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

                                    FORM 10-K

[X]   ANNUAL  REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

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

                         Commission file number 0-19612

                          IMCLONE SYSTEMS INCORPORATED
             (Exact name of registrant as specified in its charter)

               DELAWARE                                    04-2834797
    (State or other jurisdiction of            (IRS Employer Identification No.)
     incorporation or organization)

           180 Varick Street,
             New York, NY                                     10014
(Address of principal executive offices)                    (Zip Code)

                                 (212) 645-1405
              (Regristrant's telephone number, including area code)

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

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock,  par
                                                              value $.001

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

                                 Yes [X]        No [ ]

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

      The aggregate market value of voting and non-voting  common equity held by
non-affiliates of the registrant as of March 27, 1998 was $178,172,328.

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

               Class                         Outstanding as of March  27, 1998
   -----------------------------             ---------------------------------
   Common Stock, par value $.001                         24,327,685

      Documents  Incorporated by Reference:  The  registrant's  definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on May 27,
1998 to be filed with the  Commission not later than 120 days after the close of
the registrant's fiscal year, has been incorporated by reference, in whole or in
part, into Part III, Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.


<PAGE>

                     IMCLONE SYSTEMS INCORPORATED
                     1997 Form 10-K Annual Report

                           TABLE OF CONTENTS

                                                                           Page

                                PART I

Item 1.      Business                                                       1
Item 2.      Properties                                                    12
Item 3.      Legal Proceedings                                             13
Item 4.      Submission of Matters to a Vote of
             Security Holders                                              13

                                PART II

Item 5.      Market for the Registrant's Common Equity and
             Related Stockholder Matters                                   13
Item 6.      Selected Financial Data                                       14
Item 7.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                           15
Item 7A.     Quantitative and Qualitative Disclosures About Market Risk    20
Item 8.      Financial Statements and Supplementary Data                   20
Item 9.      Changes in and Disagreements With Accountants
             on Accounting and Financial Disclosure                        20

                               PART III

Item 10.     Directors and Executive Officers of the Registrant            20
Item 11.     Executive Compensation                                        20
Item 12.     Security Ownership of Certain Beneficial Owners
             and Management                                                20
Item 13.     Certain Relationships and Related Transactions                20

                                PART IV

Item 14.     Exhibits, Financial Statement Schedules and
             Reports on Form 8-K                                           21

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

Cautionary Factors With Respect to Forward-Looking Statements

Those statements  contained herein that do not relate to historical  information
are  forward-looking  statements.  There  can be no  assurance  that the  future
results  covered by such  forward-looking  statements  will be achieved.  Actual
results may differ materially due to the risks and uncertainties inherent in the
Company's business,  including without  limitation,  the risks and uncertainties
associated  with  completing  pre-clinical  and clinical trials of the Company's
compounds that demonstrate such compounds' safety and  effectiveness;  obtaining
additional  financing  to  support  the  Company's  operations;   obtaining  and
maintaining  regulatory  approval for such  compounds and  complying  with other
governmental regulations applicable to the Company's business; obtaining the raw
materials   necessary  in  the  development  of  such  compounds;   consummating
collaborative  arrangements  with  corporate  partners for product  development;
achieving  milestones under collaborative  arrangements with corporate partners;
developing the capacity to manufacture,  market and sell the Company's products,
either directly or with collaborative partners; developing market demand for and
acceptance of such products; competing effectively with other pharmaceutical and
biotechnological  products;  obtaining  adequate  reimbursement from third party
payors;  attracting and retaining key personnel;  protecting proprietary rights;
and those other factors set forth in  "Management's  Discussion  and Analysis of
Financial Condition and Results of  Operations--Overview  and Risk Factors," all
as are further discussed herein.


                                      (i)

<PAGE>

                                     PART I

Item 1. Business.

GENERAL

      ImClone   Systems   Incorporated   (the   "Company"  or  "ImClone")  is  a
biopharmaceutical  company engaged  primarily in the research and development of
therapeutic  products for the treatment of cancer and cancer-related  disorders.
The Company's product candidates include interventional  therapeutics for cancer
and cancer vaccines. The Company was incorporated in Delaware in 1984.

      The Company's  principal executive offices and laboratories are located at
180 Varick Street,  New York,  New York 10014 and the telephone  number is (212)
645-1405.

DEVELOPMENT PROGRAMS

      C225 Cancer Therapeutic. The Company's lead interventional therapeutic for
cancer is a chimerized (part mouse,  part human) antibody that acts to block the
Epidermal  Growth  Factor  receptor   ("EGFr").   EGFr  has  been  shown  to  be
over-expressed in the cells of approximately  one-third of all solid cancers. It
is also  expressed in select normal  tissue.  In vivo animal  studies with human
tumors have shown that C225 in combination with various  chemotherapeutic agents
(doxorubicin,  cisplatin or paclitaxel) demonstrates a pronounced enhancement of
the  anti-tumor  effect  of  the  chemotherapeutic   agents,  resulting  in  the
elimination  of human  tumors  established  in these  animals.  The studies have
demonstrated  long-term  tumor-free survival of animals.  The Company's research
has also shown that C225 used alone has efficacy in renal cell carcinoma  animal
models.

      Since  December  1994,  the Company has  initiated  several  Phase  Ib/IIa
clinical  trials of C225 at Memorial  Hospital (the patient care arm of Memorial
Sloan-Kettering   Cancer  Center)   ("Sloan-Kettering"),   Yale  Cancer  Center,
University of Virginia, MD Anderson Cancer Center and the University of Alabama,
among  others.  These  studies  have  involved  intravenous   administration  of
escalating  doses of C225,  both with and without  chemotherapeutic  agents,  in
patients with various solid cancers. Several of these studies are ongoing. These
studies  have  shown that the drug is  generally  well-tolerated.  In 1997,  the
Company  initiated  Phase Ib/IIa studies in head and neck cancer  patients using
C225 alone (begun in July 1997), in conjunction  with cisplatin  (begun in April
1997) and in conjunction with radiation (begun in April 1997). Additionally,  in
December  1997,  the  Company  initiated  a  multi-center,  open label  Phase II
clinical  trial to evaluate the effect of C225 on time to progression of disease
in 53 patients with metastatic renal cell carcinoma. ImClone expects to initiate
Phase  II/III  studies to evaluate the  potential of C225 in various  additional
tumor types, such as head and neck and pancreatic cancers.

      BEC2 Cancer Vaccine.  BEC2 is a monoclonal  anti-idiotypic  antibody which
the Company  believes  may be useful to prevent or delay the onset of  recurrent
primary tumors or metastatic disease. The antibody, which mimics the ganglioside
GD3,  has been tested since 1991 in Phase I clinical  trials at  Sloan-Kettering
against  certain  forms of  cancer,  including  small  cell lung  carcinoma  and
melanoma.  BEC2 has shown  prolonged  survival of patients  with small cell lung
carcinoma  in a pilot study at  Sloan-Kettering.  The Company has granted  Merck
KGaA, formerly E. Merck ("Merck"), a German-based pharmaceutical company, rights
to manufacture  and market BEC2 worldwide,  except that in North America,  Merck
does not have the right to  manufacture  BEC2 and the Company has  retained  the
right to  co-promote  BEC2. It is the intent of the parties that ImClone will be
the bulk product  manufacturer to support  worldwide sales. In return,  Merck is
paying  ImClone  research  support,  and is required to pay  milestone  fees and
royalties on future sales,  if any, and will share revenues in North America.  A
Phase III multinational  clinical trial for BEC2 in treatment of limited disease
small cell lung  carcinoma  has been opened and patients are being  screened for
treatment.

      Chimerized Monoclonal Antibody Inhibitor of Angiogenesis.  The Company has
developed a monoclonal antibody, c-p1C11, which is specific for the KDR receptor
for Vascular  Endothelial  Growth Factor ("VEGF").  The antibody is currently in
pre-clinical  studies in preparation  for the filing of an  Investigational  New
Drug  ("IND")  Application  and the  further  testing of the product as a cancer
therapeutic.  The Company is also preparing a humanized form of the antibody, in
conjunction with MRC Collaborative Centre. KDR and VEGF are known to be involved
in angiogenesis,  which is the natural process of growth of new blood vessels. A
therapeutic  product  that  would  inhibit  angiogenesis  could  be of  value in
treatment  of cancer as well as other  diseases  that  depend on growth of blood
vessels,  such as diabetic  retinopathy,  macular  degeneration  and  rheumatoid
arthritis.


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<PAGE>

RESEARCH PROGRAMS

      In addition to concentrating on its products in clinical development,  the
Company performs ongoing research in a number of related areas.

Interventional Therapeutics

      ImClone conducts an interventional  cancer therapeutic research program in
the  development  of  inhibitors of tyrosine  kinase  receptors  (growth  factor
receptors) associated with tumor cell regeneration and support.

      In addition to its  chimerized  monoclonal  antibody in  development,  the
Company is seeking to develop other  antibodies  that inhibit  angiogenesis.  In
connection  with this research and  development of the  chimerized  angiogenesis
inhibitor,  the Company is  sponsoring  research  programs  at various  academic
institutions to test KDR specific therapeutics in animal models.

      The  Company  has also  initiated  a program  to  develop  small  molecule
antagonists of growth factor receptors,  including both angiogenic growth factor
receptors  and EGF  receptors.  In October  1997,  the Company  entered  into an
agreement with CombiChem, Inc. ("CombiChem"), a combinatorial chemistry company,
pursuant  to which the  Company  has  access  to  CombiChem's  library  of small
molecules  for  screening  in  ImClone's  assays  for   identification  of  lead
candidates.  See  "Corporate  Collaborations  and  Out-licensing  Arrangements -
CombiChem,  Inc."  The  Company  has also  entered  into an  agreement  with the
Institute for Molecular  Medicine in Freiburg,  Germany to screen small molecule
therapeutic  candidates,  including those provided by the compound  libraries of
CombiChem, against various tyrosine receptors.

      The Company is conducting research on the validation of  vascular-specific
cadherin   ("VE-cadherin")   as  a  novel   potential  drug  target  to  inhibit
cancer-associated  angiogenesis.  VE-cadherin  is believed to play an  important
role in angiogenesis by enabling the assembly of endothelial cells into vascular
tubes.  Cancer growth is dependent on the formation of a capillary  blood vessel
network in the  tumor,  and  VE-cadherin  antagonists  may thus have  utility as
anti-cancer agents.  ImClone will test monoclonal antibodies against VE-cadherin
as potential angiogenesis  inhibitors and use its high-throughput assays for the
identification of small molecule VE-cadherin inhibitors. In connection with this
program,  the Company has also acquired exclusive rights to VE-cadherin-2 and to
antibodies  to  VE-cadherin  and  initiated  a  collaboration  with Mario  Negri
Institute for Pharmacological Research (Milan, Italy) to conduct pharmacological
research  in  the  role  of   VE-cadherins   in   angiogenesis.   See  "Research
Collaborations  and  In-Licensing  Arrangements  -  Mario  Negri  Institute  for
Pharmacological Research." The National Cancer Institute (the "NCI") has awarded
to the Company a Phase I Small Business  Innovation  Research  ("SBIR") grant of
approximately $100,000 to support its VE-cadherin program.

Cancer Vaccines

      ImClone seeks to discover  potential  cancer  vaccines as another route to
cancer  treatment.  Cancer vaccines would activate immune responses to tumors to
protect  against  local  spread,  distant  metastases  or  recurrence of cancer.
Choosing  appropriate  cancer  cell  targets  and  generating  effective  immune
responses  are the focus of  ImClone's  cancer  vaccine  program.  For  example,
research is being conducted on a possible  malignant  melanoma  vaccine based on
the tumor associated antigen known as gp75. Patients with malignant melanoma are
known to produce antibodies and T cells that recognize gp75. Animal studies have
shown that a gp75 cancer  vaccine is highly  effective  in  eliciting  an immune
response against melanoma cells and preventing  growth of experimental  melanoma
tumors in mice.

Endothelial Stem Cell Technology

      The Company has proprietary  technology  capable of isolating  endothelial
stem cells and is exploring  uses of endothelial  stem cells for  stimulation of
collateral  blood  circulation  in  ischemias  (e.g.,  myocardial  ischemia  and
peripheral  vascular disease) as well as for gene therapy delivery.  The Company
is considering  whether to pursue this research directly or through its recently
established wholly-owned subsidiary, EndoClone Incorporated.


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<PAGE>

Hematopoiesis

      The  Company  is  conducting   research  in   hematopoiesis   (growth  and
development  of blood cell  elements)  aimed at  discovering  factors to support
hematopoietic stem cells and to control the proliferation,  differentiation  and
functional deterioration of hematopoietic elements.

      The Company has an  exclusive  license  from The  National  Institutes  of
Health ("NIH") to the delta-like  ("DLK")  protein and gene for use in stem cell
and gene therapy.  DLK is a member of a family of proteins  which appear to have
the ability to maintain cells in an undifferentiated state.

      The  Company  also has  entered  into a  non-exclusive  license and supply
agreement with Immunex Corporation ("Immunex") for use of the FLK-2/FLT-3 ligand
for ex vivo cell therapies.  Immunex has taken a license from the Company to the
FLK-2  receptor,  limited  to the  use by  Immunex  in  the  manufacture  of the
FLK-2/FLT-3 ligand. Immunex is currently testing the ligand in human trials, for
stem cell mobilization, and for tumor inhibition.

      The Company also has rights to a recombinant  mutein form of Interleukin-6
("Interleukin-6m"  or  "IL-6m")  which it has  tested in human  trials in cancer
patients to seek to  stimulate  platelet  production.  The Company is  currently
monitoring third party research with IL-6m to explore the possibility that IL-6m
may be a critical factor in liver cell regeneration.

LICENSED DIAGNOSTICS AND INFECTIOUS DISEASE VACCINES

      The Company has licensed its  diagnostic and  infectious  disease  vaccine
product areas, based on its earlier research,  to corporate partners for further
development  and  commercialization.  The Company has granted the  Wyeth/Lederle
vaccine and pediatrics division of American Home Products Corporation ("American
Home") a worldwide  license to  manufacture  and market its  infectious  disease
vaccines, which are in development. In January 1998, this agreement was extended
to allow the  continuation  through  September 1999 of pre-clinical  research in
preparation for clinical trials of infectious disease candidate vaccines for the
treatment of gonorrhea.  ImClone receives annual funding under this agreement in
the amount of $300,000.  The Company has also entered into a strategic  alliance
with Abbott  Laboratories  ("Abbott") pursuant to which the Company has licensed
certain of its diagnostic  products to Abbott on a worldwide basis. In mid-1995,
Abbott  launched  in  Europe  its first  DNA-based  test,  using  the  Company's
proprietary  Repair  Chain  Reaction  ("RCR")  DNA  probe  technology,  for  the
diagnosis of the sexually transmitted disease chlamydia.  Abbott has added tests
for gonorrhea and  mycobacteria,  and has launched sales in the U.S. as well. In
June 1997,  the Company  received two milestone  payments  from Abbott  totaling
$1,000,000  as a result of a patent  issuance  in Europe for the  Company's  RCR
technology.  The  issuance  of the patent also  entitles  the Company to receive
royalty payments on sales in covered  European  countries for products using the
Company's  RCR  technology.  Abbott will be  entitled  to deduct from  royalties
otherwise  due,  25% of  such  royalties  due  for a  two-year  period  and  50%
thereafter  until a total of $500,000 has been  deducted.  In December 1996, the
Company  and  Abbott  modified  this  agreement  to  provide  for  an  exclusive
sublicensing  agreement  with Chiron  Diagnostics  ("Chiron")  for the Company's
patented DNA signal amplification technology, AMPLIPROBE. Under the terms of the
agreement  all sales of Chiron  branched  DNA  diagnostic  probe  technology  in
countries  covered by Company  patents will be subject to a royalty to Abbott to
be passed  through to the Company.  For the year ended  December  31, 1997,  the
Company  earned a total of $381,000 in royalty  fees  pursuant to its  strategic
alliance with Abbott.

RESEARCH AND DEVELOPMENT

      ImClone  initiated  its in-house  research and  development  in 1986.  The
Company has assembled a scientific staff with a variety of complementary  skills
in  a  broad  base  of  advanced  research  technologies,   including  oncology,
immunology,  molecular  and cell  biology,  antibody  engineering,  protein  and
synthetic  chemistry  and  high-throughput   screening.  The  Company  has  also
recruited  a  staff  of  technical  and  professional  employees  to  carry  out
manufacturing  of  clinical  trial  materials  at  its  Somerville,  New  Jersey
manufacturing  facility.  In addition to its research programs pursued in-house,
ImClone  collaborates  with certain  academic  institutions  and corporations to
support research in areas of ImClone's product development  efforts. The Company
has also  entered into  collaborations  with major  pharmaceutical  companies in
order to obtain funding and product development and commercialization assistance
for certain of its  therapeutic  product  candidates  in exchange  for  specific
product  licensing  rights.   The  Company  intends  to  enter  into  additional
agreements of this nature with appropriate  pharmaceutical company partners with
the resources and experience to


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<PAGE>

assist the Company  financially  to  successfully  bring its products to market,
both in the U.S.  and  abroad.  There  can be no  assurance,  however,  that the
Company will be successful in consummating any such arrangements.

      The  Company  has   recorded   expenses  of   approximately   $16,455,000,
$11,482,000,  and  $8,768,000  for research and  development  in the years ended
December 31, 1997, 1996 and 1995, respectively.

RESEARCH COLLABORATIONS AND IN-LICENSING ARRANGEMENTS

      The Company's  primary research  collaborations  which are non-clinical in
nature are the following.

      CombiChem,  Inc,  San Diego,  California.  In October  1997,  the  Company
entered into a Collaborative  Research and License  Agreement with CombiChem,  a
private  company,  to discover and develop  novel small cell  molecules  for use
against  selected  targets  for the  treatment  of  cancer.  The  companies  are
utilizing  CombiChem's  Discovery  Engine  and  Universal  Informer  Library  to
generate small molecules for screening in ImClone's assays for identification of
lead  candidates.  ImClone is providing  CombiChem with research funding through
October 1999 in the amount of $500,000 annually (of which the first $500,000 was
paid in October  1997),  milestone  payments and royalties on marketed  products
resulting from the collaboration, if any. Concurrently with the execution of the
Collaborative  Research and License Agreement,  the Company entered into a Stock
Purchase Agreement pursuant to which the Company purchased 250,000 shares of the
common  stock  of  CombiChem,   as  adjusted,  for  aggregate  consideration  of
$2,000,000.  CombiChem has agreed to use the proceeds from the sale of its stock
to ImClone for general corporate purposes.

      Mario Negri Institute for  Pharmacological  Research,  Milan,  Italy.  The
Company has a  supported  research  agreement  with Mario  Negri  Institute  for
Pharmacological  Research  pursuant  to  which  it  supports  the  work  of  Dr.
Elisabetta Dejana who is investigating the role of a recently discovered protein
family, VE-cadherins,  in angiogenesis.  VE-cadherins are believed to enable the
formation of capillary  blood  vessels in solid tumors.  In connection  with the
commencement  of this  supported  research  program,  the Company also  acquired
proprietary  rights to VE-cadherin-2  and to antibodies to VE-cadherin.  The NCI
has  awarded to the  Company a Phase I SBIR grant in the amount of  $100,000  to
support its VE-cadherin program.

