Committee. The Plan shall be administered by a Committee
appointed by the Board consisting of not fewer than two Directors who shall be
appointed from time to time by, and shall serve at the discretion of, the Board
of Directors. Each member of the Committee shall meet the requirements of Rule
16b-3 so that Options granted under the Plan may be considered "exempt" under
Rule 16b-3 and Section 16(b) of the Exchange Act. If for any reason the
Committee does not qualify to administer the Plan as contemplated by Rule 16b-3
of the Exchange Act, or as may be required under applicable tax law to permit a
deduction with respect to certain Options issued under the Plan, the Board of
Directors may appoint a new Committee so as to comply with the requirements of
Rule 16b-3 and such tax law.

4.2 Authority of the Committee. The Committee shall have full power
except as limited by law or by the Articles of Incorporation or Bylaws of the
Company, and subject to the provisions herein, to determine the size and types
of Options; to determine the terms and conditions of such Options in a manner
consistent with the Plan; to construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to establish, amend, or waive rules
and regulations for the Plan's administration; and (subject to the provisions of
Article XII herein) to amend the terms and conditions of any outstanding Option
to the extent such terms and conditions are within the discretion of the
Committee as provided in the Plan. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of the
Plan. As permitted by law, the Committee may delegate its authorities as
identified hereunder.

The discretion of the Committee shall be limited to the extent
necessary to retain the status of the Committee members as "disinterested
persons" pursuant to Rule 16b-3 of the Exchange Act.

4.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding on
all persons, including the Company, its shareholders, Employees, Consultants,
Optionees, and their respective successors.

Article V. Stock Subject to the Plan

5.1 Number. Subject to adjustment as provided in Section 5.3 herein,
the total number of shares of Stock hereby made available for grant and reserved
for issuance under the Plan shall be 1,000,000. The aggregate number of shares
of Stock available under this Plan shall be subject to adjustment as provided in
section 5.3. The total number of shares of Stock may be authorized but unissued
shares of Stock, or shares acquired by purchase as directed by the Board from
time to time in its discretion, to be used for issuance upon exercise of Options
granted hereunder.

5.2 Lapsed Options. If an Option shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares of Stock
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.

5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Committee, whose determination shall be
conclusive; provided, however, that fractional shares shall be rounded to the
nearest whole share. In any such case, the number and kind of shares that are
subject to any Option (including any Option outstanding after termination of
employment) and the Option price per share shall be proportionately and
appropriately adjusted without any change in the aggregate Option price to be
paid therefor upon exercise of the Option.

Article VI. Duration of the Plan

6.1 Duration of the Plan. Subject to shareholder approval, the Plan
shall be in effect for ten years from the date of its adoption by the Committee.
Any Options outstanding at the end of said period shall remain in effect in
accordance with their terms. The Plan shall terminate before the end of said
period if all Stock subject to it has been purchased pursuant to the exercise of
Options granted under the Plan.

Article VII. Terms of Stock Options

7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Employees or Consultants at any time and from time to time as determined by the
Committee; provided, however, that Consultants may receive only Nonstatutory
Options, and may not receive Incentive Stock Options. The Committee shall have
complete discretion in determining the recipient of options among the Employees
or Consultants, the number of shares of Stock subject to an Option and the
number of Options granted to each Optionee. In making such determinations, the
Committee may take into account the nature of services rendered by such
Employees or Consultants, their present and potential contributions to the
Company, and such other factors as the Committee in its discretion shall deem
relevant. The Committee also shall determine whether an Option is to be an
Incentive Stock Option or a Nonstatutory Option.

The aggregate Fair Market Value (determined at the date of grant) of
shares of Stock with respect to which Incentive Stock Options are exercisable
for the first time by the Optionee during any calendar year under all plans of
the Company under which Incentive Stock Options may be granted (and all such
plans of any Parent Corporations and any Subsidiary Corporations of the Company)
shall not exceed $100,000.

Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options in excess of the maximums established by the preceding
paragraph where such excess amount is treated as a Nonstatutory Option. In no
event, however, shall the number of shares of Stock with respect to which
Nonstatutory Stock Options may be granted to any Employee exceed $250,000 in any
fiscal year.

The Committee is expressly given the authority to issue amended Options
with respect to shares of Stock subject to an Option previously granted
hereunder. An amended Option amends the terms of an Option previously granted
and thereby supersedes the previous Option.

No Options granted under the Plan may be exercisable before the
approval of the Plan by the shareholders of the Company pursuant to the Bylaws
of the Company ("Shareholder Approval"). The granting and vesting of an Option
under the Plan by the Committee and the exercise of such Option by the Optionee
shall be subject to Shareholder Approval at the 1996 Annual Meeting of the
Company. If Shareholder Approval of the Plan does not occur at the 1996 Annual
Meeting of the Company any Option or Options held by any Optionee under the Plan
shall terminate immediately and shall be unexercisable.

7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.

7.3 Option Agreement. As determined by the Committee on the date of
grant, each Option shall be evidenced by an Option agreement (the "Option
Agreement") that includes the nontransferability provisions of Section 10.2
hereof and specifies: whether the Option is an Incentive Stock Option or a
Nonstatutory Option; the Option price; the duration of the Option; the number of
shares of Stock to which the Option applies; any vesting or serial exercise
restrictions which the Committee may impose; and any other terms or conditions
which the Committee may impose.

All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.

7.4 Option Price. No Incentive Stock Option granted pursuant to this
Plan shall have an Option price that is less than the Fair Market Value of Stock
on the date the Option is granted. Incentive Stock Options granted to
Significant Shareholders shall have an Option price of not less than 110 percent
of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be equal to the Fair Market Value of Stock on the
date the Option is granted and shall not be subject to the restrictions
applicable to Incentive Stock Options.

7.5 Term of Options. Each Option shall expire at such time as the
Committee shall determine when it is granted, provided however that no Option
shall be exercisable later than the tenth anniversary date of its grant. By its
terms, an Incentive Stock Option granted to a Significant Shareholder shall not
be exercisable after five years from the date of grant.

7.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for all
Optionees. To the extent required to maintain the exemption of an Option under
Rule 16b-3, any Option granted under this Plan to an Insider shall not become
exercisable until at least six months following the date of its grant.

7.7 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be issued
until full payment therefor has been made. Payment shall be made (i) in cash, or
(ii) if acceptable to the Committee, in Stock having a Fair Market Value at the
time of the exercise equal to the exercise price (provided that, in the case of
an Insider, the Stock that is tendered as payment upon exercise of the Option
has been held by the Optionee for at least six months prior to its tender if
such restriction is necessary to maintain the exemption of the Option under Rule
16b-3), or in some other form, including a combination of the above; provided,
however, in the case of an Incentive Stock Option, that said other form of
payment does not prevent the Option from qualifying for treatment as an
"incentive stock option" within the meaning of the Code. In addition, the
Company may establish a cashless exercise program in accordance with Federal
Reserve Board Regulation T.

Article VIII. Written Notice, Issuance of
Stock Certificates, Shareholder Privileges

8.1 Written Notice. An Optionee wishing to exercise an Option shall
give written notice to the Chief Financial Officer of the Company, in the form
and manner prescribed by the Committee. Except for approved "cashless
exercises," full payment for the shares exercised pursuant to the Option must
accompany the written notice.

8.2 Issuance of Stock Certificates. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the Optionee
or to a nominee of the Optionee a certificate or certificates for the requisite
number of shares of Stock. Such certificate may bear a legend restricting
transfer thereof.