      Memorial  Sloan-Kettering  Cancer Center,  New York, New York. The Company
has a supported research  agreement with  Sloan-Kettering to support research in
several areas, including potential cancer vaccine product, gp75. The Company has
an exclusive license from  Sloan-Kettering  to the gp75 tumor antigen and to the
BEC2 cancer vaccine and is required under the license to make good faith efforts
to proceed diligently with the manufacture and sale of these products.

      Princeton  University,  Princeton,  New Jersey.  The Company has supported
research under the direction of certain faculty members at Princeton University.
The Company supported the research of Dr. Arnold Levine, Chairman of Princeton's
Department of Molecular  Biology,  in the area of the p53 tumor suppressor gene.
The Company has an  exclusive  license to the  results of this  research,  which
license is  terminable  by the  university  if the Company does not meet certain
milestones in connection with the development of the licensed technology.

      The Company has also funded  research of Dr. Ihor  Lemischka  of Princeton
University on tyrosine kinase receptors, including FLK-2, antibodies and ligands
to such receptors,  and  hematopoietic  stem cells. The Company has an exclusive
license  from  Princeton  to the  results  of this  research,  which  license is
terminable by the university if the Company does not meet certain  developmental
milestones.

      MRC  Collaborative  Centre,  Mill Hill,  United  Kingdom.  The  Company is
funding research at the MRC Collaborative Centre on the humanization of its C225
and  anti-KDR  antibodies  and  in the  expression  of its  C225  antibody  in a
non-mouse cell line.

      The  University  of North  Carolina at Chapel Hill.  The Company  supports
research  at The  University  of North  Carolina  at Chapel  Hill in a number of
areas,  including work of Dr. P. Frederick  Sparling in connection  with vaccine
candidates  for N.  gonorrhea  and N.  meningitidis,  the  results  of which are
exclusively  licensed to the Company.  The Company also has exclusively licensed
from the university rights in connection with IL-6m.

      The Company's primary in-licensing arrangements which have resulted in the
transfer of intellectual property rights to the Company are the following:


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<PAGE>

      National  Institutes of Health.  In October 1996, the Company  obtained an
exclusive,  worldwide  patent license from the NIH for the DLK protein and gene.
The  agreement  provides the Company with an exclusive  license to stem cell and
gene  therapy  applications  of the DLK  protein  and gene,  as well as  related
diagnostic uses.

      Rhone-Poulenc  Rorer.  In June 1994,  the Company  obtained  an  exclusive
worldwide license from the  pharmaceutical  company,  Rhone-Poulenc  Rorer, Inc.
("Rhone-Poulenc  Rorer") to pending patent applications covering the use of EGFr
monoclonal antibodies in combination with specific chemotherapeutic regimens.

      The  University  of California  at San Diego.  In April 1993,  the Company
obtained an exclusive  worldwide  license from the University of California to a
United States  patent  covering  monoclonal  antibodies  that bind to EGFr.  The
Company's C225 product is the chimerized form of one such antibody.

      Generally,  subject to earlier  termination  provisions  contained  in the
agreements,  the licenses  described  above terminate upon the expiration of the
life of any patent or a related period on unpatented technology.

CLINICAL COLLABORATIONS

      The Company's  principal  collaborations  that are related to its clinical
trials are the following:

      Memorial  Sloan-Kettering  Cancer Center.  The Company has agreements with
Sloan-Kettering  to support  research in several  areas,  including the study of
potential  cancer  vaccine  products BEC2 and gp75. The Company has an exclusive
license to the results of the research in the areas  covered by the  agreements.
The BEC2  antibody  has been  tested  since 1991 in Phase I  clinical  trials at
Sloan-Kettering  against  certain  forms of  cancer,  including  small cell lung
carcinoma and melanoma.

      The Company also has agreements  with certain  institutions  by which such
institutions  serve as sites for certain of the Company's  clinical trials.  For
example,  for its C225 trials, the Company has entered into such agreements with
Yale Cancer Center,  Sloan-Kettering,  the  University of Virginia,  MD Anderson
Cancer Center and the University of Alabama,  among others. For its BEC2 trials,
it is  anticipated  that  numerous  institutions  in both the United  States and
Europe will serve as clinical trial sites.

      The European  Organization for Research and Treatment of Cancer ("EORTC"),
an oncology research clinical group, is involved in the Phase III multi-national
clinical  trial for BEC2 in the  treatment  of limited  disease  small cell lung
carcinoma,  having  responsibility for monitoring the trial in Europe at various
centers,  as well as  randomizing  patients and managing  data for the worldwide
study. It is anticipated that Quintiles, Inc., a contract research organization,
will serve as the Company's  representative  in coordinating  and monitoring the
study in the United States.

      The  Company  anticipates  that  arrangements  similar to the above may be
employed for certain future Phase II/III studies for C225.

CORPORATE COLLABORATIONS AND OUT-LICENSING ARRANGEMENTS

      To facilitate  commercialization  of certain of its products,  ImClone has
entered into agreements with major pharmaceutical companies.  Although the terms
of each agreement  differ,  these  agreements  generally  provide for ImClone to
receive license fees,  research funding and royalties on net sales of any future
products  during the life of any relevant  patent.  In some cases,  license fees
include payments related to the achievement of regulatory or product development
milestones.

Merck KGaA (Darmstadt, Germany)

      The Company  entered into a research and license  agreement  with Merck in
December 1990,  which was subsequently  amended,  most recently in December 1997
(the "Amended  License  Agreement").  Under the Amended License  Agreement,  the
Company  has  granted  Merck  a  license,  with  the  right  to  sublicense,  to
manufacture  and market the  Company's  BEC2  product and its  recombinant  gp75
antigen, for all indications  throughout the world; except that in North America
the Company has granted Merck a sole license,  without the right to  sublicense,
to  market  but not to  manufacture  BEC2.  The  Company  retains  the  right to
co-promote  BEC2 within  North  America.  It is the intent of the  parties  that
ImClone will be the bulk product  manufacturer to support  worldwide  sales. The
Company is  required  to give Merck the  opportunity  to  negotiate a license in
North  America to gp75 before  granting  such a license to any third party.  The
Amended License Agreement requires Merck to make research support and


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<PAGE>

milestone  payments to ImClone  based on  milestones  achieved  in the  licensed
products'  development,  and to make royalty payments to ImClone on all sales of
the licensed  products  outside  North  America,  if any,  with a portion of the
earlier  funding  received by the Company under the agreement  being  creditable
against  the  amount  of  royalties  due to the  Company.  The  Amended  License
Agreement  provides for milestone  payments of a total of  $22,500,000  of which
$3,000,000  have been earned to date.  Gross sales of BEC2 in North America will
be distributed in accordance with the terms of a co-promotion agreement for BEC2
to be  negotiated  by the parties.  Pursuant to the Amended  License  Agreement,
conduct of the clinical trials and regulatory  submissions outside North America
are the  responsibility of Merck and within North America are the responsibility
of ImClone.  Costs worldwide to conduct a multi-site,  multi-national  Phase III
clinical trial to obtain approval for the indication of the treatment of limited
disease small cell lung  carcinoma for BEC2,  including  out-of-pocket  costs of
ImClone (but not including costs of  establishing a manufacturing  facility) for
manufacturing  materials  for clinical  trials,  conduct of clinical  trials and
regulatory   submissions   (other  than  drug   approval   fees  which  are  the
responsibility  of Merck or ImClone  in their  respective  territories)  are the
responsibility  of Merck;  provided,  however,  that should the expenses of such
clinical trial exceed 17 million  Deutsche  Marks,  such excess expenses will be
shared 60% by Merck and 40% by  ImClone.  Costs for the  conduct  of  additional
clinical trials for other indications shall be subject to separate budgets to be
negotiated by the parties.  ImClone is  responsible  for providing the supply of
the active agent outside of North America at the expense of Merck, and it is the
intention  of the parties  that the cost of goods sold in North  America be paid
out of gross sales of any licensed product in North America in accordance with a
co-promotion agreement to be negotiated.

      The Amended  License  Agreement  terminates  upon the later of the last to
expire of any patents issued and covered by the technology or fifteen years from
the date of the first  commercial  sale,  after which such license shall survive
without  further  royalty  payment  and  is  irrevocable.  The  Amended  License
Agreement  may be  terminated  earlier by ImClone  in the event  Merck  fails to
pursue in a timely fashion regulatory  approval or sale of a licensed product in
a country in which it has the right to do so. It also may be terminated  earlier
by Merck if milestones are not achieved.

      In the year ended  December 31, 1997, the Company  recorded  $3,667,000 in
revenue  from Merck under the Amended  License  Agreement,  which is composed of
milestone and research and support payments.

      In  connection  with the December  1997  amendment to the Amended  License
Agreement,  Merck  purchased  from the Company  400,000  shares of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Shares" or "Series
A Preferred  Stock") for total  consideration  of  $40,000,000,  before issuance
costs of $3,000.  The holders of the Series A Preferred  Shares are  entitled to
receive annual cumulative  dividends of $6.00 per share.  Dividends accrue as of
the  issuance  date of the  Series A  Preferred  Shares  and are  payable on the
outstanding  Series A  Preferred  Shares  in cash on  December  31 of each  year
beginning  December 31, 1999 or at the time of  conversion  or redemption of the
Series A  Preferred  Shares on which the  dividend is to be paid,  whichever  is
sooner.  Up to 100,000 Series A Preferred Shares are currently  convertible into
the  Company's  common  stock,  $.001  par value  (the  "Common  Stock")  and an
additional  100,000 Series A Preferred Shares will become convertible on each of
January 1, 2000,  January 1, 2001 and  January 1, 2002.  During the period  from
issuance   through  December  31,  1999,  the  Series  A  Preferred  Shares  are
convertible at a price equal to $12.50 per share; during the period from January
1, 2000 through  December 31, 2000 the Series A Preferred Shares are convertible
at a price equal to the average of the closing  prices for the Common  Stock for
the five  trading  days  ending on  December  31,  1999;  during the period from
January 1, 2001  through  December  31, 2001 the Series A  Preferred  Shares are
convertible at a price equal to the average of the closing prices for the Common
Stock for the five trading  days ending on December 31, 2000;  during the period
from January 1, 2002 through December 31, 2002 the Series A Preferred Shares are
convertible at a price equal to 88% of the average of the closing prices for the
Common Stock for the five trading days ending on December 31, 2001;  and anytime
after January 1, 2003 the Series A Preferred  Shares are  convertible at a price
equal to the  average of the  closing  prices for the Common  Stock for the five
trading  days ending on December 31, 2002.  The  conversion  price is subject to
adjustment in the case of certain  dilutive  events.  Further,  in the event the
average market price of the Common Stock for the five  consecutive  trading days
ending  one  trading  day prior to any  trading  day  during  which any Series A
Preferred  Shares are outstanding  exceeds 150% of the conversion  price then in
effect,  the  Company  has the  right to  require  the  holder  of the  Series A
Preferred Shares to convert all such shares that may be convertible. The Company
may also  redeem  in whole or any part of the  Series A  Preferred  Shares  then
outstanding at a redemption price of $120 per Preferred Share,  plus accrued and
unpaid  dividends  thereon.  In  connection  with the  purchase  of the Series A
Preferred Shares,  Merck was granted certain registration rights with respect to
the shares of Common Stock underlying the Preferred Shares,  and Merck agreed to
refrain from selling such shares of Common Stock for certain  specified  periods
of time.  In  accordance  with the terms of the Series A  Preferred  Stock,  the
holder is able to realize  an assured  incremental  yield of  $5,455,000  on the
conversion of the Series A Preferred Stock if


                                       6
<PAGE>

converted from January 1, 2002 through  December 31, 2002.  Such amount is being
amortized as a preferred stock dividend over a five-year  period  beginning with
the day of  issuance.  Accrued  dividends  on the Series A Preferred  Stock were
$112,000 plus the  incremental  yield on the  conversion  discount of $51,000 at
December 31, 1997.

Abbott Laboratories

      The Company  entered into a research and license  agreement with Abbott in
December  1992,  which  provides  Abbott  an  exclusive   worldwide  license  to
manufacture  and  distribute  diagnostic  products  arising  out of  certain  of
ImClone's  research in  diagnostics,  including but not limited to ImClone's RCR
and Ampliprobe  technologies for cancer detection and prognosis.  This agreement
requires  Abbott  to  exercise  its  best  reasonable  efforts  to  develop  and
commercialize products  incorporating RCR technology,  failing which it can lose
its exclusive license to this technology. Abbott has the right on 30 days notice
to ImClone to terminate a product license in a particular  country. In mid-1995,
Abbott  launched in Europe its first  DNA-based  test,  using the  Company's RCR
technology,  for the diagnosis of the sexually  transmitted  disease  chlamydia.
Abbott has added tests for gonorrhea and mycobacteria, and has launched sales in
the U.S.  as well.  In December  1996,  the  Company  and Abbott  modified  this
agreement to provide for an exclusive sublicensing agreement with Chiron for the
Company's patented DNA signal amplification  technology,  AMPLIPROBE.  Under the
terms of the  agreement  all  sales of  Chiron  branched  DNA  diagnostic  probe
technology in countries  covered by Company patents will be subject to a royalty
to Abbott to be passed through to the Company.

      Under the  agreement  Abbott has paid ImClone  up-front  fees and research
support,  and is obligated to pay milestone fees and royalties on sales. In June
1997,  the  Company  received  two  milestone   payments  from  Abbott  totaling
$1,000,000  as a result of a patent  issuance  in Europe for the  Company's  RCR
technology,  which is partially creditable against royalties as set forth below.
The issuance of the patent also entitles the Company to receive royalty payments
on sales in covered  European  countries  for products  using the  Company's RCR
technology.  Abbott will be entitled to deduct from royalties otherwise due, 25%
of such royalties due for a two-year period and 50% thereafter  until a total of
$500,000 has been  deducted.  For the year ended  December 31, 1997, the Company
earned a total of $381,000 in royalty fees  pursuant to its  strategic  alliance
with Abbott.  The agreement  terminates  upon the later of the last to expire of
any patents  issued  covered by the  technology  or, if no patents are  granted,
twenty years, subject to certain earlier termination provisions contained in the
agreement.

American Home Products

      In December  1987,  the Company  entered  into a vaccine  development  and
licensing  agreement with American  Cyanamid Company  ("Cyanamid") that provided
Cyanamid  an  exclusive  worldwide  license  to  manufacture  and sell  vaccines
developed  during the research  period of the agreement.  In connection with the
agreement,  Cyanamid  purchased  410,001  shares of Common Stock of the Company.
During the three-year research period of the agreement,  which period expired in
December  1990,  the  Company  was  engaged in the  development  of two  vaccine
candidates,  the  first  of which  was for N.  gonorrhea  based  on  recombinant
proteins,  and the  second  of  which  was for  Herpes  Simplex  Virus  based on
recombinant glycoproteins B and D.

      In September  1993, the Company and Cyanamid,  through its  Lederle-Praxis
Biologicals division,  entered into a research collaboration  agreement which by
its  terms  supersedes  the  earlier   agreement  as  to  N.  gonorrhea  vaccine
candidates, but not as to Herpes Simplex Virus vaccine candidates. The successor
to Cyanamid,  American Home, has the responsibility  under this agreement to pay
research  support to the  Company,  as well as milestone  fees and  royalties on
sales of any N. gonorrhea  vaccine that might arise from the  collaboration.  In
January 1998, this agreement was extended to continue  annual  research  funding
payable  to  ImClone in the amount of  $300,000  through  September  1999 and to
extend  through such date the period by which  American Home is required to have
initiated clinical trials with a vaccine candidate.

      American Home has the responsibility  under both agreements for conducting
pre-clinical and clinical trials of the vaccine candidates, obtaining regulatory
approval,  and  manufacturing  and marketing  the vaccines.  There are penalties
payable  by  American  Home  in the  event  it  fails  to  have  filed  for  the
commencement  of  clinical  trials by certain  dates yet  intends to continue to
develop the product, otherwise the product will revert to ImClone. American Home
is  required  to pay  royalties  to  ImClone  in  connection  with  sales of the
vaccines.

      In the year ended  December 31,  1997,  the Company  recorded  revenues of
$300,000 under the American Home agreements.


                                       7
<PAGE>

Immunex Corporation

      In December  1996,  the Company  entered into  technology  cross-licensing
agreements with Immunex relating to FLK-2/FLT-3  ligand and its receptor.  FLT-3
ligand is a hematopoietic growth factor. Under the terms of the agreements,  the
Company has granted to Immunex an  exclusive  worldwide  license to the receptor
for use in the manufacture of the ligand. In return, the Company will receive an
initial  payment  and a royalty  based on the sales of the ligand by Immunex and
its  sub-licensees,  if any.  In  addition,  Immunex  has  granted the Company a
non-exclusive  license  in the  United  States  and  Canada to use its  patented
FLK-2/FLT-3  ligand,  manufactured  by Immunex,  for ex-vivo stem cell expansion
together  with an  exclusive  license  to  distribute  the  ligand  with its own
proprietary products for ex-vivo expansion. Immunex has agreed to seek to obtain
the consent of its parent  company,  American  Home,  to expand the territory of
this  license to include the world  outside  North  America.  Immunex  will also
supply FLK-2/FLT-3 ligand to ImClone.  The Company has been advised that Immunex
is  conducting  human  clinical  studies with  FLK-2/FLT-3  ligand for stem cell
mobilization and for tumor inhibition. Subject to earlier termination provisions
contained in the  agreements,  ImClone's  license  terminates in December  2001,
subject  to a five-  year  renewal  period,  and  Immunex's  license  terminates
thirteen years after the first commercial sale of the product.

      In the year ended December 31, 1997, the Company  recorded no revenue from
Immunex under this agreement.

MANUFACTURING

      For the  Company  to support  its  ongoing  research  and  development  it
maintains,  supplies  and staffs a facility  for the  preparation,  analysis and
distribution of clinical supplies to various study centers. The Company operates
a clinical grade manufacturing facility for biologics in Somerville,  New Jersey
that includes  laboratories,  storage  areas,  mechanical  systems and qualified
staff for the  production of and analysis of biological  materials  according to
the appropriate  Federal,  state and local  regulations.  At this facility,  the
Company is currently  producing C225, the EGFr antibody,  to supply its clinical
trials,  and packaging and distributing to clinical sites both the BEC2 antibody
and  C225  antibody.  This  facility  is  operated  according  to  current  Good
Manufacturing Practices ("cGMP") which is a requirement for product manufactured
for use in clinical  trials and for  commercial  sale. In January 1998,  ImClone
completed the construction and  commissioning of a new 1,750 square foot process
development  center  at  this  facility   dedicated  to  manufacturing   process
optimization for existing  products and the pre-clinical and Phase I development
of new biological therapeutics.

      ImClone has also established relationships with qualified contract vendors
to perform  specialized  testing and  manufacturing  operations not performed by
ImClone.  The  Company  has in the past and  expects to  continue  to  establish
defined  development and  manufacturing  arrangements with third party qualified
contract vendors to perform bulk and final product development and production to
support ImClone clinical program needs.

      The materials that are used to manufacture the Company's  products include
qualified  cell lines  developed  by the Company  and  specially  qualified  raw
materials and components  which the Company can obtain from a number of sources.
ImClone maintains necessary Quality Control and Quality Assurance  oversights of
all materials used in the manufacture of the Company's clinical supplies.

      Should any of the Company's products be approved for commercial sale, such
products will need to be  manufactured  in  commercial  quantities in compliance
with regulatory  requirements and at acceptable costs.  Although the Company has
developed  products in the laboratory and in some cases has produced  sufficient
quantities  of materials for  pre-clinical  and clinical  trials,  production in
later  stage  clinical  trials or  commercial  quantities  may create  technical
challenges  for the Company.  If the Company  commercializes  its products,  the
Company  may  adapt  its  Somerville,   New  Jersey  facility  for  use  as  its
commercial-scale  manufacturing  facility.  To this end,  the  Company has taken
steps to complete a formal design concept for large scale  manufacturing at this
facility.  The Company is also  evaluating the  requirements  of  establishing a
separate commercial  manufacturing facility at the Company's New Jersey location
or at some other  location.  The Company has limited  experience  in later stage
clinical-scale    manufacturing   and   no   experience   in    commercial-scale
manufacturing,  and no  assurance  can be given that the Company will be able to
make the transition to later stage clinical or commercial production.


                                       8
<PAGE>

MARKETING

      The Company  does not have  pharmaceutical  marketing  experience.  If the
Company  were to  market  its  products  itself or with a  partner,  significant
additional expenditures and management resources would be required to develop an
internal  sales force and there can be no  assurance  that the Company  would be
successful  in  penetrating  the  markets  for any  products  developed  or that
internal  marketing  capabilities  would  successfully  be developed at all. The
Company has co-promotion rights for commercialization of its BEC2 cancer vaccine
product in North America  pursuant to its Amended License  Agreement with Merck,
and expects that, in other instances,  it may enter into development  agreements
with third parties that may include  co-marketing or co-promotion  arrangements.
In the  alternative,  the Company could grant exclusive  marketing rights to its
corporate partners in return for up-front fees, milestone payments and royalties
on  sales.  Under  these  arrangements,  the  Company's  partner  may  have  the
responsibility  for a  significant  portion of  development  of the  product and
regulatory approval. In the event that the partner fails to develop a marketable
product or fails to market a product successfully, the Company's business may be
adversely affected.

PATENTS AND TRADE SECRETS

      The Company seeks patent  protection  for its  proprietary  technology and
products,  both in the United States and abroad.  Patent  applications have been
submitted and are pending in the United States, Canada, Europe and Japan as well
as other countries.  The patent position of biopharmaceutical firms generally is
highly uncertain and involves complex legal and factual questions.

      The  Company  currently  is  exclusive  licensee  or assignee of 39 issued
patents  world-wide,  24 of which are issued United States patents.  The Company
has the exclusive right to develop certain  anti-EGFr  receptor  antibodies with
potential  anti-tumor  activity  under  a  United  States  patent  owned  by the
University of California.  Ten of the Company's  U.S.  patents are licensed from
Princeton  University.  Six of the  Princeton  patents  relate to  hematopoietic
receptor  genes  and the  proteins  they  encode,  such as the  tyrosine  kinase
receptors  FLK-1 and FLK-2.  The other four  Princeton  patents  relate to a DNA
signal amplification system and p53 detection systems.

      To  date,   the  Company  is  the  assignee  or   exclusive   licensee  of
approximately 35 families of United States and foreign patent applications.  The
patent applications relate to a number of technologies including the use of EGFr
antibodies with chemotherapeutic agents;  anti-idiotypic antibodies for treating
cancer, such as BEC2, antibodies to receptor tyrosine kinases, such as FLK-1 and
FLK-2; methods for amplifying and detecting DNA, such as the RCR technology; and
hematopoietic factors.

      With respect to C225, the Company's EGFr cancer inhibiting  antibody,  the
Company is the exclusive  licensee of an issued U.S.  patent from the University
of California covering certain monoclonal antibodies that inhibit epidermal cell
growth. The Company is also the exclusive licensee from Rhone-Poulenc Rorer of a
family  of  patent  applications  seeking  to cover  antibodies  to EGFr used in
conjunction with chemotherapeutic agents. The EGFr antibodies being developed by
the Company include  chimerized  monoclonal  antibodies.  Chimerized  monoclonal
antibodies  are the subject of patent  applications  and  patents  held by third
parties.

      ImClone  also has pending  patent  applications  covering the chimeric and
humanized  forms  of  the  antibody  and  fragments  thereof,  in  synergy  with
anti-neoplastic  agents,  such  as  doxorubicin  and  cisplatin.   Additionally,
humanized forms of the antibody and antibody fragments,  are claimed, as well as
methods of inhibiting human tumors with C225 alone.

      The Company's  proprietary  position with respect to its  anti-tumor  BEC2
monoclonal  anti-idiotypic  antibody is based on a patent  application  filed by
Sloan-Kettering  and exclusively  licensed to the Company.  The Company is aware
that patents  have been issued in the United  States and Europe to a third party
covering anti-idiotypic antibodies and/or their use in the treatment of tumors.

      With respect to the Company's research on inhibitors to angiogenesis based
on the FLK-1  receptor,  the  Company is the  exclusive  licensee of a family of
patents and patent  applications  covering  the FLK-1  receptor  and  antibodies
thereto.  The Company is also the  assignee  of a family of patent  applications
filed by  Company  scientists  covering  angiogenesis-inhibiting  antibodies  to
receptors  that bind VEGF. A specific  patent  application of such family claims
specifically  the use of FLK-1 receptor  antibodies to isolate cells  expressing
the FLK-1  receptor  on their  cell  surface.  Additionally,  the  Company  is a
co-owner of a recently filed patent application claiming the use of FLK-1


                                       9
<PAGE>

receptor antibodies to isolate  endothelial  progenitor cells that express FLK-1
on their cell surface.  At present,  the Company is seeking  exclusive rights to
this invention from the co-owners.

      The  Company  is  also  the  exclusive  licensee  of a  family  of  patent
applications  covering novel cadherin molecules that are involved in endothelial
cell  interactions;  such interactions are believed to be involved in angiogenic
processes.  The subject patent  applications  cover antibodies that bind to, and
affect, the cadherin molecules.

      The United States Patent and Trademark  Office has granted two patents for
the Company's  cysteine-depleted IL-6 molecular variant, IL-6m, and the DNA that
encodes IL-6m.  The patent and patent  applications  are co-owned by the Company
and the  University  of North  Carolina,  whose  rights  have  been  exclusively
licensed to the Company. The Company is aware of patents issued to a third party
in the  United  States  and  Europe  covering  cysteine  depleted  proteins.  In
addition,  the Company is aware of third-party  patents for both recombinant and
native IL-6 and methods for its  production.  The Company is aware of a European
patent for the DNA  encoding  for human  recombinant  IL-6 and  methods  for its
production  which  has  been  exclusively  licensed  on a  worldwide  basis to a
pharmaceutical company. The Company has entered into a Settlement Agreement with
the pharmaceutical  company whereby the pharmaceutical company has agreed to not
enforce its patent  against the Company  based on the Company's use of its IL-6m
patent or patent applications.

      The  Company's  diagnostics  program  has  been  licensed  for  commercial
development to Abbott.  The program includes target  amplification and detection
methods,  such  as  RCR  technology,   signal  amplification  methods,  such  as
AMPLIPROBE,  and p53 mutation  detection for assisting in cancer diagnosis.  The
Company's  proprietary position with respect to its diagnostics program is based
on numerous  families of patents and patent  applications,  of which  ImClone is
either the assignee or exclusive  licensee.  The Company  currently is exclusive
licensee of an issued  patent  assigned to Princeton  University  related to the
underlying technology for its AMPLIPROBE DNA amplification and detection system.
The  Company  is aware  that  patent  applications  have been filed by, and that
patents have been issued to, third parties in the field of signal  amplification
technology for DNA assays.

      With  respect to certain  aspects  of its  technology,  such as methods of
isolating and purifying  antibodies and other proteins,  collections of plasmids
in viable host systems,  and antibodies  that are specific for proteins that are
of interest to ImClone, the Company currently relies on, and intends to continue
to rely on,  trade  secrets,  unpatented  proprietary  know-how  and  continuing
technological  innovation to protect its competitive  position.  There can be no
assurance that others will not independently  develop  substantially  equivalent
proprietary information or techniques.

      Relationships  between ImClone and its employees,  scientific  consultants
and collaborators  provide these persons with access to ImClone's trade secrets,
know-how and technological innovation under confidentiality  agreements with the
parties involved. Similarly, ImClone employees and consultants have entered into
agreements  with ImClone  which  require that they do not disclose  confidential
information  of  ImClone  and that they  assign  to  ImClone  all  rights to any
inventions made while in ImClone's employ relating to ImClone's activities.

GOVERNMENT REGULATION

      The  research  and   development,   manufacture  and  marketing  of  human
pharmaceutical  and diagnostic  products are subject to regulation  primarily by
the Food and Drug Administration  ("FDA") in the United States and by comparable
authorities in other countries. These national agencies and other federal, state
and local  entities  regulate,  among other  things,  research  and  development
activities  and the testing,  manufacturing,  safety,  handling,  effectiveness,
labeling,  storage, record keeping,  approval,  advertising and promotion of the
products  that  the  Company  is  developing.   Noncompliance   with  applicable
requirements  can  result  in  refusal  to  approve  product  license  or  other
applications, or revocation of approvals previously granted.  Noncompliance also
can result in fines, criminal prosecution,  recall or seizure of products, total
or partial  suspension  of  production  or refusal to allow the Company to enter
into supply contracts.

      The process of obtaining  requisite  FDA approval  has  historically  been
costly and time  consuming.  Current FDA  requirements  before a new human drug,
biological  product  or new  diagnostic  product  (a  medical  device  for which
efficacy  must be proven) may be marketed in the United  States  include (i) the
successful   conclusion  of   pre-clinical   laboratory  and  animal  tests,  if
appropriate,  to gain  preliminary  information  on the product's  safety,  (ii)
filing with the FDA of an IND  application to conduct human clinical  trials for
drugs  or   biologics,   (iii)  the   successful   completion  of  adequate  and
well-controlled  human  clinical  investigations  to  establish  the  safety and
efficacy of the product for its recommended use and (iv) filing by a company and
approval by the FDA of a New Drug  Application  ("NDA") for a


                                       10
<PAGE>

drug  product or a  Biological  License  Application  ("BLA")  for a  biological
product to allow commercial manufacturing of the drug or biologic.

      Pre-clinical tests include laboratory  evaluation of product chemistry and
animal  studies to assess the  potential  safety and efficacy of the product and
its formulation.  The results of the pre-clinical tests are submitted to the FDA
as part of an IND.

      Clinical  trials  involve  the  administration  of the product to patients
under the  supervision of a qualified  principal  investigator.  Such trials are
typically conducted in three sequential phases, although the phases may overlap.
In Phase I, the  initial  introduction  of the drug  into  human  subjects,  the
product  is  tested  for  safety,  dosage  tolerance,  absorption,   metabolism,
distribution  and  excretion.  Phase II  involves  studies in a limited  patient
population to (i) determine the  biological or clinical  activity of the product
for specific, targeted indications,  (ii) determine dosage tolerance and optimal
dosage,  and (iii) identify  possible adverse effects and safety risks. If Phase
II evaluations indicate that a product is effective and has an acceptable safety
profile,  Phase III  trials  may be  undertaken  to  further  evaluate  clinical
efficacy and to further test for safety within an expanded patient population at
multiple  clinical  study  sites.  The FDA reviews  the results of the  clinical
trials and may order the  temporary  or  permanent  discontinuation  of clinical
trials at any time if it believes that clinical subjects are being exposed to an
unacceptable health risk. Investigational products used in both pre-clinical and
clinical tests must be produced in compliance with cGMP regulations  pursuant to
FDA regulations.

      In  October  1988,  the FDA issued new  procedures  designed  to speed the
availability  of new  therapies  to  patients  suffering  from  life-threatening
diseases such as AIDS and cancer.  These  procedures  permit early  consultation
with and commitment  from the FDA regarding  pre-clinical  and clinical  studies
necessary  to gain market  approval and to permit NDA's and BLA's to be approved
on the basis of expanded Phase II clinical data results.

      Under current law,  each  domestic and foreign drug product  manufacturing
establishment must be registered with, and determined to be adequate by, the FDA
before product approval.  Domestic  manufacturing  establishments are subject to
inspections  by the FDA for  compliance  with  cGMP  regulations  and  licensing
specifications after an NDA, BLA or PMA has been approved.  Domestic and foreign
manufacturing facilities are subject to periodic FDA inspections and inspections
by the foreign regulatory authorities where applicable.

      Sales outside the United States of products the Company develops also will
be  subject to  regulatory  requirements  governing  human  clinical  trials and
marketing for drugs and biological  products.  The requirements vary widely from
country to country,  but typically the  registration  and approval process takes
several years and requires  significant  resources.  Products that have not been
approved  by the FDA for sale in the  United  States  may be  exported  for sale
outside of the United  States only if they have been  approved in any one of the
following countries: the European Union, Canada,  Australia, New Zealand, Japan,
Israel, Switzerland and South Africa.

      The  Company's  research  and  development  programs  involve  the  use of
biohazardous  materials.  Accordingly,  the  Company's  business  is  subject to
regulations  under  federal,  state and local laws  regarding work force safety,
environmental  protection and hazardous substance control,  and to other present
and possible future federal,  state and local regulations.  The Company believes
that its safety  procedures  for handling  hazardous  materials  comply with the
requirements of such laws and regulations.

      The  Company's  ability to earn  sufficient  returns on its  products  may
depend  in part on the  extent  to  which  reimbursement  for the  costs of such
products  and  related  treatments  will be  available  from  government  health
administration   authorities,   private  health  coverage   insurers  and  other
organizations.  Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and there can be no assurance that adequate
third-party coverage will be available.

COMPETITION

      Competition  in  the  biopharmaceutical  industry  is  intense  and  based
significantly  on scientific and  technological  factors,  the  availability  of
patent  and other  protection  for  technology  and  products,  the  ability  to
commercialize  technological developments and the ability to obtain governmental
approval for testing,  manufacturing  and marketing.  The Company  competes with
specialized  biopharmaceutical firms in the United States, Europe and elsewhere,
as well as a growing number of large pharmaceutical  companies that are applying
biotechnology to their operations. Many biopharmaceutical companies have focused
their development efforts in the human therapeutics area,  including cancer, and
many  major  pharmaceutical   companies  have  developed  or  acquired  internal
biotechnology   capabilities   or  made  commercial   arrangements   with  other
biopharmaceutical


                                       11
<PAGE>

companies.  These  companies,  as well as  academic  institutions,  governmental
agencies and private  research  organizations,  also compete with the Company in
recruiting and retaining highly qualified  scientific personnel and consultants.
The  Company's  ability to compete  successfully  with  other  companies  in the
pharmaceutical field will also depend to a considerable degree on the continuing
availability of capital to the Company.

      The Company is aware of certain products under development or manufactured
by  competitors  that are used for the  prevention,  diagnosis  or  treatment of
certain  diseases  the Company has  targeted  for product  development.  Various
companies are developing  biopharmaceutical  products that potentially  directly
compete with the Company's  product  candidates,  including in areas such as the
use of small molecules to EGFr or antibodies to those receptors to treat cancer,
the use of anti-idiotypic  antibody or recombinant  antigen approaches to cancer
vaccine therapy,  the development of inhibitors to angiogenesis,  and the use of
hematopoietic growth factors to treat blood system disorders to or for stem cell
or gene therapy.  Some of these  product  candidates  are in advanced  stages of
clinical trials.

      The  Company's  products  under  development  and in  clinical  trials are
expected  to address  major  markets  within the cancer  sector.  The  Company's
competition  will be determined in part by the potential  indications  for which
the Company's  compounds are  developed  and  ultimately  approved by regulatory
authorities.  Additionally,  the  timing of market  introduction  of some of the
Company's  potential  products or of  competitors'  products may be an important
competitive factor.  Accordingly,  the relative speed with which the Company can
develop products,  complete pre-clinical  testing,  clinical trials and approval
processes  and  supply  commercial  quantities  to  market  are  expected  to be
important  competitive  factors.  The Company  expects  that  competition  among
products  approved for sale will be based on various factors,  including product
efficacy, safety, reliability, availability, price and patent position.

HUMAN RESOURCES

      ImClone  initiated  its in-house  research and  development  in 1986.  The
Company has assembled a scientific staff with a variety of complementary  skills
in  a  broad  base  of  advanced  research  technologies,   including  oncology,
immunology,  molecular  and cell  biology,  antibody  engineering,  protein  and
synthetic  chemistry  and  high-throughput   screening.  The  Company  has  also
recruited  a  staff  of  technical  and  professional  employees  to  carry  out
manufacturing  of  clinical  trial  materials  at  its  Somerville,  New  Jersey
facility.  Of the Company's  110 full-time  personnel on March 27, 1998, 44 were
employed in its product development,  clinical and manufacturing programs, 39 in
research and 27 in administration.  The Company's staff includes 15 persons with
Ph.D.s and 2 with M.D.s.

Item 2. Properties.

RESEARCH FACILITY--NEW YORK, NEW YORK

      The Company currently  occupies two contiguous leased floors at 180 Varick
Street in New York City,  in which it is using  approximately  30,000 of a total
available  40,000 square feet on the two floors.  A portion of the lease expired
in 1993 and a portion  expires in March 1999.  The Company has extended the 1993
expired  portion  of the lease  through  March 1997 at 85% of each  year's  fair
market  rental  value and from 1997 to March  1999 at 100% of each  year's  fair
market rental value,  for a portion of the premises.  The rate for the remaining
portion of the premises is $264,000 annually through March 31, 1997 and $285,000
annually  through  March 31, 1999.  Rent  expense for the New York  facility was
approximately  $554,000,  $508,000 and $493,000 for the years ended December 31,
1997,  1996 and 1995,  respectively.  The Company is  currently  in  discussions
regarding the extension of the lease and considering other alternatives.

      The  acquisition,  construction and installation of the Company's New York
research and development  facilities were financed  principally through the sale
of Industrial Development Revenue Bonds (the "IDA Bonds") issued by the New York
City Industrial  Development  Agency (the "NYIDA").  These facilities secure the
payment of debt service on the outstanding IDA Bonds.

MANUFACTURING FACILITY--SOMERVILLE, NEW JERSEY

      In June 1992,  the Company  acquired  certain  property  and a building in
Somerville,  New Jersey at a cost to the  Company of  approximately  $4,665,000,
including  expenses.  The Company has  retrofitted  the building to serve as its
clinical-grade manufacturing facility. When purchased, the facility had in place
various features, including


                                       12
<PAGE>

clean rooms,  air  handling,  electricity  and water for  injection  systems and
administrative  offices.  The cost for completion of facility  modifications was
approximately $5,400,000.