8.3 Privileges of a Shareholder. An Optionee or any other person
entitled to exercise an Option under this Plan shall not have shareholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such stock.

Article IX. Termination of Employment

9.1 Death. If an Optionee's employment in the case of an Employee, or
provision of services as a Consultant, in the case of a Consultant, terminates
by reason of death, the Option may thereafter be exercised at any time prior to
the expiration date of the Option or within 12 months after the date of such
death, whichever period is the shorter, by the person or persons entitled to do
so under the Optionee's will or, if the Optionee shall fail to make a
testamentary disposition of an Option or shall die intestate, the Optionee's
legal representative or representatives. The Option shall be exercisable only to
the extent that such Option was exercisable as of the date of death.

9.2 Termination Other Than For Cause Or Due to Death. In the event of
an Optionee's termination of employment, in the case of an Employee, or
termination of the provision of services as a Consultant, in the case of a
Consultant, other than by reason of death or for cause, the Optionee may
exercise such portion of his Option as was exercisable by the Optionee at the
date of such termination (the "Termination Date") at any time within three (3)
months of the Termination Date; provided, however, that where the Optionee is an
Employee, and is terminated due to disability within the meaning of Code Section
422(c)(6), such Optionee may exercise such portion of any Option as was
exercisable by such Optionee on Optionee's Termination Date within one year of
such Termination Date. In any event, the Option cannot be exercised after the
expiration of the term of the Option. Options not exercised within the
applicable period specified above shall terminate.

In the case of an Employee, a change of duties or position within the
Company or an assignment of employment in a Subsidiary Corporation or Parent
Corporation of the Company, if any, or from such a corporation to the Company,
shall not be considered a termination of employment for purposes of this Plan.
The Option Agreements may contain such provisions as the Committee shall approve
with reference to the effect of approved leaves of absence upon termination of
employment.

9.3 Termination for Cause. In the event of an Optionee's termination of
employment, in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for cause, any Option or Options held by such Optionee under the
Plan, to the extent not exercised before such termination, shall terminate
immediately.

Article X. Rights of Optionees

10.1 Service. Nothing in this Plan shall interfere with or limit in any
way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.

10.2 Nontransferability. Except as otherwise determined by the
Committee in the case of Nonstatutory Options, all Options granted under this
Plan shall be nontransferable by the Optionee, other than by will or the laws of
descent and distribution, and shall be exercisable during the Optionee's
lifetime only by the Optionee.

Article XI. Optionee-Employee's
Transfer or Leave of Absence

11.1 Optionee-Employee's Transfer or Leave of Absence. For Plan
purposes:

(a) A transfer of an Optionee who is an Employee from the Company
to a Subsidiary Corporation or Parent Corporation, or from one
such corporation to another, or

(b) a leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company, and (ii) if the Optionee
holds an Incentive Stock Option, which qualifies under the
applicable regulations under the Code which apply in the case
of incentive stock options,

shall not be deemed a termination of employment. However, under no circumstances
may an Optionee exercise an Option during any leave of absence, unless
authorized by the Committee.

Article XII. Amendment,
Modification, and Termination of the Plan

12.1 Amendment, Modification, and Termination of the Plan. The Board
may at any time terminate, and from time to time may amend or modify the Plan,
provided, however, that

(a) no such action of the Board, without approval of the
shareholders, may:

(i) increase the total amount of Stock that may be
purchased through Options granted under the Plan,
except as provided in section 5.1; or

(ii) change the class of Employees or Consultants eligible
to receive Options; and

(b) without the approval of the shareholders of the Company (as
may be required by the Code, by Section 16 of the Exchange
Act, by any national securities exchange or system on which
the Stock is then listed or reported, or by a regulatory body
having jurisdiction with respect hereto) no such termination,
amendment, or modification may:

(i) materially increase the total number of shares that
may be granted to Insiders under the Plan;

(ii) materially modify the requirements as to eligibility
for Insiders to participate in the Plan;

(iii) materially increase the cost of the Plan related to
Insiders or materially increase the benefits to
Insiders;

(iv) extend the period during which Options may be granted
to or exercised by Insiders;

(v) change the provisions of the Plan regarding Option
price on grants to Insiders; or

(vi) modify the Plan or the terms of Options in such a way
that the members of the Committee lose their status
as "disinterested persons" under Rule 16b-3 of the
Exchange Act.

12.2 Options Previously Granted. No amendment, modification, or
termination of the Plan shall in any manner adversely affect any outstanding
Option under the Plan without the consent of the Optionee holding the Option.

Article XIII. Merger, Consolidation or Acceleration Event

13.1 Merger, Consolidation.

(a) Subject to any required action by the shareholders, if the
Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to
and apply to the securities to which a holder of the number of
shares of Stock subject to the Option would have been entitled
in such merger or consolidation.

(b) A dissolution or a liquidation of the Company or a merger and
consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to
terminate as of the effective date of such dissolution,
liquidation, merger or consolidation. However, the Optionee
either (i) shall be offered a firm commitment whereby the
resulting or surviving corporation in a merger or
consolidation will tender to the Optionee an option (the
"Substitute Option") to purchase its shares on terms and
conditions both as to number of shares and otherwise, which
will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder granted by the
Company, or (ii) shall have the right immediately prior to
such merger, or consolidation to exercise any unexercised
Options whether or not then exercisable, subject to the
provisions of this Plan. The Board shall have absolute and
uncontrolled discretion to determine whether the Optionee has
been offered a firm commitment and whether the tendered
Substitute Option will substantially preserve to the Optionee
the rights and benefits of the Option outstanding hereunder.
In any event, any Substitute Option for an Incentive Stock
Option shall comply with the requirements of Code Section
424(a).

13.2 Impact of Acceleration Event. Subject to Shareholder Approval of
the Plan, options granted hereunder will become fully exercisable and vested in
the event of a "Acceleration Event" as defined in Section 13.3 or a "Potential
Acceleration Event" as defined in Section 13.4.

13.3 Definition of "Acceleration Event." For purposes of Section 13.2,
an "Acceleration Event" means the happening of any of the following:

(a) When any "person" as defined in Section 3(a) (9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the
Exchange Act, but excluding the Company or any subsidiary or
parent or any employee benefit plan sponsored or maintained by
the Company or any subsidiary or parent (including any trustee
of such plan acting as trustee), directly or indirectly,
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act, as amended from time to time), of securities
of the Company representing 30 percent or more of the combined
voting power of the Company's then outstanding securities;

(b) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning
of such period, constitute the Board ("Incumbent Directors")
cease for any reason other than death to constitute at least a
majority thereof; provided, however, that a Director who was
not a Director at the beginning of such 24-month period will
be deemed to have satisfied such 24-month requirement (and be
an Incumbent Director) if such Director was elected by, or on
the recommendation or, or with the approval of, at least 60%
of the Directors who then qualified as Incumbent Directors
either actually (because they were Directors at the beginning
of such 24-month period) or by prior operation of this Section
13.3(b); or

(c) The approval by the shareholders of any sale, lease, exchange,
or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the
Company or the adoption of any plan or proposal for the
liquidation or dissolution of the Company.

13.4 Definition of "Potential Acceleration Event." For purposes of
Section 13.2, a "Potential Acceleration Event" means the approval by the Board
of an agreement by the Company the consummation of which would result in an
Acceleration Event of the Company as defined in Section 13.3.