      Currently  the  facility  is being  operated  to develop  and  manufacture
materials for the Company's clinical trials.  Under certain  circumstances,  the
Company also may use the facility for the manufacturing of commercial  products.
The timing and any  additional  costs of adapting the  facility  for  commercial
manufacturing  depend on several  factors,  including  the  progress of products
through clinical trials. In January 1998, ImClone completed the construction and
commissioning  of a new 1,750  square foot  process  development  center at this
facility dedicated to manufacturing  process  optimization for existing products
and the pre-clinical and Phase I development of new biological therapeutics.  In
addition,  the Company has taken steps to complete a formal  design  concept for
large scale manufacturing at this facility.

Item 3.  Legal Proceedings.

      There is no material legal  proceeding  pending against the Company or any
of its  property,  nor was any such  proceeding  terminated  during  the  fourth
quarter of the year ended December 31, 1997.

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

      None.

                                     PART II


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

MARKET INFORMATION

      The Company's  Common Stock is traded in the  over-the-counter  market and
prices are  reported  on the Nasdaq  National  Market  tier of The Nasdaq  Stock
Market under the symbol "IMCL".

      The following table sets forth,  for the periods  indicated,  the range of
high and low sale prices for the Common Stock on the Nasdaq National Market,  as
reported by The Nasdaq Stock Market. The quotations shown represent inter-dealer
prices without adjustment for retail mark-ups, mark downs or commissions and may
not necessarily reflect actual transactions.

                                             High           Low
                                             ----           ---
      Year ended December 31, 1997
            First Quarter .............   $ 10 1/8     $   5  3 /4
            Second Quarter ............   $  7 7/8     $   4  5 /8
            Third Quarter .............   $  8 1/8     $   4  5 /8
            Fourth Quarter ............   $  8 1/2     $   5 21/32



                                              High          Low
                                              ----          ---
      Year ended December 31, 1996
            First Quarter .............   $  9 3/8      $  6
            Second Quarter ............   $ 17 3/8      $  7 1/4
            Third Quarter .............   $  9 7/8      $  5 3/4
            Fourth Quarter ............   $ 11          $  6 7/8

STOCKHOLDERS

      As of the close of business on March 27,  1998,  there were  approximately
195 holders of record of the Company's Common Stock. The Company  estimates that
there are approximately 4,900 beneficial owners of its Common Stock.


                                       13
<PAGE>

DIVIDENDS

      The Company has never  declared cash dividends on its Common Stock and has
no present intention of declaring such cash dividends in the foreseeable future.
Pursuant to the terms of the Company's  Series A Preferred Stock, the holders of
Series A Preferred  Shares are entitled to receive  cumulative  dividends at the
annual rate of $6.00 per share,  compounded  annually,  which dividends began to
accrue when the Series A Preferred  Shares  were  issued on December  15,  1997.
Dividends on the  outstanding  Series A Preferred  Shares are payable in cash on
December  31st of each year  beginning on December  31, 1999,  or at the time of
conversion, whichever is sooner. Series A Preferred Shares are of senior rank to
all shares of Common Stock with respect to payment of dividends.

RECENT SALES OF UNREGISTERED SECURITIES

      In December  1997,  the Company sold to Merck  400,000  Series A Preferred
Shares for total  consideration  of  $40,000,000  pursuant to an exemption  from
registration under Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities  Act"). In March 1997, the Company issued 20,000 shares
of unregistered Common Stock to a single individual upon exercise of outstanding
warrants for  aggregate  consideration  of $30,000.  In March 1997,  the Company
issued an aggregate of 190,000  shares of  unregistered  Common Stock jointly to
two   individuals   upon   exercise  of   outstanding   warrants  for  aggregate
consideration  of $285,000.  Such  issuances  were  consummated as private sales
pursuant to Section 4(2) of the Securities Act.

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                               --------------------------------------------------------
(In thousands, except per share data)              1997        1996       1995        1994        1993
                                                   ----        ----       ----        ----        ----
<S>                                            <C>         <C>         <C>         <C>         <C>
Statements of Operations Data:
Revenues                                       $  5,348    $    600    $    800    $    950    $  5,403
Operating expenses:
  Research and development                       16,455      11,482       8,768      11,816      13,876
  General and administrative                      5,356       3,961       3,739       3,348       4,375
Interest and other income                        (1,523)       (918)     (3,120)     (3,186)       (573)
Interest and other expense                          551         823       1,054         821         587
Equity in loss of affiliate                        --          --          --           342       1,140
                                               ---------   ---------   --------    --------    --------
Loss before extraordinary item                   (15,491)    (14,748)    (9,641)    (12,191)    (14,002)
Extraordinary loss on extinguishment of debt        --          1,267       --          --          --
                                               ---------   ---------   --------    --------    --------
Net loss                                         (15,491)    (16,015)    (9,641)    (12,191)    (14,002)
Preferred dividends (including incremental
  yield of $51)                                      163       --          --           --          --
                                               ---------   ---------   --------    --------    --------
Net loss to common stockholders                $ (15,654)  $ (16,015)  $ (9,641)   $(12,191)   $(14,002)
                                               =========   =========   ========    ========    ========
Basic and diluted net loss per common share:
Loss before extraordinary item                 $   (0.67)  $   (0.76)  $  (0.72)   $  (1.12)   $  (1.58)
Extraordinary loss on extinguishment of debt        --          0.07        --          --          --
                                               ---------   ---------   --------    --------    --------
Net loss                                       $   (0.67)  $   (0.83)  $  (0.72)   $  (1.12)   $  (1.58)
                                               =========   =========   ========    ========    ========
Weighted average shares outstanding               23,457       19,371    13,311      10,903       8,879

</TABLE>

(In thousands)             1997       1996       1995       1994       1993
                           ----       ----       ----       ----       ----
Balance Sheet Data:
Cash and securities (1)  $ 59,610   $ 13,514   $ 10,207   $  3,032   $  7,301
Working capital            56,671      7,695      3,735     (1,470)     1,215
Total assets               75,780     25,885     22,803     17,467     24,208
Long-term obligations       3,430      2,775      4,235      4,487      3,636
Accumulated deficit      (117,464)  (101,973)   (85,958)   (76,317)   (64,126)
Stockholders' equity       68,226     16,589     11,823      8,176     14,812


                                       14
<PAGE>

(1) Includes  $532,000 as of December 31, 1993 which was restricted for use only
for  construction  and equipping the Company's New York City facility  under the
terms of certain industrial development bonds.

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

      The  following  discussion  and  analysis  by  management  is  provided to
identify  certain  significant  factors which  affected the Company's  financial
position and operating  results during the periods  included in the accompanying
financial statements.

OVERVIEW AND RISK FACTORS

      The  Company  is a  biopharmaceutical  company  engaged  primarily  in the
research and  development of therapeutic  products for the treatment of selected
cancers and  cancer-related  disorders.  The products under development  include
cancer therapeutics,  cancer vaccines and inhibitors of angiogenesis.  Since its
inception  in April  1984,  the Company  has  devoted  substantially  all of its
efforts and  resources to research and  development  conducted on its own behalf
and through  collaborations  with corporate  partners and academic  research and
clinical  institutions.  The Company  has  generated  a  cumulative  net loss of
approximately  $117,464,000  for the period from its  inception  to December 31,
1997. The Company expects to incur significant  additional operating losses over
each of the next  several  years.  The major  sources of the  Company's  working
capital  have been the  proceeds  from the  public  and  private  sale of equity
securities,  the sale of the IDA Bonds by the NYIDA (the  proceeds of which have
been used for the  acquisition,  construction  and installation of the Company's
research and development  facility in New York City),  license fees and contract
research and  development  fees and royalties  from  collaborative  partners and
interest earned on these funds.

      Substantially  all of the  Company's  products  are in  various  stages of
development,  clinical  studies or  research.  Substantially  all the  Company's
revenues   were   generated   from  license  and  research   arrangements   with
collaborative  partners.  The Company's  revenues under its research and license
agreements with corporate sponsors have fluctuated and are expected to fluctuate
significantly  from  period to  period.  Similarly,  the  Company's  results  of
operations  have  fluctuated  and are expected to fluctuate  significantly  from
period to period.  These  variations  have been,  and are  expected to be, based
primarily  on the  timing  of  entering  into  supported  research  and  license
agreements,  the status of the Company's various products,  the timing and level
of  revenues  from sales by its  partner in  diagnostics,  Abbott,  of  products
bearing  the  Company's  technology,  the  addition or  termination  of research
programs  or  funding   support,   performance   by  the   Company's   corporate
collaborators  of their funding and marketing  obligations,  the  achievement of
specified  research or development  milestones,  including those relating to the
Company's  Amended License  Agreement with Merck, and variations in the level of
expenditures for the Company's proprietary products during any given period. The
Company's products will require substantial  additional development and clinical
testing  and  investment  prior  to  commercialization.  To  achieve  profitable
operations,  the  Company,  alone or with  others,  must  successfully  develop,
introduce  and market its  products.  No assurance  can be given that any of the
Company's  product  development  efforts will be  successfully  completed,  that
required  regulatory  approvals  can  be  obtained  or  that  any  products,  if
developed,  will be successfully  manufactured  or marketed or achieve  customer
acceptance.

RESULTS OF OPERATIONS

Years Ended December 31, 1997 and December 31, 1996

Revenues

      Revenues for the years ended  December  31, 1997 and 1996 were  $5,348,000
and $600,000 respectively, an increase of $4,748,000. Revenue for the year ended
December  31,  1997  consisted  of (i)  $300,000 in  research  support  from the
Company's   partnership  with  American  Home  Products  in  infectious  disease
vaccines,  (ii) $2,000,000 in milestone  payments and $1,667,000 in research and
support  payments from the Company's  Amended License  Agreement with Merck, and
(iii) $1,000,000 in milestone  payments and $381,000 in royalty revenue from the
Company's  strategic alliance with Abbott in diagnostics.  Revenues for the year
ended December 31, 1996  consisted of (i) $300,000 in research  support from the
Company's  partnership with the Wyeth/Lederle vaccine and pediatrics division of
American Home in infectious  disease vaccines,  (ii) $225,000 in royalty revenue
from the Abbott alliance, and (iii) $75,000 in license


                                       15
<PAGE>

fees  from the  Company's  cross-licensing  agreement  with  Immunex  for  novel
hematopoietic growth factors. Increased revenues for the year ended December 31,
1997 were primarily  attributable to the Company's  having achieved  development
milestones  under the Company's  Amended  License  Agreement  with Merck and the
Company's strategic license with Abbott.

Operating; Research and Development Expenses

      Total  operating  expenses for the years ended  December 31, 1997 and 1996
were  $21,811,000 and  $15,443,000,  respectively,  an increase of $6,368,000 or
41%. Research and development expenses for the years ended December 31, 1997 and
1996 were $16,455,000 and $11,482,000,  respectively,  an increase of $4,973,000
or 43%. Such amounts for the years ended December 31, 1997 and December 31, 1996
represented 75% and 74%, respectively, of total operating expenses. The increase
in research and  development  expenses for the year ended  December 31, 1997 was
partly  attributable  to a one-time  $2,233,000  non-cash  compensation  expense
recorded in connection with the extension of the term of an officer's warrant to
purchase  397,000 shares of Common Stock.  The increase is also  attributable to
costs associated with additional staffing,  contract  manufacturing and testing,
and expenditures in the functional areas of product  development,  manufacturing
and clinical and regulatory  affairs to support the Company's  lead  therapeutic
product candidate,  C225, as well as travel-related expenses to pursue strategic
partnerships  for C225 and other  product  candidates.  The  remaining  increase
reflects growth in the area of discovery research for future product candidates.

General and Administrative Expenses

      General  and  administrative  expenses  include  administrative  personnel
costs,  costs incurred in connection with pursuing  arrangements  with corporate
partners and technology  licensors,  and expenses  associated  with applying for
patent protection for the Company's  technology and products.  Such expenses for
the years ended  December  31,  1997 and 1996 were  $5,356,000  and  $3,961,000,
respectively,  an increase of  $1,395,000  or 35%.  The  increase in general and
administrative  expenses primarily  reflects (i) $279,000 non-cash  compensation
expense recorded in connection with an option grant to an officer of the Company
and (ii)  additional  support  staffing for the  expanding  research,  clinical,
development and manufacturing efforts of the Company,  particularly with respect
to C225. The Company expects general and administrative  expenses to increase in
future periods to support planned increases in research and development.

Interest and Other Income and Expenses

      Interest and other income was  $1,523,000  for the year ended December 31,
1997  compared to $918,000 for the year ended  December 31, 1996, an increase of
$605,000 or 66%.  The  increase  was  primarily  attributable  to the  increased
interest  income earned from higher cash  balances in the  Company's  investment
portfolio  resulting from the proceeds received from a public offering of Common
Stock  completed  in March 1997 and a private  placement  of Series A  Preferred
Stock completed in December 1997. Interest expense was $551,000 and $823,000 for
the years ended December 31, 1997 and 1996, respectively, a decrease of $272,000
or 33%.  Interest expense for both periods  primarily  included  interest on two
then  outstanding  IDA Bonds with an aggregate  principal  amount of  $4,313,000
($2,113,000 of which was repaid in December  1997) and interest  recorded on the
liability to Pharmacia and UpJohn Inc.  ("Pharmacia"),  for the reacquisition of
the  worldwide  rights to IL-6m as well as clinical  material  manufactured  and
supplied by Pharmacia to the Company. The decrease was primarily attributable to
the May 1996  exchange  of debt for Common  Stock  with the  Oracle  Group and a
Company Director.

Net Losses

      The Company had net losses to common  stockholders of $15,654,000 or $0.67
per share for the year ended  December 31, 1997,  compared with  $16,015,000  or
$0.83 per share for the year ended  December 31, 1996.  The year ended  December
31, 1996  included a $1,267,000 or $0.07 per share  extraordinary  loss on early
extinguishment  of debt. This  extraordinary  loss resulted from the issuance of
Common Stock in lieu of cash repayment of a $2,500,000 loan due the Oracle Group
and a $180,000  long-term note owed to a Company  Director.  The decrease in the


                                       16
<PAGE>

per share net loss to common  stockholders  is due  primarily  to the  increased
number  of  shares of Common  Stock  outstanding  as a result of the March  1997
public offering of Common Stock.

Years Ended December 31, 1996 and December 31, 1995

Revenues

      Revenues for the years ended  December 31, 1996 and 1995 were $600,000 and
$800,000,  respectively,  a decrease of $200,000. Revenues for 1996 consisted of
(i) $300,000 in research support from the Company's  corporate  partnership with
the Wyeth/Lederle vaccine and pediatrics division of American Home, (ii) royalty
revenue of $225,000 from the Company's strategic alliance with Abbott, (iii) and
$75,000  in  license  fees from the  Company's  cross-licensing  agreement  with
Immunex.  Revenues for 1995  consisted of (i) $300,000 in research  support from
the  Company's  corporate   partnership  with  the  Wyeth/Lederle   vaccine  and
pediatrics  division  of  American  Home,  and (ii)  contract  research  fees of
$500,000 from the Company's strategic alliance with Abbott.

Operating; Research and Development Expenses

      Total  operating  expenses  for the  years  ended  December  31,  1996 and
December 31, 1995 were $15,443,000 and $12,507,000, respectively, an increase of
$2,936,000  or 23%.  Research  and  development  expenses  for the  years  ended
December  31,  1996 and  December  31,  1995 were  $11,482,000  and  $8,768,000,
respectively, an increase of $2,714,000 or 31%. Such amounts for the years ended
December 31, 1996 and December 31, 1995  represented 74% and 70%,  respectively,
of total operating expenses.  The increase in research and development  expenses
is  primarily  attributable  to costs  incurred  for C225,  the  Company's  lead
therapeutic   product   candidate.   This  includes   additional   staffing  and
expenditures in the functional areas of product  development,  manufacturing and
clinical and  regulatory  affairs to support the  manufacture  of C225 for human
clinical trials and travel-related expenses to pursue strategic partnerships for
C225 (and other product  candidates).  The remaining increase reflects growth in
the area of discovery research for future product candidates.

General and Administrative Expenses

      General  and  administrative  expenses  include  administrative  personnel
costs,  costs incurred in connection with pursuing  arrangements  with corporate
partners and technology  licensors,  and expenses  associated  with applying for
patent protection for the Company's  technology and products.  Such expenses for
the year ended December 31, 1996 were $3,961,000  compared to $3,739,000 for the
year ended  December  31,  1995,  an increase  of  $222,000 or 6%. The  increase
primarily  reflects  additional  staffing  to support  the  expanding  research,
clinical,  development and  manufacturing  efforts of the Company,  particularly
with its lead therapeutic  product candidate,  C225. The Company expects general
and  administrative  expenses  to increase  in future  years to support  planned
increases in research and development.

Interest and Other Income and Expenses

      Interest and other  income was  $918,000  for the year ended  December 31,
1996 as compared to $3,120,000  for the year ended December 31, 1995, a decrease
of $2,202,000 or 71%. Other income for the year ended December 31, 1995 included
the Company's  sale of the remaining  one-half of its shares of capital stock of
Cadus Pharmaceutical Corporation, a company it assisted in founding in 1992, for
$3,000,000 to High River, LP. The greater interest income earned during the year
ended  December 31, 1996 reflects the Company's  improved cash position from the
November  1995 and  February  1996 public  sales of shares of its Common  Stock.
Interest  expense was $823,000 and  $1,054,000  for the years ended December 31,
1996 and December 31, 1995,  respectively,  a decrease of $231,000 or 22%.  Such
expense for both years primarily  included  interest on two then outstanding IDA
Bonds with an aggregate principal amount of $4,313,000  ($2,113,000 of which was
repaid in December  1997),  interest  recorded on the liability to Pharmacia for
the reacquisition of the worldwide rights to IL-6m and the contract  manufacture
of clinical material,  and interest accrued and the amortization of the non-cash
debt discount  recorded in connection  with the Company's  August 1995 financing
with the Oracle Group.


                                       17
<PAGE>

Net Losses

      The Company had net losses to common  stockholders of $16,015,000 or $0.83
per share,  and $9,641,000 or $0.72 per share,  for the years ended December 31,
1996 and December 31, 1995,  respectively.  The net loss to common  stockholders
for the year ended  December 31, 1996  included a $1,267,000  or $0.07 per share
extraordinary  loss on early  extinguishment of debt through the May issuance of
Common Stock in lieu of cash repayment of a $2,500,000 loan due the Oracle Group
and a $180,000 long-term note owed to a Company Director.

LIQUIDITY AND CAPITAL RESOURCES

      At  December  31,  1997,  the  Company's  principal  sources of  liquidity
consisted of cash and cash  equivalents  and  securities  available  for sale of
approximately  $59,600,000.  The  Company  has  financed  its  operations  since
inception  primarily through the public and private sales of equity  securities,
the sale of the IDA Bonds through the NYIDA,  license fees and contract research
and development fees and royalties  received under agreements with collaborative
partners and interest earned on these funds. Since inception, public and private
sales  of  equity  securities  have  raised  approximately  $163,799,000  in net
proceeds,  including  approximately  $23,200,000  raised in a public offering of
3,000,000  shares of Common  Stock in March 1997 and  approximately  $39,997,000
raised in a private  placement of 400,000 Series A Preferred  Shares in December
1997.  The  sale of the IDA  Bonds in each of 1985,  1986  and  1990  raised  an
aggregate  of  $6,313,000,  the  proceeds  of  which  have  been  used  for  the
acquisition,  construction  and  installation  of  the  Company's  research  and
development  facility in New York City,  and of which  $2,200,000  is  currently
outstanding.  Since inception, the Company has earned approximately  $28,662,000
from license fees,  contract  research and  development  fees and royalties from
collaborative  partners,  including  approximately  $5,348,000 received in 1997.
Since  inception  the Company has earned  approximately  $5,447,000  in interest
income, including approximately $1,523,000 in 1997.

      The Company  has  obligations  under  various  capital  leases for certain
laboratory, office and computer equipment and also certain building improvements
primarily  under a December  1996  financing  agreement  with Finova  Technology
Finance, Inc. ("Finova").  The agreement allows the Company to finance the lease
of equipment and make certain  building and leasehold  improvements  to existing
facilities  involving  amounts  aggregating   approximately  $2,500,000.  As  of
December  31,  1997,  the  Company  had  entered  into  six  individual   leases
aggregating  a total  cost of  $1,745,000.  Each lease has a fair  market  value
purchase option at the expiration of a 42-month term. Pursuant to the agreement,
the Company  issued to Finova a warrant  expiring  December 31, 1999 to purchase
23,220  shares of Common  stock at an  exercise  price of $9.69 per  share.  The
Company  recorded  a  non-cash  debt  discount  of  approximately   $125,000  in
connection  with this  financing,  which  discount is being  amortized  over the
42-month term of the first lease. The financing agreement with Finova expired in
December  1997 and the Company did not  utilize  the full  $2,500,000  under the
agreement.  The  Company  anticipates  that it will enter  into a new  financing
agreement   with  Finova   during  the  second   quarter  of  1998   aggregating
approximately $2,000,000; however, no assurance can be given that such agreement
will be consummated.

      The  Company  has  expended  and will  continue  to expend  in the  future
substantial  funds to continue  the research and  development  of its  products,
conduct   pre-clinical  and  clinical  trials,   establish   clinical-scale  and
commercial-scale  manufacturing  in its own  facilities or in the  facilities of
others,  and market its  products.  The  Company has  entered  into  preliminary
discussions  with  several  major  pharmaceutical  companies  regarding  various
alternatives  concerning the funding of research and  development for certain of
its  products.  No assurance can be given that the Company will be successful in
consummating any such  alternatives.  These discussions have included  potential
significant strategic alliances for the development and commercialization of the
Company's lead product candidate,  C225. Such strategic  alliances could include
up-front license fees plus milestone fees and revenue  sharing.  There can be no
assurance that the Company will be successful in achieving such  alliances,  nor
can the Company predict the amount of funds which might be available to it if it
entered  into  such  alliances  or the time at which  such  funds  would be made
available.

      In January 1998, the Company  completed the construction and commissioning
of a new 1,750 square foot process  development  center at its  Somerville,  New
Jersey  facility  at a cost of  approximately  $1,650,000.  The Company has also
taken steps to complete a formal design concept for large scale manufacturing at
this facility.  If the Company adapts this facility to large scale manufacturing
or does so at another location, it will incur substantial  additional costs. The
lease on the Company's New York City facility expires in March 1999. The Company
is  currently  in  discussions  regarding  the  extension  of the  lease  and is
considering other alternatives, such as relocating


                                       18
<PAGE>

its executive  offices and  laboratories to a new facility.  Were the Company to
relocate its  executive  offices and  laboratories,  it would incur  substantial
additional costs.

      The IDA Bond  issued in 1990  (the  "1990  IDA  Bond") in the  outstanding
principal  amount  of  $2,200,000  becomes  due in  2004.  If the  lease  on the
Company's New York City facility is terminated,  the 1990 IDA Bond provides that
it will become due 60 days prior to such  termination.  Interest  payable on the
1990 IDA Bond will aggregate approximately $250,000 during 1998. The Company has
granted the NYIDA a security  interest in substantially  all facility  equipment
located in the New York facility to secure the obligations of the Company to the
NYIDA  under the 1990 IDA Bond.  In  December  1997,  the  Company  paid off the
outstanding  principal on the IDA Bond issued in 1986 in the aggregate principal
amount of $2,113,000, plus accrued and unpaid interest thereon.

      The  holders of the Series A  Preferred  Shares  are  entitled  to receive
cumulative  dividends at an annual rate of $6.00 per share.  Dividends accrue as
of the  issuance  date of the Series A  Preferred  Shares and are payable on the
outstanding  Series A  Preferred  Shares  in cash on  December  31 of each  year
beginning  December 31, 1999 or at the time of  conversion  or redemption of the
Series A  Preferred  Shares on which the  dividend is to be paid,  whichever  is
sooner.  Accrued  dividends  were  $112,000  plus the  incremental  yield on the
conversion discount of $51,000 at December 31, 1997.

      Total capital  expenditures  made during the year ended  December 31, 1997
were $2,981,000.  Of the total capital  expenditures  made during the year ended
December 31, 1997,  $1,324,000 has been  reimbursed in accordance with the terms
of the Finova  agreement  discussed  above which provides for  improvements  and
equipping of the Company's  manufacturing facility in New Jersey. The balance of
capital additions was for equipment and computer-related  purchases for both the
New Jersey  facility and the corporate  office and research  laboratories in New
York.

      The Company anticipates that its existing capital resources, including the
on-going  research  support  of its  corporate  partners,  should  enable  it to
maintain  its current and planned  operations  through the end of the year 2000.
However,  the receipt of such ongoing  research  support is subject to attaining
research  and  development  milestones,  certain  of  which  have  not yet  been
achieved.  There  can be no  assurance  that  the  Company  will  achieve  these
milestones.  The Company's future working capital and capital  requirements will
depend upon numerous factors,  including the progress of the Company's  research
and  development  programs,   pre-clinical  testing  and  clinical  trials,  the
Company's  corporate partners  fulfilling their obligations to the Company,  the
timing  and cost of  seeking  regulatory  approvals,  the cost of  manufacturing
scale-up and effective commercialization activities and arrangements,  the level
of resources that the Company  devotes to the development of marketing and sales
capabilities,  the costs involved in filing,  prosecuting  and enforcing  patent
claims, technological advances, the status of competitors and the ability of the
Company to maintain existing and establish new  collaborative  arrangements with
other companies to provide  funding to the Company to support these  activities.
In order to fund its capital  needs after the end of the year 2000,  the Company
will require  significant  levels of additional capital and intends to raise the
capital through additional arrangements with corporate partners,  equity or debt
financings  or from other  sources.  There is no  assurance  the Company will be
successful in  consummating  any such  arrangements.  If adequate  funds are not
available,  the Company may be  required  to  significantly  curtail its planned
operations.

      Uncertainties  associated with the length and expense of pre-clinical  and
clinical  testing of any of the Company's  products  could greatly  increase the
cost of  development  of such  product  and  affect  the  timing of  anticipated
revenues  from product  sales,  and failure by the Company to obtain  regulatory
approval for any product will preclude its  commercialization.  In addition, the
failure by the Company to obtain  patent  protection  for its  products may make
certain of its products commercially unattractive.

      At December 31, 1997, the Company had net operating loss carryforwards for
federal  income tax  purposes  of  approximately  $115,000,000  which  expire at
various  dates from 2000  through  2012.  At  December  31, 1997 the Company had
research  credit  carryforwards  of  approximately  $2,303,000  which  expire at
various  dates  between  years 2001 and 2012.  Pursuant  to  Section  382 of the
Internal  Revenue  Code of 1986,  as  amended,  the  annual  utilization  of the
Company's net operating loss and research credit carryforwards may be limited if
the Company  experiences a change in ownership of more than 50 percentage points
within a three-year  period.  Since 1986, the Company  experienced two ownership
changes.  Accordingly, the Company is significantly limited in utilizing its tax
net operating loss carryforwards arising before such ownership changes to offset
future  federal  taxable  income.   Similarly,   the  Company  is  significantly
restricted  in using its  research  credit  carryforwards  arising  before  such
ownership changes to offset future federal income tax expense.


                                       19
<PAGE>

OTHER ITEMS

      The Company is  evaluating  the risks and costs  associated  with the year
2000  conversion.  The Company intends to communicate  with those  organizations
with which it does  business to ensure that year 2000 issues will be resolved in
a timely manner. If necessary  modifications and conversions by those with which
the Company does business are not  completed  timely,  the year 2000  conversion
issue may have a material adverse effect on the Company's consolidated financial
position and results of operations.  Based on the Company's ongoing  evaluation,
management  does not  currently  believe  that the  costs to  achieve  year 2000
compliance  will be material to the Company's  financial  position or results of
operations.

Item  7A. Quantitative and Qualitative Disclosures About Market Risk.

      Not Applicable.

Item  8.  Financial Statements and Supplementary Data.

      The  response  to this item is  submitted  as a  separate  section of this
report commencing on Page F-1.

Item  9.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure.

      Not Applicable.

                                    PART III

      The information  required by "Item 10. - Directors and Executive  Officers
of the Registrant";  "Item 11. - Executive  Compensation";  "Item 12. - Security
Ownership of Certain Beneficial Owners and Management";  and "Item 13. - Certain
relationships  and Related  Transactions" is incorporated  into Part III of this
Annual Report on Form 10-K by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on May 27, 1998.


                                       20
<PAGE>

                                     PART IV

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

(a)(1)and(2). The  response  to  this  portion  of Item 14. is  submitted  as  a
              separate  section of  this report  commencing on page F-1. (a) (3)
              Exhibits (numbered in accordance with Item 601 of Regulation S-K).

                                                                   Incorporation
Exhibit No.                         Description                     by Reference
-----------                         -----------                     ------------
 3.1          Certificate of Incorporation, and all amendments
              thereto                                              N (3.1)
 3.2          Amended and Restated By-Laws of the Company          M (3.2)
 4.1          Form of Warrant issued to the Company's officers
              and directors under Warrant Agreements               A (4.1)
 4.2          Stock Purchase Agreement between Erbamont Inc. and
              the Company, dated May 1, 1989                       A (4.2)
 4.3          Stock Purchase Agreement between American Cyanamid
              Company (Cyanamid) and the Company dated December
              18, 1987                                             A (4.3)
 4.4          Form of Subscription Agreement entered into in
              connection with September 1991 private placement     A (4.4)
 4.5          Form of Warrant issued in connection with
              September 1991 private placement                     A(4.5)
 4.6          Preferred Stock Purchase Agreement between the
              Company and Merck KGaA ("Merck") dated December
              3, 1997                                              P
 4.7          Certificate of Designations, Preferences and
              Rights of Series A Convertible Preferred Stock       P
10.1          Company's 1986 Employee Incentive Stock Option
              Plan, including form of Incentive Stock Option
              Agreement                                            F (10.1)
10.2          Company's 1986 Non-qualified Stock Option Plan,
              including form of Non-qualified Stock Option
              Agreement                                            F (10.2)
10.3          Company's 401(k) Plan                                F (10.3)
10.4          Research and License Agreement between Merck and
              the Company dated December 19, 1990                  B (10.4)
10.5          Hematopoietic Growth Factors License Agreement
              between Erbamont, N.V. and the Company, dated May
              1, 1989, and Supplemental Amendatory Agreement
              between Erbamont, N.V. and the Company dated
              September 28, 1990                                   B (10.6)
10.6          Agreement between Cyanamid and the Company dated
              December 18, 1987 and supplemental letter
              agreement between Cyanamid and the Company dated
              September 6, 1991                                    B (10.7)
10.7          Agreement between Hadasit Medical Research
              Services & Development, Ltd. and the Company         B (10.8)
10.8          Agreement between Hadasit Medical Research
              Services & Development, Ltd. and the Company dated
              September 21, 1989                                   B (10.9)
10.9          Supported Research Agreement between Memorial
              Sloan-Kettering Cancer Center (MSKCC) and the
              Company dated March 26, 1990                         A (10.10)
10.10         License Agreement between MSKCC and the Company,
              dated March 26, 1990                                 B (10.11)
10.11         License Agreement between MSKCC and the Company,
              dated March 26, 1990                                 B (10.12)
10.12         License Agreement between MSKCC and the Company,
              dated March 26, 1990                                 B (10.13)
10.13         Research Agreement between the Trustees of
              Princeton University (Princeton) and the Company
              dated January 1, 1991                                B (10.14)
10.14         Research Agreement between Princeton and the
              Company dated May 1, 1991                            B (10.15)
10.15         Research Agreement between Princeton and the
              Company dated May 1, 1991                            B (10.16)
10.16         License Agreement between Princeton and the
              Company dated March 20, 1991                         B (10.17)
10.17         License Agreement between Princeton and the
              Company dated May 29, 1991                           B (10.18)
10.18         License Agreement between Princeton and Oncotech,
              Inc. dated September 3, 1987                         B (10.19)
10.19         Supported Research Agreement between The
              University of North Carolina at Chapel Hill
              ("UNC") and the Company effective July 5, 1988       B (10.20)
10.20         License Agreement between UNC and the Company
              dated July 5, 1988                                   B (10.21)
10.21         License Agreement between UNC and the Company
              dated July 27, 1988                                  B (10.22)
10.22         Supported Research Agreement between UNC and the
              Company effective April 1, 1989                      B (10.23)
10.23         License Agreement between UNC and the Company
              dated July 1, 1991                                   B (10.24)
10.24         Agreement between Celltech Limited and the Company
              dated May 23, 1991                                   B (10.25)
10.25         Form of Non-disclosure and Discovery Agreement
              between employees of the Company and the Company     A (10.30)
10.26         Industrial Development Bond Documents:               A (10.31)
10.26.1       Industrial Development Revenue Bonds (1985 ImClone
              Systems Incorporated Project)                        A (10.31.1)


                                       21
<PAGE>

10.26.1.1     Lease Agreement, dated as of October 1, 1985,
              between the New York City Industrial Development
              Agency (NYCIDA) and the Company, as Lessee           A (10.31.1.3)
10.26.1.2     Indenture of Trust, dated as of October 1, 1985,
              between NYCIDA and United States Trust Company of
              New York (US Trust), as Trustee                      A (10.31.1.2)
10.26.1.3     Company Sublease Agreement, dated as of October 1,
              1985, between the Company and NYCIDA                 A (10.31.1.3)
10.26.1.4     Tax Regulatory Agreement, dated October 9, 1985,
              from NYCIDA and the Company to US Trust, as
              Trustee                                              A (10.31.1.4)
10.26.1.5     Lessee Guaranty Agreement, dated as of October 1,
              1985, between the Company and US Trust, as Trustee   A (10.31.1.5)
10.26.1.6     First Supplemental Indenture of Trust, dated as of
              November 1, 1985 from the NYCIDA to US Trust         A (10.31.1.6)
10.26.1.7     Third Supplemental Indenture of Trust, dated as of
              October 12, 1990 from NYCIDA to US Trust             A (10.31.1.7)
10.26.2       Industrial Development Revenue Bonds (1986 ImClone
              Systems Incorporated Project)                        A (10.31.2)
10.26.2.1     First Amendment to Company Sublease Agreement,
              dated as of December 1, 1986, between the Company,
              as Sublessor, and NYCIDA as Sublessee                A (10.31.2.1)
10.26.2.2     First Amendment to Lease Agreement, dated as of
              December 1, 1986, between NYCIDA and the Company,
              as Lessee                                            A (10.31.2.2)
10.26.2.3     Second Supplement Indenture of Trust, dated as of
              December 1, 1986 between NYCIDA and US Trust, as
              Trustee                                              A (10.31.2.3)
10.26.2.4     Tax Regulatory Agreement, dated December 31, 1986,
              from NYCIDA and the Company to US Trust, as
              Trustee                                              A (10.31.2.4)
10.26.2.5     First Amendment to Lessee Guaranty Agreement,
              dated as of December 1, 1986, between the Company
              and US Trust, as Trustee                             A (10.31.2.5)
10.26.2.6     Bond Purchase Agreement, dated as of December 31,
              1986, between NYCIDA and New York Muni Fund, Inc.,
              as Purchaser                                         A(10.31.2.6)
10.26.2.7     Letter of Representation and Indemnity Agreement,
              dated as of December 31, 1986, from the Company to
              NYCIDA and New York Muni Fund, Inc., as Purchaser    A(10.31.2.7)
10.26.3       Industrial Development Revenue Bonds (1990 ImClone
              Systems Incorporated Project)                        A(10.31.3)
10.26.3.1     Lease Agreement, dated as of August 1, 1990,
              between NYCIDA and the Company, as lessee            A(10.31.3.1)
10.26.3.2     Company Sublease Agreement, dated as of August 1,
              1990, between the Company, as Sublessor, and
              NYCIDA                                               A (10.31.3.2)
10.26.3.3     Indenture of Trust, dated as of August 1, 1990,
              between NYCIDA and US Trust, as Trustee              A (10.31.3.3)
10.26.3.4     Guaranty Agreement, dated as of August 1, 1990,
              from the Company to US Trust, as Trustee             A (10.31.3.4)
10.26.3.5     Tax Regulatory Agreement, dated August 1, 1990,
              from the Company and NYC.IDA to US Trust, as
              Trustee                                              A(10.31.3.5)
10.26.3.6     Agency Security Agreement, dated as of August 1,
              1990, from the Company, as Debtor, and the NYCIDA
              to US Trust, as Trustee                              A(10.31.3.6)
10.26.3.7     Letter of Representation and Indemnity Agreement,
              dated as of August 14, 1990, from the Company to
              NYCIDA, New York Mutual Fund, Inc., as the
              Purchaser and Chase Securities, Inc., as Placement
              Agent Company to NYCIDA                              A(10.31.3.7)
10.27         Lease Agreement between 180 Varick Street
              Corporation and the Company, dated October 8,
              1985, and Additional Space and Modification
              Agreement between 180 Varick Street Corporation
              and the Company, dated June 13, 1989                 A(10.32)
10.28         License Agreement between The Board of Trustees of
              the Leland Stanford Junior University and the
              Company effective May 1, 1991                        A(10.33)
10.29         License Agreement between Genentech, Inc. and the
              Company dated December 28, 1989                      A(10.34)
10.30         License Agreement between David Segev and the
              Company dated December 28, 1989                      B(10.35)
10.31         Letter of Intent between the Company and Dr. David
              Segev dated November 18, 1991                        C(10.40)
10.32         Agreement between the Company and Celltech Limited
              dated March 11, 1992                                 C(10.42)
10.33         Agreement of Sale dated June 19, 1992 between the
              Company and Korsch Tableting Inc.                    D(10.45)
10.34         Research and License Agreement, having an
              effective date of December 15, 1992, between the
              Company and Abbott Laboratories                      E(10.46)
10.35         Research and License Agreement between the Company
              and Chugai Pharmaceutical Co., Ltd. dated January
              25, 1993                                             E(10.47)