Article XIV. Securities Registration

14.1 Securities Registration. In the event that the Company shall deem
it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.

Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he or she is
acquiring such shares for his or her own account for investment and not with a
view to, or for sale in connection with, the distribution of any part thereof,
(b) that before any transfer in connection with the resale of such shares, he or
she will obtain the written opinion of counsel for the Company, or other counsel
acceptable to the Company, that such shares may be transferred. The Company may
also require that the certificates representing such shares contain legends
reflecting the foregoing.

Article XV. Tax Withholding

15.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require an Optionee to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the Optionee's
FICA obligation) required by law to be withheld with respect to any grant,
exercise, or payment made under or as a result of the Plan.

15.2 Share Withholding. With respect to withholding required upon the
exercise of Options, or upon any other taxable event hereunder, Optionees may
elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold shares having a
Fair Market Value, on the date the tax is to be determined, equal to the minimum
marginal tax which could be imposed on the transaction.

Share withholding upon the exercise of an Option will be done if the
Optionee makes a signed, written election and either of the following occurs:

(a) The Option exercise occurs during a "window period" and the
election to use such share withholding is made at any time
prior to exercise. For this purpose, "window period" means the
period beginning on the third business day following the date
of public release of the Company's quarterly financial
information and ending after the twelfth business day
following such date. An earlier election can be revoked up
until the exercise of the Option during the window period; or

(b) An election to withhold shares is made at least six months
before the Option is exercised. If this election is made, then
the Option can be exercised and shares may be withheld outside
of the window period.

Article XVI. Indemnification

16.1 Indemnification. To the extent permitted by law, each person who
is or shall have been a member of the Committee or of the Board shall be
indemnified and held harmless by the Company against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by him or
her in connection with or resulting from any claim, action, suit, or proceeding
to which he or she may be a party or in which he or she may be involved by
reason of any action taken or failure to act under the Plan and against and from
any and all amounts paid by him or her in settlement thereof, with the Company's
approval, or paid by him or her in satisfaction of judgment in any such action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.

Article XVII. Requirements of Law

17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.

17.2 Governing Law. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Minnesota.

17.3 Compliance with the Code. Incentive Stock Options granted
hereunder are intended to qualify as "incentive stock options" under Code
Section 422. If any provision of this Plan is susceptible to more than one
interpretation, such interpretation shall be given thereto as is consistent with
Incentive Stock Options granted under this Plan being treated as incentive stock
options under the Code.

Article XVIII. Effective Date of Plan

18.1 Effective Date. Subject to Shareholder Approval of the Plan, the
Plan shall be effective as of July 1, 1996, the date of its adoption by the
Board.

Article XIX. No Obligation to Exercise Option

19.1 No Obligation to Exercise. The granting of an Option shall impose
no obligation upon the holder thereof to exercise such Option.

CHRONIMED INC.

By:
-----------------------------------
Its: President and Chief Executive
Officer

CHRONIMED INC.

EXHIBIT 11.1

COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED
JULY 1, JUNE 30, JUNE 28,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Primary
Average shares outstanding . . . . . . . . . . . . . . . . . . 10,058 11,685 12,221
Net effect of dilutive stock options
and warrants--based on the treasury
stock method using average market price . . . . . . . . . . 1,200 927 916
------- ------- -------

Total . . . . . . . . . . . . . . . . . . . . . . . . . 11,258 12,612 13,137
======= ======= =======

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,002 $ 1,603 $ 5,459
======= ======= =======

Net income per share . . . . . . . . . . . . . . . . . . . . . . $ .18 $ .13 $ .42
======= ======= =======

Fully Diluted
Average shares outstanding . . . . . . . . . . . . . . . . . . 10,058 11,685 12,221
Net effect of dilutive stock options
and warrants--based on the treasury
stock method using average market price . . . . . . . . . . 1,200 927 997
------- ------- -------

Total . . . . . . . . . . . . . . . . . . . . . . . . . 11,258 12,612 13,218
======= ======= =======

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,002 $ 1,603 $ 5,459
======= ======= =======

Net income per share . . . . . . . . . . . . . . . . . . . . . . $ .18 $ .13 $ .41
======= ======= =======
</TABLE>

CHRONIMED INC.

EXHIBIT 13.1

Portions of the 1996 Annual Report to Shareholders

SELECTED FINANCIAL DATA
(In thousands, except per share data)

JUNE 28, JUNE 30, JULY 1, JULY 2, JUNE 30,
FINANCIAL RESULTS 1996 1995 1994 1993 1992

<S> <C> <C> <C> <C> <C>
Revenues $ 90,512 $ 62,527 $ 49,027 $ 31,202 $ 20,397

Operating income 6,974 1,054 1,748 863 484
Interest income 1,327 1,024 426 329 113
Interest expense -- -- (1) (3) (127)
Income tax expense (2,842) (475) (171) (30) (16)
Net income $ 5,459 $ 1,603 $ 2,002 $ 1,159 $ 454

Net income per share $ .42 $ .13 $ .18 $ .12 $ .07

Weighted average number of shares
outstanding 13,137 12,612 11,258 9,898 6,797

JUNE 28, JUNE 30, JULY 1, JULY 2, JUNE 30,
FINANCIAL POSITION 1996 1995 1994 1993 1992

Working capital $ 40,261 $ 31,124 $ 26,905 $ 13,727 $ 14,037
Total assets 67,908 52,394 53,196 18,462 16,802
Current liabilities 10,396 4,824 10,247 1,605 1,930
Long-term debt and capital lease
obligations 350 -- -- 79 12
Shareholders' equity 57,162 47,570 42,949 16,778 14,860

</TABLE>

Page 14

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The fiscal years referenced herein are as follows: FISCAL YEAR YEAR ENDED
1996 June 28, 1996
1995 June 30, 1995
1994 July 1, 1994

The following table sets forth for the years indicated the percentage of
revenues represented by items in the Consolidated Statements of Income and the
percentage by which each item changed from year to year.

<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE CHANGES
FISCAL 1996 OVER 1995 OVER
1996 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues
Managed Care 16% 13% 8% 74% 104%
Proprietary Products 36 27 24 93 41
Health Professional Referral/
Patient Choice 48 60 68 17 13
Total revenues 100 100 100 45 28

Cost of sales 72 75 74 39 30
Gross profit 28 25 26 63 22
Operating expenses:
Selling and marketing 7 9 9 15 27
Orphan Medical development
expenses -- -- 2 * *
General and administrative 13 14 12 34 49
20 23 23 27 31

Operating income 8 2 3 562 (40)
Interest income 1 2 1 30 140
Income tax expense (3) (1) * 498 178

Net income 6% 3% 4% 241% (20)%

</TABLE>

*Not meaningful

RECAP OF 1996 RESULTS
Total revenues in 1996 were up 45% from the prior year to a record $90.5
million. Gross profit as a percentage of revenue increased to 28.0% in 1996
against 24.9% in 1995, with gross profit dollars increasing 63% versus the prior
year to $25.4 million. Selling and marketing expenses increased $814,000 or 15%
against the prior year, but declined as a percentage of revenue from 8.9% in
1995 to 7.0% in 1996. General and administrative expenses, including the
provision for uncollectible accounts, increased $2.9 million or 34%, but
declined as a percentage of revenue from 13.9% in 1995 to 12.8% in 1996. The
Company's operating income increased to $7.0 million, 562% over the prior year
operating income of $1.1 million. Interest income increased $303,000, or 30%,
against the prior year interest income of $1.0 million. Net income of $5.5
million or $.42 per share compares favorably to 1995 net income of $1.6 million
or $.13 per share. Inflation and changing prices had very little impact on the
Company's overall revenue growth and operating income for 1996 and 1995.