                                       22
<PAGE>

10.36         License Agreement between the Company and the
              Regents of the University of California dated
              April 9, 1993                                        G (10.48)
10.37         Contract between the Company and John Brown, a
              division of Trafalgar House, dated January 19,
              1993                                                 H (10.49)
10.38         Collaboration and License Agreement between the
              Company and the Cancer Research Campaign
              Technology, Ltd., signed April 4, 1994, with an
              effective date of April 1, 1994.                     G (10.50)
10.39         Termination Agreement between the Company and
              Erbamont Inc. dated July 21, 1993                    H (10.51)
10.40         Research and License Agreement between the Company
              and Cyanamid dated September 15, 1993                G (10.52)
10.41         Clinical Trials Agreement between the Company and
              the National Cancer Institute dated November 23,
              1993                                                 H (10.53)
10.42         License Agreement between the Company and UNC
              dated December 1, 1993                               G (10.54)
10.43         Notice of Termination for the research
              collaboration between the Company and Chugai
              Pharmaceutical Co., Ltd. dated December 17, 1993     H (10.55)
10.44         License Agreement between the Company and
              Rhone-Poulenc Rorer dated June 13, 1994              I (10.56)
10.45         Offshore Securities Subscription Agreement between
              ImClone Systems Incorporated and GFL Ultra Fund
              Limited dated August 12, 1994                        I (10.57)
10.46         Offshore Securities Subscription Agreement between
              ImClone Systems Incorporated and GFL Ultra Fund
              Limited dated November 4, 1994                       I (10.58)
10.47         Offshore Securities Subscription Agreement between
              ImClone Systems Incorporated and Anker Bank
              Zuerich dated November 10, 1994                      I (10.59)
10.48         Option Agreement, dated as of April 27, 1995,
              between ImClone Systems Incorporated and High
              River Limited Partnership relating to capital
              stock of Cadus Pharmaceutical Corporation            J (10.60)
10.49         Option Agreement, dated as of April 27, 1995,
              between ImClone Systems Incorporated and High
              River Limited Partnership relating to 300,000
              shares of Common Stock of ImClone Systems
              Incorporated                                         J (10.61)
10.50         Option Agreement, dated as of April 27, 1995,
              between ImClone Systems Incorporated and High
              River Limited Partnership relating to 150,000
              shares Common Stock of ImClone Systems
              Incorporated                                         J (10.62)
10.51         Stock Purchase Agreement, dated as of August 10,
              1995, by and between ImClone Systems Incorporated
              and the members of the Oracle Group                  J (10.63)
10.52         Form of Warrant issued to the members of the
              Oracle Group                                         J (10.64)
10.53         Loan Agreement, dated as of August 10, 1995, by
              and between ImClone Systems Incorporated and the
              members of the Oracle Group                          J (10.65)
10.54         Security Agreement, dated as of August 10, 1995,
              by and between ImClone Systems Incorporated and
              the members of the Oracle Group                      J (10.66)
10.55         Mortgage, dated August 10, 1995, made by ImClone
              Systems Incorporated for the benefit of Oracle
              Partners, L.P., as Agent                             J (10.67)
10.56         Financial Advisory Agreement entered into between
              the Company and Genesis Merchant Group Securities
              dated November 2, 1995                               K (10.68)
10.57         Repayment Agreement (with Confession of Judgment,
              and Security Agreement) entered into between the
              Company and Pharmacia, Inc. on March 6, 1996         K (10.69)
10.58         License Amendment entered into between the Company
              and Abbott Laboratories on August 28,
              1995,amending the Research and License Agreement
              between the parties dated December 15, 1992          K (10.70
10.59         Amendment of September 1993 to the Research and
              License Agreement between the Company and Merck of
              April 1, 1990                                        K (10.71)
10.60         Amendment of October 1993 to the Research and
              License Agreement between the Company and Merck of
              April 1, 1990                                        K (10.72)
10.61         Employment agreement dated May 17, 1996 between
              the Company and Carl S. Goldfischer                  L (10.73)
10.62         Financial Advisory Agreement dated February 26,
              1997 between the Company and Hambrecht & Quist LLC   L (10.74)
10.63         Exchange Agreement exchanging debt for Common
              Stock dated as of April 15, 1996 among the Company
              and members of The Oracle Group.                     L (10.75)
10.64         Collaborative Research and License Agreement
              between the Company and CombiChem, Inc. dated
              October 10, 1997                                     L (10.76)


                                       23
<PAGE>

10.65         Amendment of May 1996 to Research and License
              Agreement between the Company and Merck of April
              1, 1990                                              O
10.66         Amendment of December 1997 to Research and License
              Agreement between the Company and Merck of April
              1, 1990                                              O
21.1          Subsidiaries                                         P
23.1          Consent of KPMG Peat Marwick LLP                     P
27.1          Financial Data Schedule                              P
99.1          1996 Incentive Stock Option Plan, as amended         N (99.1)
99.2          1996 Non-Qualified Stock Option Plan, as amended     N (99.2)

----------
A     Previously  filed  with  the  Commission;  incorporated  by  reference  to
      Registration Statement on Form S-1, File No. 33-43064.

B     Previously  filed  with  the  Commission;  incorporated  by  reference  to
      Registration  Statement  on Form  S-1,  File  No.  33-43064.  Confidential
      treatment was granted for a portion of this exhibit.

C     Previously  filed  with  the  Commission;  incorporated  by  reference  to
      Registration  Statement  on Form  S-1,  File  No.  33-48240.  Confidential
      treatment was granted for a portion of this exhibit.

D     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's Annual Report on Form 10-K, filed June 26, 1992.

E     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Annual  Report on Form 10-K for the fiscal year ended  December
      31,  1992.  Confidential  treatment  was  granted  for a  portion  of this
      Exhibit.

F     Previously filed with the Commission;  incorporated by reference Amendment
      No. 1 to Registration Statement on to Form S-1, File No. 33-61234.

G     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Annual  Report on Form 10-K for the fiscal year ended  December
      31,  1993.  Confidential  Treatment  was  granted  for a  portion  of this
      Exhibit.

H     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Annual  Report on Form 10-K for the fiscal year ended  December
      31, 1993.

I     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Annual  Report on Form 10-K for the fiscal year ended  December
      31, 1994.

J     Previously  filed  with  the  Commission;  incorporated  by  reference  to
      Registration Statement on Form S-2, File No. 33-98676.

K     Previously  filed with the  Commission,  incorporated  by reference to the
      Company's  Annual  Report on Form 10-K for the fiscal year ended  December
      31, 1996.

L     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Quarterly  Report on Form 10-Q for the quarter ended  September
      30, 1997, as amended.  Confidential treatment was granted for a portion of
      this Exhibit.

M     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's Current Report on Form 8-K dated January 21, 1998.

N     Previously  filed with the  Commission;  incorporated  by reference to the
      Company's  Quarterly  Report on Form 10-Q for the  quarter  ended June 30,
      1997.

O     Filed herewith.  Confidential treatment has been requested with respect to
      certain portions of this Exhibit.

P     Filed herewith.


                                       24
<PAGE>

(b)  Reports on Form 8-K

      On December 9, 1997,  the Company filed with the  Securities  and Exchange
Commission  (the  "Commission")  a Current  Report on Form 8-K dated December 4,
1997  relating to the  Company's  entering  into an amendment  with Merck to the
Company's  Research and License  Agreement  with Merck and the purchase by Merck
from the Company of 400,000 shares of Series A Preferred Stock (Item 5).

      On October 15,  1997,  the  Company  filed with the  Commission  a Current
Report on Form 8-K dated  October 10, 1997  relating to the  Company's  entering
into a  Collaborative  Research and License  Agreement  with  CombiChem  and the
purchase of shares of CombiChem Common Stock (Item 5).


                                       25
<PAGE>

                                   SIGNATURES

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

                                           IMCLONE SYSTEMS INCORPORATED

March 27, 1998                             By /s/ Samuel D. Waksal
                                              ----------------------------------
                                           Samuel D. Waksal
                                           President and Chief Executive Officer

      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 date indicated.


        Signature                         Title                        Date
        ---------                         -----                        ----

/s/ Robert F. Goldhammer   Chairman of the Board of Directors     March 27, 1998
--------------------------
(Robert F. Goldhammer)

/s/ Samuel D. Waksal       President, Chief Executive Officer     March 27, 1998
-------------------------- and Director
(Samuel D. Waksal)         (Principal Executive Officer)

/s/ Harlan W. Waksal       Executive Vice President,              March 27, 1998
-------------------------- Chief Operating Officer and Director
(Harlan W. Waksal)

/s/ Carl S. Goldfischer    Vice President, Financial and          March 27, 1998
-------------------------- Strategic Planning and Chief Financial
(Carl S. Goldfischer)      Officer (Principal Financial Officer)

/s/ Richard Barth          Director                               March 27, 1998
--------------------------
(Richard Barth)

/s/ Jean Carvais           Director                               March 27, 1998
--------------------------
(Jean Carvais)

/s/ Vincent T. DeVita, Jr. Director                               March 27, 1998
--------------------------
(Vincent T. DeVita, Jr.)


/s/ David M. Kies          Director                               March 27, 1998
--------------------------
(David M. Kies)

__________________________ Director                               March 27, 1998
(Paul B. Kopperl)

/s/ John Mendelsohn        Director                               March 27, 1998
--------------------------
(John Mendelsohn)

/s/ William R. Miller      Director                               March 27, 1998
--------------------------
(William R. Miller)


                                       26
<PAGE>

                              FINANCIAL STATEMENTS

                          Index to Financial Statements

Financial Statements
Independent Auditors' Report .............................................   F-2
Balance Sheets at December 31, 1997 and 1996 .............................   F-3
Statements of Operations for the Years Ended
 December 31, 1997, 1996, and 1995 .......................................   F-4
Statements of Stockholders' Equity for the Years
 Ended December 31, 1997, 1996, and 1995 .................................   F-5
Statements of Cash Flows for the Years Ended
 December 31, 1997, 1996, and 1995 .......................................   F-6
Notes to Financial Statements ............................................   F-7


                                      F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors of ImClone Systems Incorporated:

      We have audited the financial  statements of ImClone Systems  Incorporated
as  listed  in the  accompanying  index.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ImClone Systems Incorporated
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.

                                           /s/  KPMG Peat Marwick LLP
                                           ----------------------------
                                               KPMG Peat Marwick LLP

New York, New York
February 20, 1998


                                      F-2
<PAGE>

                          IMCLONE SYSTEMS INCORPORATED

                                 Balance Sheets
                        (in thousands, except share data)

                                                       December 31, December 31,
                                     Assets                1997          1996
                                                       -----------  ------------
Current assets:
     Cash and cash equivalents ......................... $   2,558    $   2,734
     Securities available for sale .....................    57,052       10,780
     Prepaid expenses ..................................       596          122
     Amount due from officer and stockholder ...........      --            101
     Other current assets ..............................       589          479
                                                         ---------    ---------
                      Total current assets .............    60,795       14,216
                                                         ---------    ---------
Property and equipment:
     Land ..............................................       340          340
     Building and building improvements ................     8,969        8,969
     Leasehold improvements ............................     4,832        4,832
     Machinery and equipment ...........................     6,315        5,159
     Furniture and fixtures ............................       550          536
     Construction in progress ..........................     2,159          320
                                                         ---------    ---------
                      Total cost .......................    23,165       20,156
     Less accumulated depreciation
            and amortization ...........................   (11,294)      (9,606)
                                                         ---------    ---------
                      Property and equipment, net ......    11,871       10,550
                                                         ---------    ---------
Patent costs, net ......................................       944          977
Deferred financing costs, net ..........................        55           65
Other assets ...........................................     2,115           77
                                                         ---------    ---------
                                                         $  75,780    $  25,885
                                                         =========    =========

                      Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable .................................. $   1,731    $   1,059
     Accrued expenses and other ........................     1,440        1,366
     Interest payable ..................................        68          238
     Deferred revenue ..................................       208         --
     Current portion of long-term liabilities ..........       677        3,858
                                                         ---------    ---------
                      Total current liabilities ........     4,124        6,521
                                                         ---------    ---------
Long-term debt .........................................     2,200        2,200
Other long-term liabilities, less current portion ......     1,230          575
                                                         ---------    ---------
                      Total liabilities ................     7,554        9,296
                                                         ---------    ---------
Commitments and contingencies

Stockholders' equity:
     Preferred stock, $1.00 par value;  authorized
          4,000,000 shares;  issued and outstanding
          Series A  Convertible:  400,000 and none
          at December 31, 1997 and December 31, 1996,
          respectively (preference in liquidation
          $40,112 and none, respectively)  .............       400         --
     Common stock, $.001 par value; authorized
          45,000,000 shares; issued 24,265,072
          and 20,248,122 at December 31, 1997 and
          December 31, 1996, respectively;
          outstanding 24,214,255 and
          20,233,699 at December 31, 1997 and
          December 31, 1996, respectively ..............        24           20
     Additional paid-in capital ........................   185,706      118,760
     Accumulated deficit ...............................  (117,464)    (101,973)
     Treasury stock, at cost; 50,817 and 14,423
          shares at December 31, 1997
          and December 31, 1996, respectively ..........      (492)        (169)
     Unrealized gain (loss) on securities
          available for sale ...........................        52          (49)
                                                         ---------    ---------
                      Total stockholders' equity .......    68,226       16,589
                                                         ---------    ---------
                                                         $  75,780    $  25,885
                                                         =========    =========

                 See accompanying notes to financial statements.


                                      F-3
<PAGE>

                          IMCLONE SYSTEMS INCORPORATED

                            Statements of Operations
                      (in thousands, except per share data)

                                                   Year Ended December 31,
                                              -------------------------------
                                                1997       1996        1995
                                              -------    --------    --------
Revenues:
  License fees from third parties ......     $  3,000    $     75    $   --
  Research and development funding
   from third parties and other ........        2,348         525         800
                                             --------    --------    --------
    Total revenues .....................        5,348         600         800
                                             --------    --------    --------
Operating expenses:
  Research and development .............       16,455      11,482       8,768
  General and administrative ...........        5,356       3,961       3,739
                                             --------    --------    --------
    Total operating expenses ...........       21,811      15,443      12,507
                                             --------    --------    --------
Operating loss .........................      (16,463)    (14,843)    (11,707)
                                             --------    --------    --------
Other:
  Interest and other income ............       (1,523)       (918)     (3,120)
  Interest expense .....................          551         823       1,054
                                             --------    --------    --------
    Net interest and other income ......         (972)        (95)     (2,066)
                                             --------    --------    --------
Loss before extraordinary item .........      (15,491)    (14,748)     (9,641)

Extraordinary loss on
 extinguishment of debt ................         --         1,267        --
                                             --------    --------    --------
Net loss ...............................      (15,491)    (16,015)     (9,641)

Preferred dividends (including
 incremental yield of $51) .............          163        --          --
                                             --------    --------    --------
Net loss to common stockholders ........     $(15,654)   $(16,015)   $ (9,641)
                                             ========    ========    ========
Net loss per common share:
  Basic and diluted:
    Loss before extraordinary item .....     $  (0.67)   $  (0.76)   $  (0.72)
    Extraordinary loss on
     extinguishment of debt ............         --          0.07        --
                                             --------    --------    --------
  Net loss .............................     $  (0.67)   $  (0.83)   $  (0.72)
                                             ========    ========    ========
Weighted average shares outstanding ....       23,457      19,371      13,311
                                             ========    ========    ========

                 See accompanying notes to financial statements.


                                      F-4
<PAGE>

                          IMCLONE SYSTEMS INCORPORATED

                       Statements of Stockholders' Equity
                  Years Ended December 31, 1995, 1996, and 1997
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                              Preferred Stock                Common Stock           Additional
                                         -------------------------    --------------------------     Paid-in     Accumulated
                                           Shares       Amount           Shares        Amount        Capital        Deficit
                                         ----------    -----------    -----------    -----------   -----------   -----------
<S>                                     <C>            <C>             <C>           <C>           <C>           <C>
Balance at December 31, 1994  .......          --      $      --       12,577,685    $        13   $    84,630   $   (76,317)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Issuance of common stock ............                                   4,000,000              4        11,998
Options exercised ...................                                     156,750                          162
Warrants exercised ..................                                      15,300                           23
Payment of promissory notes .........                                      57,184                           36
Proceeds from promissory notes ......                                                                        2
Debt discount .......................                                                                    1,063
Net loss ............................                                                                                 (9,641)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Balance at December 31, 1995  .......          --      $      --       16,806,919    $        17   $    97,914   $   (85,958)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Issuance of common stock ............                                   2,200,000              2        13,560
Options exercised ...................                                     266,275                          846
Warrants exercised ..................                                     604,892              1         2,960
Options granted to non-employees ....                                                                       95
Extinguishment of debt ..............                                     357,333                        3,260
Debt discount .......................                                                                      125
Treasury shares .....................                                      (1,720)
Changes in unrealized loss on
    securities available for sale ...
Net loss ............................                                                                                (16,015)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Balance at December 31, 1996  .......          --      $      --       20,233,699    $        20   $   118,760   $  (101,973)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Issuance of preferred stock .........       400,000            400                                      39,597
Issuance of common stock ............                                   3,000,000              3        23,152
Options exercised ...................                                     147,450                          223
Warrants exercised ..................                                     869,500              1         1,385
Options granted to non-employees ....                                                                      189
Options/warrants granted to
 employees ..........................                                                                    2,512
Treasury shares .....................                                     (36,394)
Changes in unrealized gain on
    securities available for sale ...
Preferred stock dividends ...........                                                                     (112)
Net loss ............................                                                                                (15,491)
                                        -----------    -----------    -----------    -----------   -----------   -----------
Balance at December 31, 1997  .......       400,000    $       400     24,214,255    $        24   $   185,706   $  (117,464)
                                        ===========    ===========    ===========    ===========   ===========   ===========
</TABLE>

                                                      Unrealized
                                                      (Loss) on
                                                      Securities
                                        Treasury      Available
                                          Stock        for Sale        Total
                                       ----------    -----------    -----------
Balance at December 31, 1994  .......  $     (150)   $      --      $     8,176
                                       ----------    -----------    -----------
Issuance of common stock ............                                    12,002
Options exercised ...................                                       162
Warrants exercised ..................                                        23
Payment of promissory notes .........                                        36
Proceeds from promissory notes ......                                         2
Debt discount .......................                                     1,063
Net loss ............................                                    (9,641)
                                       ----------    -----------    -----------
Balance at December 31, 1995  .......  $     (150)   $      --      $    11,823
                                       ----------    -----------    -----------
Issuance of common stock ............                                    13,562
Options exercised ...................                                       846
Warrants exercised ..................                                     2,961
Options granted to non-employees ....                                        95
Extinguishment of debt ..............                                     3,260
Debt discount .......................                                       125
Treasury shares .....................         (19)                          (19)
Changes in unrealized loss on
    securities available for sale ...                        (49)           (49)
Net loss ............................                                   (16,015)
                                       ----------    -----------    -----------
Balance at December 31, 1996  .......  $     (169)   $       (49)   $    16,589
                                       ----------    -----------    -----------
Issuance of preferred stock .........                                    39,997
Issuance of common stock ............                                    23,155
Options exercised ...................                                       223
Warrants exercised ..................                                     1,386
Options granted to non-employees ....                                       189
Options/warrants granted to
 employees ..........................                                     2,512
Treasury shares .....................        (323)                         (323)
Changes in unrealized gain on
    securities available for sale ...                        101            101
Preferred stock dividends ...........                                      (112)
Net loss ............................                                   (15,491)
                                       ----------    -----------    -----------
Balance at December 31, 1997  .......  $     (492)   $        52    $    68,226
                                       ==========    ===========    ===========

                 See accompanying notes to financial statements.


                                      F-5
<PAGE>

                          IMCLONE SYSTEMS INCORPORATED

                            Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                            ------------------------------------
                                                               1997         1996         1995
                                                            ----------   ----------   ----------
<S>                                                         <C>          <C>          <C>
Cash flows from operating activities:
  Net loss ..............................................   $ (15,491)   $ (16,015)   $  (9,641)
  Adjustments to reconcile net loss to net
        cash used in operating activities:
    Depreciation and amortization .......................       1,797        1,704        1,789
    Expense associated with issuance
        of options and warrants .........................       2,729           95         --
    Extraordinary loss on extinguishment of debt ........        --          1,267         --
    Discounted interest amortization ....................        --            156          222
    Write-off of fixed assets ...........................        --           --              2
    Write-off of patent costs ...........................         146         --            126
    Loss on sale of investments .........................           2         --           --
    Changes in:
      Prepaid expenses ..................................        (474)          (7)         (37)
      Other current assets ..............................        (110)        (453)          42
      Due from officer ..................................         101           31           24
      Other assets ......................................         (37)         (14)         115
      Interest payable ..................................        (170)        (105)         328
      Accounts payable ..................................         672           67         (624)
      Accrued expenses and other ........................          75          540          421
      Deferred revenue ..................................         208         --           --
                                                            ---------    ---------    ---------
         Net cash used in operating activities ..........     (10,552)     (12,734)      (7,233)
                                                            ---------    ---------    ---------
Cash flows from investing activities:
  Acquisitions of property and equipment ................      (1,657)        (272)         (36)
  Purchases of securities available for sale ............    (241,623)     (32,665)        --
  Sales of securities available for sale ................     195,450       21,836         --
  Investment in CombiChem, Inc ..........................      (2,000)        --           --
  Additions to patents ..................................        (212)        (343)        (186)
                                                            ---------    ---------    ---------
         Net cash used in investing activities ..........     (50,042)     (11,444)        (222)
                                                            ---------    ---------    ---------
Cash flows from financing activities:
  Net proceeds from issuance of preferred stock .........      39,997         --           --
  Net proceeds from issuance of common stock ............      23,154       13,562       12,002
  Proceeds from exercise of stock options and
     warrants............................................       1,581        3,807          185
  Purchase of treasury stock ............................        (323)         (19)        --
  Proceeds from long-term notes payable .................        --           --          2,680
  Proceeds from short-term notes payable ................        --           --            100
  Repayment of long-term debt ...........................      (2,113)        --           --
  Repayment of short-term notes payable .................        --           --           (284)
  Payments of other liabilities .........................      (1,878)        (645)         (53)
                                                            ---------    ---------    ---------
          Net cash provided by financing activities .....      60,418       16,705       14,630
                                                            ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents ....        (176)      (7,473)       7,175

Cash and cash equivalents at beginning of period ........       2,734       10,207        3,032
                                                            ---------    ---------    ---------
Cash and cash equivalents at end of period ..............   $   2,558    $   2,734    $  10,207
                                                            =========    =========    =========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-6
<PAGE>

                          IMCLONE SYSTEMS INCORPORATED

                          Notes To Financial Statements

      (1) Organization and Basis of Preparation

      ImClone  Systems  Incorporated  (the  "Company")  is  a  biopharmaceutical
company  engaged  primarily  in the  research  and  development  of  therapeutic
products for the treatment of cancer and cancer related  disorders.  The Company
employs  accounting  policies that are in  accordance  with  generally  accepted
accounting principles in the United States.

      The  biopharmaceutical  industry  is  subject  to  rapid  and  significant
technological  change.  The Company has numerous  competitors,  including  major
pharmaceutical  and  chemical  companies,   specialized   biotechnology   firms,
universities and other research  institutions.  These competitors may succeed in
developing  technologies  and products that are more effective than any that are
being developed by the Company or that would render the Company's technology and
products   obsolete  and   non-competitive.   Many  of  these  competitors  have
substantially  greater  financial and technical  resources  and  production  and
marketing  capabilities  than the Company.  In addition,  many of the  Company's
competitors  have   significantly   greater   experience  than  the  Company  in
pre-clinical testing and human clinical trials of new or improved pharmaceutical
products  and in  obtaining  Food  and Drug  Administration  ("FDA")  and  other
regulatory approvals on products for use in health care. The Company is aware of
various products under  development or manufactured by competitors that are used
for the prevention,  diagnosis or treatment of certain  diseases the Company has
targeted for product development,  some of which use therapeutic approaches that
compete directly with certain of the Company's product  candidates.  The Company
has limited experience in conducting and managing pre-clinical testing necessary
to enter clinical trials required to obtain government approvals and has limited
experience in conducting clinical trials. Accordingly, the Company's competitors
may succeed in  obtaining  FDA  approval  for  products  more  rapidly  than the
Company,  which could adversely affect the Company's  ability to further develop
and market its products. If the Company commences  significant  commercial sales
of its  products,  it will  also be  competing  with  respect  to  manufacturing
efficiency and marketing capabilities, areas in which the Company has limited or
no experience.

      (2) Summary of Significant Accounting Policies

      (a)Cash Equivalents

      Cash  equivalents  consist  primarily  of  U.S.  Government   instruments,
commercial  paper,  master notes and other readily  marketable debt instruments.
The  Company   considers  all  highly  liquid  debt  instruments  with  original
maturities not exceeding three months to be cash equivalents.

      (b) Investments in Securities

      The Company classifies its investment in debt and equity securities in one
of three categories: trading, available-for-sale,  or held-to-maturity.  Trading
securities  are bought and held  principally  for the purpose of selling them in
the near term.  Held-to-maturity  securities  are those  securities in which the
Company has the  ability and intent to hold the  security  until  maturity.  All
other securities not included in trading or  held-to-maturity  are classified as
available-for-sale.

      Trading  and  available-for-sale  securities  are  recorded at fair value.
Held-to-maturity  securities  are recorded at amortized  cost,  adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings.  Unrealized holding gains
and losses,  net of related tax effect,  on  available-for-sale  securities  are
excluded from earnings and are reported as a separate component of stockholders'
equity   until   realized.   Realized   gains  and  losses   from  the  sale  of
available-for-sale securities are determined on a specific identification basis.

      A   decline   in  the   market   value   of  any   available-for-sale   or
held-to-maturity  security  below cost that is deemed to be other than temporary
results in a reduction  in  carrying  amount to fair value.  The  impairment  is
charged  to  earnings  and a new cost  basis for the  security  is  established.
Premiums and  discounts  are  amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.

      At December 31, 1997,  all  investments in securities  were  classified as
available-for-sale.


                                      F-7
<PAGE>

      (c) Long-Lived Assets

      Long-lived assets include:

      o  Fixed  assets  are  stated  at cost.  Depreciation  of fixed  assets is
         provided by straight-line  methods over estimated useful lives of three
         to twelve years,  and leasehold  improvements  are being amortized over
         the related lease term (including  optional  renewal periods (Note 12))
         or the service lives of the improvements, whichever is shorter.

      o  Patent and patent  application  costs are amortized on a  straight-line
         basis over their  respective  expected  useful  lives,  up to a 15-year
         period.  Capitalized patent costs are reviewed for impairment  whenever
         events  or  circumstances  provide  evidence  that  suggests  that  the
         carrying  amount  may not be  recoverable.  The  Company  assesses  the
         recoverability  of net  capitalized  patent costs by determining if the
         unamortized balance can be recovered through future cash flows.

     The  Company  reviews  long-lived  assets for  impairment  when  events or
changes in business  conditions  indicate that their full carrying value may not
be  recovered.  Assets are  considered  to be impaired  and written down to fair
value if expected associated cash flows are less than the carrying amounts. Fair
value is generally the present value of the expected associated cash flows.

      (d) Deferred Financing Costs

      Costs incurred in obtaining the Industrial Development Revenue Bonds (Note
6) are amortized  using the  straight-line  method over the terms of the related
bonds.

      (e) Gain on Sale of Investment in Affiliate

      Cadus  Pharmaceutical  Corporation  ("Cadus") was  incorporated in January
1992 to develop novel classes of  therapeutics  that target signal  transduction
pathways.  The  Company  held a 50%  investment  in the  capital  stock of Cadus
through November 1994.  During 1994 and 1995, the Company sold its capital stock
holding in Cadus to High River Limited Partnership ("High River"). The Statement
of  Operations  for the year ended  December  31, 1995  includes in interest and
other income the gain on the sale of the Cadus stock sold during that period. In
exchange for receiving a now-expired  right to  repurchase  all the  outstanding
shares of capital stock of Cadus held by High River, the Company granted to High
River two options to purchase shares of the Company's  common stock (the "Common
Stock").  One option is for 150,000  shares at an exercise price per share equal
to $2.00,  subject to  adjustment  under  certain  circumstances,  and the other
option is for  300,000  shares at an  exercise  price per share  equal to $0.69,
subject to adjustment under certain  circumstances.  Both options will expire on
April 26, 2000.

      (f) Revenue Recognition

      License fees are recognized if the Company enters into license  agreements
with third parties that provide for the payment of non-refundable  fees when the
agreement  is  signed  or when all  parties  concur  that  specified  goals  are
achieved.  These fees are recognized as license fee revenues in accordance  with
the terms of the particular agreement.

      Research and  development  funding  revenue is derived from  collaborative
agreements  with third parties and is recognized in accordance with the terms of
the respective  contracts.  Revenue from certain  agreements is recognized using
the  percentage of completion  method based on contract  costs  incurred to date
compared with total estimated contract costs.

      Royalty  revenue is recognized  upon receipt by the Company and is derived
from sales of products by corporate partners using licensed Company technology.

      Revenue  recognized  in the  accompanying  statements of operations is not
subject to repayment.  Revenue  received  that is related to future  performance
under such contracts is deferred and recognized as revenue when earned.

      (g) Stock Option Plans

      Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees,  and related  interpretations.
As such, compensation expense would be recorded on the date of grant only if the
market price on the date of grant of the underlying  stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 123,  "Accounting for  Stock-Based  Compensation,"


                                      F-8
<PAGE>

which permits  entities to recognize as expense over the vesting period the fair
value of all stock based  awards on the date of grant.  Alternatively,  SFAS No.
123 also allows  entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for  employee  stock  option  grants  made in 1995  and  future  years as if the
fair-value-based  method  defined in SFAS No. 123 had been applied.  The Company
has  elected to  continue  to apply the  provisions  of APB  Opinion  No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

      (h) Research and Development

      Research and development  expenditures  made pursuant to certain  research
and  development  contracts with academic  institutions,  and other research and
development costs, are expensed as incurred.

      (i) Income Taxes

      Income  taxes are  accounted  for under  the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

      (j) Use of Estimates

      Management of the Company has made a number of estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities  to prepare  these  financial  statements in
conformity with generally accepted accounting  principles.  Actual results could
differ from those estimates.

      (k) Net Loss Per Share

      The Company  adopted the provisions of SFAS No. 128,  "Earnings Per Share"
("EPS") for the year ended  December 31, 1997.  This  statement  simplifies  the
standards for computing EPS and makes them more comparable to international  EPS
standards.  It replaces the  presentation  of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS on the face of
the statement of operations  of all entities  with complex  capital  structures.
SFAS 128 also requires a reconciliation  of the numerator and denominator of the
diluted EPS calculation.  Potentially dilutive securities, including convertible
preferred stock, options and warrants, have not been included in the diluted EPS
computation because they are anti-dilutive.

      (l) Reclassification

      Certain amounts  previously  reported have been reclassified to conform to
current year's presentation.


                                      F-9
<PAGE>

(3) Securities Available-For-Sale

      The amortized  cost,  gross  unrealized  holding gains,  gross  unrealized
holding  losses  and  fair  value  for  available-for-sale  securities  by major
security type at December 31, 1997 and 1996, were as follows:

At December 31, 1997:

<TABLE>
<CAPTION>
                                                               Gross
                                                            Unrealized         Gross
                                              Amortized       Holding        Unrealized
                                                Cost           Gains       Holding Losses    Fair Value
                                                ----           -----       --------------    ----------
<S>                                         <C>            <C>             <C>             <C>
Commercial paper ........................   $ 12,104,000   $      4,000    $       --      $ 12,108,000
U.S. Government debt ....................     23,568,000         24,000          (5,000)     23,587,000
U.S. corporate debt .....................      3,992,000          4,000            --         3,996,000
Foreign corporate debt ..................      4,719,000          7,000            --         4,726,000
Foreign Government/Agency
 guaranteed debt.........................     12,617,000         18,000            --        12,635,000
                                            ------------   ------------    ------------    ------------
                                            $ 57,000,000   $     57,000    $     (5,000)   $ 57,052,000
                                            ============   ============    ============    ============
At December 31, 1996:

U.S. Government debt ....................   $ 10,829,000   $       --      $    (49,000)   $ 10,780,000
                                            ============   ============    ============    ============
</TABLE>

      Maturities of debt  securities  classified as  available-for-sale  were as
follows at December 31, 1997:

      Years Ended December 31,
                                      Amortized Cost          Fair Value
                                      --------------          ----------
      1998 ......................      $25,849,000           $25,859,000
      1999 ......................        6,984,000             6,983,000
      2000 ......................       24,167,000            24,210,000
                                       -----------           -----------
                                       $57,000,000           $57,052,000
                                       ===========           ===========

      Proceeds from the sale of investment  securities  available-for-sale  were
$195,450,000  and  $21,836,000  in 1997 and 1996,  respectively.  Gross realized
gains included in income in 1997 were $1,000 and gross realized  losses included
in income 1997 were $3,000. There were no realized gains or losses in 1996.


                                      F-10
<PAGE>

(4) Other Assets

      The following items are included in other assets:

                                                    December 31,    December 31,
                                                       1997             1996
                                                    ----------      ----------
Deposits .......................................    $  115,000      $   77,000
Investment in CombiChem, Inc. ..................     2,000,000            --
                                                    ----------      ----------
                                                    $2,115,000      $   77,000
                                                    ==========      ==========

      In October 1997,  the Company  entered into a  Collaborative  Research and
License  Agreement with CombiChem,  Inc.  ("CombiChem"),  a private company,  to
discover and develop novel small molecules for use against  selected targets for
the  treatment of cancer.  The companies  are  utilizing  CombiChem's  Discovery
EngineTM  and  Universal  Informer  LibraryTM  to generate  small-molecules  for
screening in the Company's assays for  identification  of lead  candidates.  The
Company is providing CombiChem with research funding through October 1999 in the
amount of $500,000  annually  (of which the first  $500,000  was paid in October
1997),  milestone payments and royalties on marketed products resulting from the
collaboration,  if any.  Concurrent  with  the  execution  of the  Collaborative
Research  and License  Agreement,  the  Company  entered  into a Stock  Purchase
Agreement pursuant to which the Company purchased 250,000 shares of common stock
of  CombiChem,  as adjusted,  for aggregate  consideration  of  $2,000,000.  The
Company  has  recorded  its  investment  in  CombiChem  using the cost method of
accounting which approximates market value.

(5) Accrued Expenses and Other

      The following items are included in accrued expenses and other:

                                                    December 31,    December 31,
                                                       1997             1996
                                                    -----------     -----------
Salaries and other payroll
  related expenses .............................    $  773,000       $  782,000
Legal and accounting fees ......................       169,000          217,000
Other ..........................................       498,000          367,000
                                                    ==========       ==========
                                                    $1,440,000       $1,366,000
                                                    ==========       ==========

(6) Long-term Debt

      Long-term debt consists of the following:

                                                   December 31,     December 31,
                                                      1997              1996
                                                   -----------      -----------
10.75% Bond due 1997  ..........................   $      --        $ 2,113,000
11.25% Bond due 2004 ...........................     2,200,000        2,200,000
                                                   -----------      -----------
                                                     2,200,000        4,313,000
Less current portion ...........................          --         (2,113,000)
                                                   ===========      ===========
                                                   $ 2,200,000      $ 2,200,000
                                                   ===========      ===========

      On December 31, 1986, the New York City Industrial Development Agency (the
"NYIDA") issued on behalf of the Company an Industrial  Development Revenue Bond
(the "1986 Bond") in the amount of  $2,113,000  with a


                                      F-11
<PAGE>

maturity date of December 15, 1994.  The proceeds from the sale of the 1986 Bond
were used by the Company for the  acquisition,  construction and installation of
the  Company's  research  and  development  facility  in New York  City.  During
December 1994, the 1986 Bond's  original  maturity date of December 15, 1994 was
extended to June 15, 1996.  During June 1996, the Company and the NYIDA extended
the maturity  date an  additional  eighteen  months to December  15,  1997.  The
Company repaid the obligation on December 15, 1997.

      In August 1990, the NYIDA issued another  Industrial  Development  Revenue
Bond (the "1990 Bond") in the amount of $2,200,000.  The 1990 Bond is due May 1,
2004.  If the Company  terminates  its lease on its New York City  facility (the
"Lease") the 1990 Bond will become due 60 days prior to such date.  The Lease is
scheduled to expire in March 1999 and the Company is  currently  in  discussions
regarding its extension and considering  other  alternatives.  The proceeds from
the  sale of the  1990  Bond  were  used  by the  Company  for the  acquisition,
construction and installation of the Company's research and development facility
in New York City.

      The Company has granted a security interest in substantially all equipment
located in its New York City facility to secure the  obligations  of the Company
to the NYIDA  relating to the 1990 Bond.  Interest  expense on the 1986 and 1990
Bonds for the years ended  December  31, 1997 and 1996 was $465,000 and $475,000
respectively.

(7) Other Long-term Liabilities

      Other long-term liabilities are comprised of the following:

                                                   December 31,     December 31,
                                                      1997              1996
                                                   -----------      -----------
Liability to reacquire IL-6m rights ..........     $   283,000      $ 1,917,000
Liability under capital lease obligations ....       1,469,000          354,000
Liability under license agreement ............          43,000           49,000
Preferred stock dividends payable ............         112,000             --
                                                   -----------      -----------
                                                     1,907,000        2,320,000
Less current portion .........................        (677,000)      (1,745,000)
                                                   -----------      -----------
                                                   $ 1,230,000      $   575,000
                                                   ===========      ===========

      In July 1993, the Company  entered into an agreement with Erbamont,  Inc.,
now a subsidiary of Pharmacia  and Upjohn,  Inc.  ("Pharmacia"),  to acquire the
worldwide  rights to IL-6m, a blood cell growth factor,  which had been licensed
to Pharmacia pursuant to a development and licensing agreement. In consideration
of the return of rights and the transfer of certain  material  and  information,
the Company  had paid $1.4  million and had  further  obligations  to  Pharmacia
totaling  $283,000 at December 31, 1997. In February 1998,  such amount was paid
off in its entirety. In addition, the Company is required to pay Pharmacia up to
$2.7 million in royalties on eventual sales of IL-6m, if any.