Page 15

REVENUES
The Company's revenues are derived from three principal sources: Managed
Care--revenues from customers who are part of a managed care network serviced by
the Company, consisting of the self-injectables program and the diabetes program
contract business; Proprietary Products--revenues generated mainly from
proprietary products, primarily the blood glucose reagent testing strips and
publishing; and Health Professional Referral/ Patient Choice--revenues from
referrals from health care providers or patients who choose to purchase from the
Company, primarily Specialty Pharmacy (organ transplant) and Home Service
Medical (direct mail diabetes products).

1996 VERSUS 1995 Total revenues increased to $90.5 million from $62.5 million,
up 45% year to year. Revenues from Managed Care increased 74% from $8.4 million
to $14.6 million due primarily to growth in the managed care self-injectables
program. For Proprietary Products, revenues increased 93%, or $15.5 million,
from $16.6 million in 1995 to $32.1 million in 1996. $15.0 million of this
growth is from the sale of blood glucose testing reagent strips that the Company
markets under exclusive distribution agreements. The 1995 revenue for
Proprietary Products was negatively impacted by approximately $4.0 million due
to a production hold by a key supplier. Revenues from Health Professional
Referral/Patient Choice increased 17% from $37.5 million to $43.8 million due
primarily to increased sales to organ transplant patients through the Specialty
Pharmacy business. Also, the direct mail diabetes products business -- Home
Service Medical--grew $540,000, or 8%, in 1996.

Revenue growth is expected to continue into fiscal 1997, with Managed Care and
Proprietary Product sales experiencing the greatest increases. The Company
predicates its high growth managed care projections on a business model which
relates the number of converted patients for the Company's self-injectables
program to the number of members of health insurance plans under formal
agreements with the Company. Because the Company has had limited time with the
programs to develop statistically sound patient conversion rates, its
projections may be subject to inaccuracy. As to the projections for Proprietary
Products, recent production rates of reagent strips coupled with the potential
for additional marketing arrangements should provide continued growth into 1997.
Further, the July 1, 1996 acquisition of StatScript Management Services, Inc.
and related pharmacies is expected to provide the Company with $16 million or
more of same-stores 1997 revenue in the HIV/AIDS specialty pharmacy marketplace.

1995 VERSUS 1994 Total revenues increased to $62.5 million from $49.0 million,
up 28% year to year. Revenues from Managed Care increased 104% from $4.1 million
to $8.4 million, with $2.9 million of growth in the diabetes program contract
business (from two major contracts) and $1.4 million in growth from the start-up
of the managed care self-injectables program. For Proprietary Products, revenues
increased 41% or $4.9 million, from $11.8 million in 1994 to $16.7 million in
1995. $3.9 million of this growth was from the sale of the Quick Check and
Supreme blood glucose testing reagent strips. Also, as noted above, the 1995
revenue for Proprietary Products was negatively impacted by approximately $4.0
million due to a production hold by a key supplier. Revenues from Health
Professional Referral/ Patient Choice increased 13% from $33.1 million to $37.5
million, with $6.8 million coming from growth in sales to organ transplant
patients through the Specialty Pharmacy business, offset primarily by a decline
in the direct mail diabetes products business--Home Service Medical--due to
reduced promotional spending in 1995.

Page 16

COST OF SALES AND GROSS PROFITS
1996 VERSUS 1995 The increase in cost of sales dollars during the year--up
39%--reflects the Company's 45% revenue growth. The Company's overall gross
profit percentage of 28.0% is significantly improved over the prior year
percentage of 24.9%. This improvement is a result of the sales mix of products
and an increase in internal production of blood glucose testing reagent strips,
which are sold at a favorable margin. Selected price increases also had a
favorable gross profit impact. Also, the average order size increased
significantly from $315 in 1995 to $433 in 1996; this increase in order size has
resulted in higher gross margin dollars per order.

1995 VERSUS 1994 The increase in cost of sales dollars during the year--up
30%--reflects the Company's 28% revenue growth. The Company's overall gross
profit percentage of 24.9% is down from the prior year percentage of 26.0%. This
decline reflects the slight relative shift in mix of revenue toward lower margin
business, partially offset by order size efficiencies. Average order size
increased from $257 in 1994 to $315 in 1995.

SELLING AND MARKETING EXPENSES
1996 VERSUS 1995 Selling and marketing expenses increased 15% in 1996 over the
prior year, but declined as a percentage of revenue from 8.9% to 7.0%. The two
most significant growth areas are the Managed Care self-injectables program and
the Proprietary Product reagent strip business. In the self-injectables program,
the Company invested significantly in selling and marketing expenses to grow the
program beyond the pilot phase startup in 1995. In the reagent strip business,
the Company incurred expenses in achieving the year to year revenue growth of
108%. On the expense reduction side, the Company received a large expense credit
from a major supplier to help defray expenses incurred in converting patients to
a new drug in the Specialty Pharmacy line of the Patient Choice business.

1995 VERSUS 1994 Selling and marketing expenses increased 27% in 1995 over the
prior year, remaining flat as a percentage of revenue at 8.9%. The efficiencies
obtained through the growth in average order size were offset by the hiring of
additional sales personnel in the Managed Care and Proprietary Products
businesses.

GENERAL AND ADMINISTRATIVE
EXPENSES
1996 VERSUS 1995 General and administrative expenses (G&A), including the
provision for uncollectible accounts, increased $2.9 million or 34% in 1996 over
the prior year, but declined as a percentage of revenue from 13.9% to 12.8%. The
increase of $2.9 million in G&A spending is a result of increased customer
service and fulfillment costs related to increases in revenue, along with
investments in systems and people to support the rapid business growth. The
decline in G&A expense as a percentage of revenue is due to the benefits
obtained from reengineering a number of key processes and the leveraging impact
of revenue growth on fixed costs.

1995 VERSUS 1994 G&A expenses increased $2.9 million, or 49% in 1995 over the
prior year and increased as a percentage of revenue from 11.8% to 13.9%. The
percentage increase reflects the $4.0 million shortfall in revenues from a blood
glucose testing reagent strip as well as infrastructure investments to prepare
for business growth in 1995 and beyond.

INTEREST INCOME
ALL YEARS Interest income in 1996, 1995 and 1994 was generated primarily from
the proceeds of the Company's sale of common stock in 1994 coupled with the
Company's positive operating cash flow. The increases in interest income are due
to increases in average investable funds and average yield.

Page 17

INCOME TAXES
ALL YEARS The Company's income tax rate was approximately 34% in 1996 due to
favorable tax treatment on municipal bond interest income. The Company does not
expect this low rate to continue in 1997 as the proportion of municipal bond
interest income drops with respect to operating income, which is fully taxed for
both federal and state purposes. The Company's income tax rate was approximately
23% in 1995, again due primarily to the favorable tax treatment on municipal
bond interest income.

LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 1996, the Company had $40.3 million of working capital. As of
July 1, 1996, working capital decreased approximately $10 million due to the
all-cash acquisition of StatScript Management Services, Inc. During 1996, the
Company generated $9.6 million of cash from operating activities. The average
days sales outstanding (DSO) of the Company's accounts receivable improved from
80 days at June 30, 1995 to 67 days at June 28, 1996. The decrease reflects
improved collection efforts; growth in revenue from payors which are billed
electronically; and increased sales to large institutions which pay claims in a
more timely manner. Cash was used for purchases of property and equipment and
other investing activities in amounts totaling $2.3 million. The primary
expenditures were for information systems and manufacturing equipment for
reagent strip production. Cash provided from the exercise of stock options was
$1.9 million.

As of June 30, 1995, the Company had $31.1 million of working capital. During
1995, the Company used $1.8 million in cash for operating activities, primarily
to support growth in accounts receivable and inventory. Cash totalling $7.9
million was used to purchase property and equipment primarily for pharmacy
operations and manufacturing, and to reduce notes payable and capital lease
obligations. Cash totalling $5.6 million was provided from the exercise of stock
options and the net sales of available-for-sale securities.

As of June 28, 1996, the Company had $350,000 in long-term debt, to be
converted to stock in August, 1997, and shareholders' equity of $57.2 million.
The Company has a discretionary line of credit totaling $2.5 million, with no
balance outstanding as of June 28, 1996, plus $33.3 million of cash and
available-for-sale securities. In addition, on September 6, 1996, the Company
approved a stock repurchase plan of up to 1 million shares at times and prices
to be determined by management. The Company believes that available-for-sale
securities, line of credit, and cash generated by operations will allow it to
meet foreseeable cash requirements and provide the flexibility to fund future
growth.

The Company has no material commitments for capital expenditures for 1997.

OUTLOOK
Information contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," other than historical information, should
be considered forward looking and reflects management's current views of future
events and financial performance that involve a number of risks and
uncertainties. The factors that could cause actual results to differ include,
but are not limited to, the following: competition and pricing pressures;
difficulties or delays in the development and marketing of the Company's
products; difficulties in realizing the expected revenues and profits from the
StatScript acquisition; termination of key payor contracts; termination of key
supplier contracts; changes in or unknown violations of various Federal, State,
and Local regulations governing the business; and management of growth.

Page 18

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS

ASSETS June 28, June 30,
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,433,774 $ 2,203,055
Available-for-sale securities 12,802,788 11,595,690
Accounts receivable (net of allowance of $860,000 and
$725,000 at June 28, 1996 and June 30, 1995, respectively) 19,842,665 15,103,540
Income taxes receivable 48,793 1,397,653
Inventory 5,475,987 4,490,149
Other current assets 559,772 298,380
Deferred taxes 493,000 860,300
Total current assets 50,656,779 35,948,767

Notes receivable 1,374,601 927,641
Available-for-sale securities 9,069,248 11,605,667

Property and equipment:
Property and equipment 8,542,187 5,102,253
Allowance for depreciation (3,096,836) (1,629,432)
5,445,351 3,472,821

Other assets, net 1,362,258 438,977
Total assets $67,908,237 $52,393,873

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $5,054,234 $ 3,276,518
Accrued expenses 4,366,565 1,547,827
Income taxes payable 570,956 --
Short-term debt 404,000 --
Total current liabilities 10,395,755 4,824,345

Long-term debt 350,000 --

Shareholders' equity:
Preferred Stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - None -- --
Common Stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares -
12,454,560 and 11,903,751 at
June 28, 1996 and June 30, 1995, respectively 124,546 119,038
Additional paid-in capital 49,569,368 45,357,161
Retained earnings 7,475,642 2,016,254
57,169,556 47,492,453

Unrealized gain (loss) on available-for-sale securities (7,074) 77,075
Total shareholders' equity 57,162,482 47,569,528
Total liabilities and shareholders' equity $67,908,237 $52,393,873

</TABLE>

See accompanying notes to consolidated financial statements.

Page 19

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

Year Ended

June 28, June 30, July 1,
1996 1995 1994

<S> <C> <C> <C>
Revenues $90,511,550 $62,527,042 $49,027,232
Cost of sales 65,152,167 46,980,798 36,257,956
Gross profit 25,359,383 15,546,244 12,769,276

Operating expenses:
Selling and marketing 6,348,369 5,534,621 4,370,223
Orphan Medical development expenses -- -- 848,662
Research and development 437,185 292,933 --
General and administrative 10,501,258 7,660,826 4,965,533
Provision for uncollectible accounts 1,099,063 1,003,870 837,236
Total operating expenses 18,385,875 14,492,250 11,021,654

Operating income 6,973,508 1,053,994 1,747,622
Interest income 1,327,380 1,024,082 425,774
Income before income taxes 8,300,888 2,078,076 2,173,396
Income tax expense (2,841,500) (475,000) (171,000)
Net income $ 5,459,388 $ 1,603,076 $ 2,002,396

Income per share $.42 $.13 $.18

Weighted average number of shares
outstanding during the period 13,137,460 12,611,816 11,257,531

</TABLE>

See accompanying notes to consolidated financial statements.

Page 20

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY

UNREALIZED
GAIN (LOSS) ON
ADDITIONAL RETAINED RECEIVABLE INVESTMENTS
COMMON STOCK PAID-IN EARNINGS FROM AVAILABLE-
SHARES AMOUNT CAPITAL (DEFICIT) OFFICER FOR-SALE TOTAL

<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 2, 1993 9,493,701 $ 94,937 $18,363,734 $(1,589,218) $(91,046) $ -- $16,778,407
Exercise of stock
options and
warrants 229,148 2,291 476,406 -- -- -- 478,697
Public offering
proceeds,
net of expenses
of $1,987,128 1,699,500 16,995 29,436,627 -- -- -- 29,453,622
Tax benefit of stock
option exercises -- -- 363,500 -- -- -- 363,500
Payment on
receivable
from officer -- -- -- -- 91,046 -- 91,046
Unrealized loss
on available-
for-sale securities -- -- -- -- -- (49,383) (49,383)
Spin-off of Orphan
Medical, Inc. -- -- (6,169,666) -- -- -- (6,169,666)
Net income -- -- -- 2,002,396 -- -- 2,002,396
Balance
July 1, 1994 11,422,349 114,223 42,470,601 413,178 -- (49,383) 42,948,619
Exercise of
stock options 481,402 4,815 1,618,860 -- -- -- 1,623,675
Tax benefit of stock
option exercises -- -- 1,267,700 -- -- -- 1,267,700
Unrealized gain
on available-
for-sale securities -- -- -- -- -- 126,458 126,458
Net income -- -- -- 1,603,076 -- -- 1,603,076
Balance
June 30, 1995 11,903,751 119,038 45,357,161 2,016,254 -- 77,075 47,569,528
Common stock issued
for acquisition 42,716 427 549,274 -- -- -- 549,701
Exercise of
stock options 508,093 5,081 1,889,748 -- -- -- 1,894,829
Tax benefit of stock
option exercises -- -- 1,773,185 -- -- -- 1,773,185
Unrealized loss
on available-
for-sale securities -- -- -- -- -- (84,149) (84,149)
Net income -- -- -- 5,459,388 -- -- 5,459,388
Balance
June 28, 1996 12,454,560 $124,546 $49,569,368 $7,475,642 $ -- $ (7,074) $57,162,482

</TABLE>

See accompanying notes to consolidated financial statements.

Page 21

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS
OF CASH FLOWS

YEAR ENDED

JUNE 28, JUNE 30, JULY 1,
1996 1995 1994

<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $5,459,388 $1,603,076 $ 2,002,396
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,811,580 819,501 360,357
Deferred income taxes 367,300 (448,400) (411,900)
Income tax benefit of stock option plans 1,773,185 1,267,700 363,500
Changes in operating assets and liabilities:
Accounts and notes receivable (4,825,370) (2,072,674) (5,380,000)
Income taxes receivable 1,348,860 (1,397,653) --
Inventory (612,245) (1,210,333) (1,238,696)
Accounts payable 1,220,486 (181,256) 2,273,856
Accrued expenses 2,721,754 (159,916) 338,111
Income taxes payable 570,956 -- --
Other assets (245,860) (10,422) (193,554)
Net cash provided by (used in) operating activities 9,590,034 (1,790,377) (1,886,498)

INVESTING ACTIVITIES
Acquisitions, net of cash purchased (84,461) -- --
Purchases of property and equipment (3,414,855) (2,824,397) (1,039,944)
Payment received on shareholder note receivable -- -- 91,046
Purchase of available-for-sale securities (16,634,062) (21,394,632) (31,344,251)
Sale and maturities of available-for-sale securities 17,879,234 25,410,247 9,303,264
Net cash provided by (used in) investing activities (2,254,144) 1,191,218 (22,989,885)

FINANCING ACTIVITIES
Net proceeds from sale of Common Stock 1,894,829 1,623,675 29,932,319
Principal payments on notes payable and capital
lease obligations -- (5,081,698) (104,637)
Net cash (used in) provided by financing activities 1,894,829 (3,458,023) 29,827,682

(Decrease) increase in cash and cash equivalents 9,230,719 (4,057,182) 4,951,299
Cash and cash equivalents at beginning of period 2,203,055 6,260,237 1,308,938
Cash and cash equivalents at end of period $11,433,774 $2,203,055 $ 6,260,237

SUPPLEMENTAL DISCLOSURES:
* Income taxes paid in fiscal 1996, 1995 and 1994 were $163,850,
$1,425,404 and $95,439, respectively.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
* The Company acquired the stock of British American Medical in
August, 1995. The Company purchased $145,586 of cash, $360,715 of
accounts receivable, $352,258 of inventory, $24,316 of other assets,
$25,079 of fixed assets and $849,961 of intangible assets, and
assumed accounts payable and accrued expenses of $654,214. The
acquisition was financed by the issuance of 42,716 shares of
Chronimed stock and $554,000 of debt to be converted to stock.

</TABLE>

See accompanying notes to consolidated financial statements.

Page 22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 BUSINESS ACTIVITY

Chronimed Inc. develops, manufactures, markets and distributes through various
channels of distribution prescription drugs, medical products and proprietary
educational materials to specific populations of patients with chronic
conditions.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR
The Company uses a four-week, four-week, five-week (4-4-5) quarterly accounting
cycle with the fiscal year ending on the Friday closest to June 30.

CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Home Direct Medical Services, Inc., which was
incorporated in fiscal 1993, and British American Medical, Inc., which was
acquired in a stock purchase in fiscal 1996. The operations of Orphan Medical,
Inc., which was incorporated and spun off in fiscal 1994, are included in the
Company's results prior to the spin-off.

REVENUE RECOGNITION
Sales are recognized upon shipment of products and at the time of purchase in
the retail stores.

STOCK-BASED COMPENSATION
The Company currently follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
Compensation. Compliance with FAS 123 is not required for the Company until
fiscal 1997. The Company has not yet determined the impact of the new standard
on its financial statements.

CASH EQUIVALENTS
The Company considers all investments with a maturity of 90 days or less when
purchased to be cash equivalents.

INVESTMENTS
The Company's investment policy is to invest idle and excess funds in high
grade, fixed income securities with maturities generally of no more than two
years. The major objective of investment activities is to protect capital value.

Investments consist of debt securities with a remaining maturity of more than
90 days at the date of purchase. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
"available-for-sale" as of June 28, 1996 and June 30, 1995. The Company
considers the net unrealized gain (loss) on these investments of $(7,074) and
$77,075 at June 28, 1996 and June 30, 1995, respectively, to be temporary, and
as such has recorded it through shareholders' equity.

Page 23

ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance amount based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.

INVENTORIES
Inventories consist primarily of goods held for resale, and are carried at the
lower of cost or market determined under the average cost method.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on additions to property
and equipment is computed using the straight-line method. Depreciation occurs
over estimated useful lives of one to seven years.

INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis; goodwill is amortized
over five to twenty years and customer lists and technology rights are amortized
over two to five years.

INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and the tax basis of assets and liabilities.

PER SHARE DATA
Income per common and common equivalent share is based on the weighted average
number of shares and dilutive Common Stock equivalents outstanding during the
year. Common Stock equivalents consist of options and warrants outstanding to
purchase shares of the Company's Common Stock.

The Company's Board of Directors approved a three-for-two stock split of the
Company's Common Stock, effected in the form of a 50% stock dividend, effective
February 21, 1994 for shares outstanding as of February 7, 1994. All share and
per share information has been retroactively adjusted to show the effect of this
stock split.

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 amounts reported in the financial statements and accompanying notes.
Those assumptions and estimates are subject to constant revisions, and actual
results could differ from those estimates.

IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current
year presentation. These reclassifications have no impact on net income or
shareholders' equity as previously reported.

Page 24

3 AVAILABLE-FOR-SALE SECURITIES

The amortized cost and estimated market value of available-for-sale securities
are as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE

<S> <C> <C> <C> <C>
As of June 30, 1995:
Municipal bonds $23,124,282 $77,075 $ -- $23,201,357

As of June 28, 1996:
Municipal bonds $16,173,325 $38,810 $ 6,695 $16,205,440
U.S. Government securities 5,215,653 -- 75,539 5,140,114
Commercial paper 490,132 36,350 -- 526,482

$21,879,110 $75,160 $82,234 $21,872,036

</TABLE>

The amortized cost and estimated market value of available-for-sale securities
by contractual maturity are as follows:

<TABLE>
<CAPTION>
JUNE 28, 1996 JUNE 30, 1995

ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE

<S> <C> <C> <C> <C>
Due in one year or less $12,723,287 $12,802,788 $11,524,203 $11,595,690
Due after one year through
two years 9,155,823 9,069,248 11,600,079 11,605,667
$21,879,110 $21,872,036 $23,124,282 $23,201,357

</TABLE>

4 SPIN-OFF OF ORPHAN MEDICAL, INC.

The Company spun off Orphan Medical, Inc. (OMI), a subsidiary of the Company,
effective July 1, 1994. The spin-off was effected through a distribution of OMI
stock to the Company's shareholders. The fiscal 1994 balance sheet of Chronimed
Inc. was adjusted to reflect the transfer of certain assets and liabilities to
OMI; taxes, accounting and legal fees to be paid by the Company; as well as a
note payable of $5,000,000 paid to OMI as part of the spin-off.

Unaudited pro forma results of operations of Chronimed Inc. for fiscal 1994
as if OMI had been spun off at the beginning of fiscal 1994 are as follows:

1994

Revenues $49,027,232
Net income 2,574,868
Income per share $.23

Page 25

5 NOTE RECEIVABLE

The Company has a $1,374,601 note receivable from Health Craft International,
Inc. (HCI) at June 28, 1996. The note bears interest at a rate of 8%, payable
monthly. Proceeds from the note are being used to fund development of a new
product for diabetes patients. Principal payments on the note have been
restructured to commence in September, 1996, and are payable in sixty equal
monthly installments. The Company has the option of converting this note into a
controlling equity interest in HCI. Alternatively, the Company has the option to
acquire the assets of HCI by forgiving the note, paying a one-time fee, and
agreeing to a revenue-based royalty schedule subject to a maximum dollar limit.
As is always the case with product design and development efforts, there is a
risk that the project will not be completed successfully. If the underlying HCI
project is unsuccessful, the Company's note receivable may become uncollectible.

6 OPERATING LEASES

The Company leases its office space, distribution facilities and retail
locations under operating lease agreements. The remaining lease terms range from
one to four years as of June 28, 1996.

Future minimum lease payments, including current real estate taxes and
operating expenses, under the operating leases with lease terms in excess of one
year at June 28, 1996, are approximately as follows:

AMOUNT
Fiscal year:
1997 $648,000
1998 112,000
1999 31,000
2000 11,000
$802,000

Total rent expense was approximately $692,000, $566,000 and $457,000 during
fiscal 1996, 1995 and 1994, respectively.

7 LONG-TERM DEBT AND CREDIT FACILITIES

The Company has short and long-term debt of $404,000 and $350,000, respectively,
arising from its acquisition of British American Medical, Inc. in August, 1995.
This debt will be converted to Chronimed stock at the average of the closing
price of Chronimed stock on the last ten trading days prior to August 14, 1996
(for short-term debt) and August 14, 1997 (for long-term debt).

The Company has a discretionary line of credit totalling $2,500,000. There is
no balance outstanding under this line of credit at June 28, 1996.

Page 26

8 INCOME TAXES

Income tax expense for fiscal 1996, 1995 and 1994 is classified as:

<TABLE>
<CAPTION>
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994

<S> <C> <C> <C>
Current $2,474,200 $346,800 $582,900
Deferred 367,300 128,200 (411,900)
$2,841,500 $475,000 $171,000
</TABLE>

The Company's income tax expense differs from the federal rate of 34%. The
reconciliation of differences is:

<TABLE>
<CAPTION>
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994

<S> <C> <C> <C>
Federal statutory rate $2,822,300 $706,500 $739,000
Change in valuation allowance -- -- (499,100)
Interest on municipal bonds (305,900) (312,400) (77,900)
State taxes, net of federal benefit 334,100 81,600 52,100
Alternative minimum tax credits -- -- (30,100)
Other, net (9,000) (700) (13,000)
$2,841,500 $475,000 $171,000
</TABLE>

Components of deferred tax assets and liabilities are:

<TABLE>
<CAPTION>
JUNE 28, JUNE 30,
1996 1995

<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ -- $576,600
Alternative minimum tax credit 251,600 --
Bad debt reserve 326,100 246,500
Inventory reserve 27,400 13,600
Other reserves 291,100 223,300
Vacation accrual 90,300 63,500
Deferred tax liabilities:
Depreciation (318,700) (210,200)
Prepaid assets (174,800) (53,000)
Net deferred tax assets $493,000 $860,300

</TABLE>

As of June 30, 1995, the Company had a net operating loss carryforward for tax
purposes of approximately $1,696,000 that gave rise to a deferred tax asset of
$576,600, which was fully utilized in fiscal 1996. This net operating loss
carryforward for tax purposes is principally the result of the exercise of
non-qualified stock options during the year, resulting in a deduction for tax
purposes.

Page 27

9 STOCK OPTIONS

The Company has two employee Stock Option Plans that have reserved 1,912,500
shares of Common Stock for option grants. The options are granted with exercise
prices equal to market value on the date of the grant. Twelve months after the
grant date 20% of the options become exercisable with another 20% becoming
exercisable after each succeeding twelve months. The options are cumulatively
exercisable and expire seven years after the date of grant.

The Company also has a director performance Stock Option Plan that reserved
300,000 shares of Common Stock for option grants. The options are granted with
exercise prices equal to market value on the date of the grant. The options
become exercisable after seven years. Certain acceleration provisions apply if
the stock price increases significantly prior to the end of seven years. Stock
option activity is summarized as follows:

<TABLE>
<CAPTION>
SHARES
RESERVED OPTIONS OUTSTANDING
FOR FUTURE PRICE
GRANTS PLAN OTHER PER SHARE EXERCISABLE

<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1994 215,960 803,291 871,000 $1.67 - $19.25 1,064,077
Reserved for future grants 1,050,000 -- --
Granted (827,500) 827,500 25,000 9.00 - 12.88
Exercised -- (351,630) (135,000) 1.67 - 9.33
Cancelled 108,832 (108,832) (10,000) 4.00 - 19.25
Balance June 30, 1995 547,292 1,170,329 751,000 $2.67 - $12.88 868,200
Granted (315,800) 315,800 -- 12.25 - 21.88
Exercised -- (152,902) (362,500) 2.67 - 12.88
Cancelled 49,068 (49,068) -- 3.92 - 12.88
Expired (3,750) --
Balance June 28, 1996 276,810 1,284,159 388,500 $2.67 - $21.88 672,762

</TABLE>

10 WARRANTS

In conjunction with the Company's initial public offering, warrants were issued
to the underwriters for 352,500 shares of Common Stock with an exercise price of
$4.80, which was 20% above the initial offering price. During fiscal 1994,
75,000 of these warrants were exercised. The 277,500 warrants outstanding at
June 28, 1996 will expire in fiscal 1997.

11 EMPLOYEE BENEFIT PLANS

The Company has a qualified 401(k) Employee Savings Plan covering substantially
all employees. Company contributions are required. The Company's contributions
to the Plan, representing 401(k) matching contributions only, were $50,488,
$15,880 and $5,987 in fiscal years 1996, 1995 and 1994, respectively.

Page 28

12 FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107 requires disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.

AVAILABLE-FOR-SALE SECURITIES The fair values for available-for-sale
securities are based on quoted market prices.

LONG AND SHORT-TERM DEBT The carrying amounts for the Company's long and
short-term debt approximate their fair value.

The carrying amounts and fair values of the Company's financial instruments at
June 28, 1996 are as follows:

<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
Cash and cash equivalents $11,433,774 $11,433,774
Available-for-sale securities
Current 12,802,788 12,802,788
Non-current 9,069,248 9,069,248
Short-term debt 404,000 404,000
Long-term debt 350,000 350,000

</TABLE>

13 RELATED PARTY TRANSACTIONS

The Company had a $98,199 note receivable from the Society for Chronic Diseases,
a not-for-profit organization established to provide medicines and medical
information to uninsured people with a chronic disease. A member of the
Company's Board of Directors and a former Vice President of the Company are
officers of the Society. The note was written off in fiscal 1995.

14 SIGNIFICANT SUPPLIER

The Company provides immunosupressent drugs to patients who have had an organ
transplant. Two of these drugs, Sandimmune(R) and Neoral(R), are manufactured
by Sandoz, A.G. These two drugs accounted for 19% and 26% of the Company's total
revenue in the fiscal years ended June 28, 1996 and June 30, 1995, respectively.

15 SUBSEQUENT EVENT

Effective July 1, 1996, the Company acquired the assets of StatScript Management
Services, Inc. and its associated specialty pharmacies (StatScript). The
all-cash purchase price was $10,250,000, plus a contingent payment of up to
$2,250,000. StatScript provides pharmacy services to patients with HIV and AIDS.
The Company has filed a preliminary Form 8-K with the Securities and Exchange
Commission; the required financial statements will be filed in an amended Form
8-K on or before September 16, 1996. The Company's financial statements as of
June 28, 1996, do not retroactively reflect StatScript financial statements.
However, for fiscal year 1996, proforma revenue, net income, and income per
share for the Company including StatScript for the full year would have been
$103,367,000, $5,301,000, and $.40, respectively.

Page 29

REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying consolidated balance sheets of Chronimed Inc.
as of June 28, 1996 and June 30, 1995, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended June 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chronimed Inc. at
June 28, 1996 and June 30, 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 28,
1996, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP
Minneapolis, Minnesota
August 2, 1996

MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

PRICE RANGE OF COMMON STOCK
The Company's Common Stock, $.01 par value per share, is traded in the
over-the-counter market and quoted on the NASDAQ Stock Market under the symbol
"CHMD". The following table sets forth the range of high and low transaction
prices as reported by NASDAQ. The prices represented are between dealers and do
not include retail mark-up, mark-down, or commission and do not necessarily
represent actual transactions. This information reflects a three-for-two split
of Common Stock effective as of February 21, 1994.

<TABLE>
<CAPTION>
1996 1995 1994
HIGH LOW HIGH LOW HIGH LOW

<S> <C> <C> <C> <C> <C> <C>
First Quarter $17.38 $10.63 $13.75 $ 8.75 $ 9.00 $ 4.92
Second Quarter 15.63 13.13 20.25 10.25 12.00 7.67
Third Quarter 23.25 13.25 20.25 9.88 21.50 10.92
Fourth Quarter 25.13 16.63 15.38 11.13 19.00 9.25

</TABLE>

NUMBER OF SHAREHOLDERS OF RECORD
The number of shareholders of record of the Company's common stock as of
September 6, 1996 was 402.

DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock. The
Company does not anticipate paying any cash dividends in the foreseeable future.

CHRONIMED Inc.

EXHIBIT 21.1

SUBSIDIARIES

Home Direct Medical Services, Inc., incorporated in the state of Minnesota,
doing business as Home Service Medical.

British American Medical, Inc., incorporated in the state of California.

Chronimed Holdings, Inc., incorporated in the State of Minnesota, doing business
as Statscript Pharmacy.

CHRONIMED INC.

EXHIBIT 23.1

Consent of Ernst & Young LLP

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of CHRONIMED Inc. of our report dated August 2, 1996 included in the 1996 Annual
Report to Shareholders of CHRONIMED Inc.

Our audits also included the financial statement schedule of CHRONIMED Inc.
listed in Item 14 (a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements as a whole, presents fairly in all
material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-87712) pertaining to the CHRONIMED Inc. 1994 Stock Option Plan
for Directors, the Registration Statement (Form S-8 No. 33-87718) pertaining to
the CHRONIMED Inc. 1994 Stock Option Plan, and the Registration Statement (Form
S-8 No. 81041) pertaining to the CHRONIMED Inc. Employee Stock Purchase Plan of
1995 of our report dated August 2, 1996 included in the 1996 Annual Report to
Shareholders of CHRONIMED Inc.

Ernst & Young LLP

Minneapolis, Minnesota
September 11, 1996

EXHIBIT 99

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT

CHRONIMED Inc. (The "Company) desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is filing
this Exhibit to its Annual Report on Form 10-K in order to do so. When used in
this Annual Report on Form 10-K and in future filings by the Company with the
Securities and Exchange Commission in the Company's annual report, quarterly
reports, press releases and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "look
for", "may result", "will continue", "is anticipated", "expect", "project", or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company cautions readers that the following
important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:

The Company's ability to maintain its on-going arrangements with the
manufacturers of various products and their ability to satisfy the Company's
volume requirements and pricing and product criteria, particularly with the
Sandimmune(R) and Neoral(R) products manufactured by Sandoz, A. G. and the Quick
Check reagent strip manufactured by Diagnostic Solutions, Inc.

Changes in or unknown violations of various Federal, State, and Local
regulations governing: the dispensing of prescription drugs; the prohibiting of
payments for patient referrals; the labeling, packaging, advertising and
adulteration of prescription drugs; the dispensing of "controlled" substances
and prescription drugs; the "fraud and abuse" provisions of the Social Security
Act; and others not specifically mentioned.

The costs and other effects of legal and administrative cases and proceedings;
claims of customers, both current and former; settlements and investigations;
and changes in those items; developments or assertions by or against the Company
relating to distribution rights and licenses; adoption of new, or changes in,
accounting policies and practices and the application of such policies and
practices.

The amount, and rate of growth in, the Company's selling, general and
administrative expenses; and the impact of unusual items resulting from the
Company's ongoing evaluation of its business strategies, asset valuations and
organizational structures.

The effects, of and changes in, trade, monetary and fiscal policies, laws and
regulations, other activities of government agencies, as previously mentioned;
changes in social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other charges or
taxes; the ability or inability of the Company to obtain, or hedge against,
foreign currency, foreign exchange rates and fluctuations in those rates;
unstable governments and legal systems, and intergovernmental disputes.

The Company's ability to obtain competitive financing to fund its growth.

Difficulties or delays in the development and marketing of the Company's
products, including, but not limited to, a failure to deliver new proprietary
products and technologies when anticipated (e.g., the continuous membrane blood
glucose monitor and the Vanguard patient information system).

Occurrences affecting the Company's ability to realize cost and volume
efficiencies, particularly in its Managed Care business.

Heightened competition, including specifically the intensification of price
competition; the entry of new competitors; and the introduction of new products
and services by new and existing competitors.

Termination of payor contracts or renegotiation at lower rates or less favorable
terms of payment.

Difficulties in realizing the expected revenues and profits from the July, 1996
StatScript acquisition.

Adverse actions of governmental payors, including reduction of Medicare and
Medicaid allowables for products or services provided, and discontinuance or
limitations on governmentally-funded programs.

Failure to obtain new customers, retain existing customers or reductions in
force by existing customers.

Adverse publicity and news coverage.

Inability to carry out marketing and sales plans.

Loss or retirement of key executives.

Changes in interest rates causing a reduction of interest income, or the
unforeseen need for the Company to liquidate its available-for-sale securities
prior to maturity, potentially resulting in permanent losses.

The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1996
<PERIOD-END> JUN-28-1996
<CASH> 11,433,774
<SECURITIES> 12,802,788
<RECEIVABLES> 20,751,458
<ALLOWANCES> 860,000
<INVENTORY> 5,475,987
<CURRENT-ASSETS> 50,656,779
<PP&E> 8,542,187
<DEPRECIATION> 3,096,836
<TOTAL-ASSETS> 67,908,237
<CURRENT-LIABILITIES> 10,395,755
<BONDS> 0
0
0
<COMMON> 124,546
<OTHER-SE> 57,037,936
<TOTAL-LIABILITY-AND-EQUITY> 67,908,237
<SALES> 90,511,550
<TOTAL-REVENUES> 90,511,550
<CGS> 65,152,167
<TOTAL-COSTS> 65,152,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,099,063
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,300,888
<INCOME-TAX> 2,841,500
<INCOME-CONTINUING> 5,459,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,459,388
<EPS-PRIMARY> .42
<EPS-DILUTED> .41

</TABLE>