      The  Company  is  obligated  under  various  capital  leases  for  certain
laboratory, office and computer equipment and also certain building improvements
primarily  under a December  1996  financing  agreement  with Finova  Technology
Finance, Inc. ("Finova").  The agreement allows the Company to finance the lease
of equipment and make certain  building and leasehold  improvements  to existing
facilities  involving  amounts  aggregating   approximately  $2,500,000.  As  of
December  31,  1997,  the  Company  had  entered  into  six  individual   leases
aggregating  a total  cost of  $1,745,000.  Each lease has a fair  market  value
purchase option at the expiration of a 42-month term. Pursuant to the agreement,
the Company  issued to Finova a warrant  expiring  December 31, 1999 to purchase
23,220  shares of Common  Stock at an  exercise  price of $9.69 per  share.  The
Company  recorded  a  non-cash  debt  discount  of  approximately   $125,000  in
connection  with this  financing,  which  discount is being  amortized  over the
42-month term of the first lease. The financing agreement with Finova expired in
December  1997 and the Company did not  utilize  the full  $2,500,000  under the
agreement.  The  Company  anticipates  that it will enter  into a new  financing
agreement   with  Finova   during  the  second   quarter  of  1998   aggregating
approximately $2,000,000; however, no assurance can be given that such agreement
will be consummated. See Notes 12 and 14.


                                      F-12
<PAGE>

      At December 31, 1997 and 1996,  the gross amount of laboratory  and office
equipment and building improvements and the related accumulated depreciation and
amortization recorded under all capital leases were as follows:

                                                     December 31,   December 31,
                                                        1997            1996
                                                     -----------    -----------
Laboratory, office and computer equipment ........   $ 1,204,000    $   406,000
Building improvements ............................       831,000        297,000
                                                     -----------    -----------
                                                       2,035,000        703,000
Less accumulated depreciation and amortization ...      (291,000)      (190,000)
                                                     -----------    -----------
                                                     $ 1,744,000    $   513,000
                                                     ===========    ===========

      In connection  with the  Company's  production  and eventual  marketing of
certain  products,  the Company  entered into a license  agreement that requires
minimum  annual  royalty  payments  throughout  the term of the  agreement.  The
agreement  expires in 2004 and calls for  minimum  annual  payments  of $10,000,
which are creditable against royalties that may be due from sales. To the extent
the minimum annual royalties are not expected to be offset by sales, the Company
has charged the net present value of these payments to  operations.  An interest
rate of 10% was used to discount the cash flows.

      In July 1995,  a director  loaned the Company  $180,000 in exchange  for a
long-term note due two years from issuance at an annual  interest rate of 8%. As
part of the  transaction,  the director was granted 36,000  warrants to purchase
Company  Common Stock at $1.50 per share and an  additional  36,000  warrants to
purchase  Common  Stock at $3.00 per share.  In May 1996,  the  Company  and the
director  exchanged  the note for 24,000  shares of Common Stock and the Company
paid the  accrued  and unpaid  interest  on the note in the amount of $10,000 in
cash.   The  Company   recorded  an   extraordinary   loss  of  $39,000  on  the
extinguishment  of the debt.  The Company has  registered  such shares of Common
Stock with the Securities and Exchange  Commission  (the  "Commission")  under a
registration  statement in accordance  with the provisions of the Securities Act
of 1933 (the "1933 Act").

      On August 11, 1995, the Oracle Group purchased  1,000,000 shares of Common
Stock for a purchase price of $1.5 million and made a loan to the Company in the
aggregate  amount of $2.5  million  with a  two-year  maturity,  but  subject to
mandatory  prepayment,  in whole or in part,  upon  the  occurrence  of  certain
events,  including the raising of certain  additional funds. The loan carried an
annual  interest  rate of 8%. The Oracle Group  includes  Oracle  Partners,  LP,
Quasar International Partners C.V., Oracle Institutional Partners LP, Sam Oracle
Fund,  Inc.  and Warren B.  Kanders.  The Oracle  Group also  received  warrants
exercisable at any time until August 10, 2000  entitling the holders  thereof to
purchase  500,000  shares  of  Common  Stock at a price of $1.50  per  share and
500,000 shares of Common Stock at a price of $3.00 per share. As a result of the
Company's  offerings of shares of its Common Stock in November 1995 and February
1996,  the Oracle  Group was entitled to require the Company to apply 20 percent
of the  gross  proceeds  of the sale of the  shares  of  Common  Stock  from the
offerings to repay the loan.

      In May 1996,  the Company and the Oracle Group  exchanged the notes in the
aggregate  outstanding  principal  amount of $2.5 million for 333,333  shares of
Common Stock and the Company  paid the accrued and unpaid  interest on the notes
in the amount of $143,000 in cash. The Company recorded an extraordinary loss of
$1,228,000 on the  extinguishment  of the debt. The Company has registered  such
shares of Common Stock with the  Commission  under a  registration  statement in
accordance with the provisions of the 1933 Act.

(8) Research Agreements

      The Company has entered into several  research and development  agreements
with third parties. Generally, the agreements provide for the Company to receive
research and development funding, milestone payments, royalties, or license fees
or a combination  thereof.  In return, the Company has granted licenses to these
third  parties to market or  manufacture  and market  certain of its products in
specified  fields of use and in  specified  geographic  areas.  Pursuant  to the
Company's research and license agreement with Merck KGaA ("Merck"),  the Company
has the right to co-promote its BEC2 product in North America.


                                      F-13
<PAGE>

      Revenues  for the years  ended  December  31,  1997,  1996,  and 1995 were
$5,348,000,  $600,000,  and  $800,000  respectively.   Revenues  for  each  year
consisted  of  $300,000  in  research  support  from  the  Company's   corporate
partnership with the Wyeth-Lederle  vaccine and pediatrics  division of American
Home Products Corporation  ("American Home") in infectious disease vaccines. The
year ended  December 31, 1997  included  $2,000,000  in  milestone  payments and
$1,667,000  in research and support  payments  from the  Company's  research and
license agreement with Merck. In addition, revenues for the years ended December
31, 1997 and 1995  included  milestone  payments  of  $1,000,000  and  $500,000,
respectively,  from the Company's  strategic  alliance with Abbott  Laboratories
("Abbott")  in  diagnostics.  The years  ended  December  31, 1997 and 1996 also
included royalty revenue of $381,000 and $225,000, respectively, from the Abbott
alliance.  Finally, the year ended December 31, 1996 included $75,000 in license
fees from the  Company's  cross-licensing  agreement  with  Immunex  Corporation
("Immunex") for novel hematopoietic growth factors.

Revenues were derived from the following geographic areas:

                                             Year Ended December 31,
                                  ---------------------------------------------
                                     1997              1996              1995
                                  ----------        ----------        ----------
United States ............        $1,681,000        $  600,000        $  800,000
Europe ...................         3,667,000              --                --
                                  ----------        ----------        ----------
                                  $5,348,000        $  600,000        $  800,000
                                  ==========        ==========        ==========

(9) Preferred Stock

      In connection  with the December 1997 amendment to the Company's  research
and license  agreement with Merck,  Merck purchased from the Company in December
1997 400,000 shares of the Company's  Series A Convertible  Preferred Stock (the
"Series  A  Preferred   Shares"  or  "Series  A  Preferred   Stock")  for  total
consideration  of $40,000,000,  before issuance costs of $3,000.  The holders of
the  Series A  Preferred  Shares  are  entitled  to  receive  annual  cumulative
dividends of $6.00 per share.  Dividends  accrue as of the issuance  date of the
Series A Preferred Shares and are payable on the outstanding  Series A Preferred
Shares in cash annually on December 31 of each year beginning  December 31, 1999
or at the time of conversion  or redemption of the Series A Preferred  Shares on
which the dividend is to be paid,  whichever is sooner.  Up to 100,000  Series A
Preferred  Shares are currently  convertible and an additional  100,000 Series A
Preferred Shares will become  convertible on each of January 1, 2000, January 1,
2001 and January 1, 2002.  During the period from issuance  through December 31,
1999, the Series A Preferred  Shares are  convertible at a price equal to $12.50
per share;  during the period from January 1, 2000 through December 31, 2000 the
Series A Preferred Shares are convertible at a price equal to the average of the
closing prices for the Common Stock for the five trading days ending on December
31, 1999;  during the period from January 1, 2001 through  December 31, 2001 the
Series A Preferred Shares are convertible at a price equal to the average of the
closing prices for the Common Stock for the five trading days ending on December
31, 2000;  during the period from January 1, 2002 through  December 31, 2002 the
Series A Preferred Shares are convertible at a price equal to 88% of the average
of the closing  prices for the Common  Stock for the five trading days ending on
December  31,  2001;  and anytime  after  January 1, 2003 the Series A Preferred
Shares are convertible at a price equal to the average of the closing prices for
the Common Stock for the five  trading  days ending on December  31,  2002.  The
conversion  price is  subject  to  adjustment  in the case of  certain  dilutive
events.  Further,  in the event the average market price of the Common Stock for
the five  consecutive  trading  days ending one trading day prior to any trading
day during which any Series A Preferred  Shares are outstanding  exceeds 150% of
the  conversion  price then in effect,  the Company has the right to require the
holder of the Series A  Preferred  Shares to convert all such shares that may be
convertible.  The  Company  may also redeem in whole or any part of the Series A
Preferred  Shares then  outstanding at a redemption  price of $120 per Preferred
Share, plus accrued and unpaid dividends thereon.  In the event of any voluntary
or  involuntary  liquidation,  dissolution  or  winding up of the  Company,  the
holders of the Series A  Preferred  Shares  shall be entitled to receive in cash
out of the  assets  of the  Company,  whether  from  capital  or from  earnings,
available for distribution to its stockholders,  before any amount shall be paid
the holders of the Common Stock or holders of shares of other  classes or series
of  capital  stock  of  the  Company,  an  amount  equal  to the  preference  in
liquidation;  provided  that,  if the  assets are  insufficient  to pay the full
amount due to the  holders  of Series A  Preferred  Shares,  such  holders  will
receive a pro rata portion thereof. In accordance with the terms of the Series A
Preferred Stock, the holder is able to realize an assured  incremental  yield of
$5,455,000 on the  conversion of the Series A Preferred  Stock if converted from
January 1, 2002 through  December 31, 2002.  Such amount is being amortized as a
preferred  stock  dividend  over a five-year  period  beginning  with the day of
issuance.  Accrued  dividends  were $112,000 plus the  incremental  yield on the
conversion discount of $51,000 at December 31, 1997.


                                      F-14
<PAGE>

(10) Stock Options and Warrants

      (a) Stock Option Plans:

      In February  1986,  the Company  adopted and the  shareholders  thereafter
approved an Incentive  Stock Option Plan and a  Non-Qualified  Stock Option Plan
(the "86 Plans"). In February 1996, the Company's Board of Directors adopted and
the shareholders  thereafter approved an additional  Incentive Stock Option Plan
and Non-Qualified Stock Option Plan (the "96 Plans"). Combined, the 86 Plans and
96 Plans,  as  amended,  provide  for the  granting of options to purchase up to
4,500,000  shares of Common Stock to key employees,  directors,  consultants and
advisors of the Company.  Incentive  stock options may not be granted at a price
less than the fair market value of the stock at the date of grant and may not be
granted to non-employees.  Options under both the 86 Plans and 96 Plans,  unless
earlier  terminated,  expire ten years from the date of grant.  Certain  options
granted under these plans vest over  one-to-five-year  periods.  At December 31,
1997,  options to purchase 2,377,095 shares of Common Stock were outstanding and
1,592,156  shares  were  available  for grant.  Options may no longer be granted
under the 86 Plans pursuant to the terms of the Plans.

A summary of stock option activity follows:

                                                                      Weighted
                                                                      average
                                                                      exercise
                                                      Number of      price per
                                                       shares          share
                                                     ----------      ---------
Balance at December 31, 1994  ................         892,079        $   6.83
1995 activity:
    Granted ..................................         752,000            1.91
    Exercised ................................        (156,750)           1.04
    Canceled .................................        (120,375)           1.45
                                                     ---------
Balance at December 31, 1995  ................       1,366,954            2.34
1996 activity:
    Granted ..................................       1,077,875            9.32
    Exercised ................................        (266,275)           3.18
    Canceled .................................         (74,977)           2.58
                                                     ---------
Balance at December 31, 1996  ................       2,103,577            5.80
1997 activity:
    Granted ..................................         456,194            6.62
    Exercised ................................        (147,450)           1.51
    Canceled .................................         (35,226)           8.60
                                                     ---------
Balance at December 31, 1997  ................       2,377,095        $   6.19
                                                     =========

      During the years ended  December  31, 1997 and 1996,  the Company  granted
options to purchase  32,000  shares and  116,000  shares,  respectively,  of its
Common Stock to certain  Scientific  Advisory Board members in consideration for
future  services.  The fair value of these  grants was  $124,000  and  $756,000,
respectively,  as  calculated  using the  Black-Scholes  option  pricing  model.
Compensation  expense is being  recognized  ratably over the respective  vesting
period of the options.  See Note 10(c) for weighted  average  assumptions  used.
During the years  ended  December  31,  1997 and 1996,  the  Company  recognized
approximately  $189,000  and  $95,000,  respectively,  in  compensation  expense
relating to the options granted to Scientific Advisory Board members.

      During  April  1995,  the  Company  completed  the  sale of the  remaining
one-half of its shares of capital stock of Cadus for $3.0 million to High River.
In exchange for receiving a now-expired  right to repurchase all the


                                      F-15
<PAGE>

outstanding  shares of capital  stock of Cadus held by High  River,  the Company
granted to High River two options to purchase shares of Common Stock. One option
is for 150,000 shares at an exercise price per share equal to $2.00,  subject to
adjustment  under  certain  circumstances,  and the other  option is for 300,000
shares at an  exercise  price per share  equal to $0.69,  subject to  adjustment
under  certain  circumstances.  Both options will expire on April 26, 2000.  The
450,000 options have a weighted average exercise price of $1.13.

      On  February 2, 1995,  exercise  prices for  certain  outstanding  options
granted  under the 1986 Plans with original  exercise  prices in excess of $1.25
per share were  offered to be repriced to $1.25 per share,  by vote of a Special
Subcommittee of the Compensation Committee of the Board of Directors. Benefit of
repricing  was  confined to  individuals  who  continued to serve the Company as
employees or consultants,  and 645,000 options were repriced. In connection with
the  offer of  repricing,  the  vesting  schedule  of those  choosing  to accept
repriced  options was extended to June 30, 1995 for options already vested or to
vest prior to June 30, 1995. The closing  trading price of the Company's  Common
Stock on February 2, 1995 was $0.69.

      (b) Warrants

      As of December 31, 1997, a total of 2,406,145  shares of Common Stock were
issuable upon exercise of outstanding  warrants.  Such warrants have been issued
to certain  officers,  directors  and other  employees of the  Company,  certain
Scientific  Advisory  Board  members,   certain  investors  and  certain  credit
providers and investors.

A summary of warrant activity follows:

                                                                      Weighted
                                                                      average
                                                                      exercise
                                                      Number of      price per
                                                       shares          share
                                                     ----------      ---------
Balance at December 31, 1994  ...............        2,472,567       $   10.01
1995 activity:
    Granted .................................        1,434,300            3.03
    Exercised ...............................          (15,300)           1.50
    Canceled ................................             --               --
                                                     ---------
Balance at December 31, 1995  ...............        3,891,567            3.15
1996 activity:
    Granted .................................           23,220            9.69
    Exercised ...............................         (604,892)           4.89
    Canceled ................................          (34,250)          12.92
                                                     ---------
Balance at December 31, 1996  ...............        3,275,645            2.41
1997 activity:
    Granted .................................          397,000            1.50
    Exercised ...............................         (869,500)           1.56
    Canceled ................................         (397,000)           1.50
                                                     ---------
Balance at December 31, 1997  ...............        2,406,145       $    2.71
                                                     =========

      In March 1997, the Company  extended for a two-year  period the term of an
officer's  warrant to purchase 397,000 shares of the Company's Common Stock at a
per share exercise price equal to $1.50.  In connection  with this  transaction,
the  Company   recognized   non-cash   compensation   expense  of  approximately
$2,233,000.

      During  September  1996,  the Company  repriced  certain  warrants held by
investors to purchase  80,700  shares of Common Stock in order to promote  their
exercise  prior to pending  expiration.  The warrants were repriced to an amount
which was ten percent less than the average  closing  price for the Common Stock
for the thirty  days  leading


                                      F-16
<PAGE>

up to and including the day prior to the date of exercise. The fair market value
of the warrants was reflected as a cost of capital.

      During  November  1996,  the Company  repriced  certain  warrants  held by
investors to purchase  130,000  shares of Common Stock in order to promote their
exercise  prior to pending  expiration.  The warrants were repriced to an amount
which was ten percent less than the average  closing  price for the Common Stock
for the thirty  days  leading up to and  including  the day prior to the date of
exercise.  The fair market  value of the  warrants  was  reflected  as a cost of
capital.

      In December 1995, the Company granted its President a ten-year  warrant to
purchase  350,000 shares of Common Stock at an exercise price equal to the $5.50
trading price of the Common Stock on the date of grant. The grant of the warrant
was approved by shareholders at the Company's Annual Meeting held June 3, 1996.

      On February 2, 1995,  exercise  prices for certain granted and outstanding
warrants  were  offered to be  repriced  to $1.50 per share.  The benefit of the
repricing  was  confined to  individuals  who  continued to serve the Company as
employees,  directors or consultants,  and 2,048,217 warrants were repriced.  In
consideration for the offer of repricing,  those choosing to accept the repriced
warrants  were to pay the  Company  the  difference  in value  before  and after
repricing as calculated by use of the Black-Scholes  model,  which payment could
be made through  promissory  notes to the Company.  The closing trading price of
the Company's Common Stock on February 2, 1995 was $.69.

      The  outstanding  warrants  expire and are  exercisable  for the number of
shares of Common Stock as shown below:

December 1999  ............................................        47,820
March 2000 ................................................        12,300
July 2000 .................................................        72,000
August 2000  ..............................................       925,000
November 2000  ............................................        12,720
March 2001  ...............................................         2,500
May 2001  .................................................       971,805
June 2003  ................................................        12,000
December 2005 .............................................       350,000
                                                                ---------
   Total ..................................................     2,406,145
                                                                =========

      (c) SFAS No. 123:

      In 1996, the Company  adopted the provisions of SFAS No. 123,  "Accounting
for Stock Based  Compensation."  The  following  table  summarizes  the weighted
average  fair value of stock  options  and  warrants  granted to  employees  and
directors during the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                      Option Plans
                                        ------------------------------------------------------------------------
                                               1997                       1996                      1995
                                        -------------------       --------------------       -------------------
                                        Shares         $          Shares          $          Shares         $
                                        ------      -------       ------       -------       ------      -------
<S>                                    <C>          <C>         <C>           <C>            <C>         <C>
Exercise price equals market value
at date of grant ..................    424,194(1)   $   4.29    961,875(1)    $   5.56       602,000     $   1.07
Exercise price exceeds market value
at date of grant ..................       --        $    --         --        $    --        795,000     $   0.32
</TABLE>

      (1) Does not  include  32,000  shares in 1997 and  116,000  shares in 1996
under options  granted to  non-employees.  The fair value of these  non-employee
grants has been recorded as  compensation  expense as prescribed  under SFAS 123
and is being  recognized  ratably  over the  respective  vesting  period  of the
options.


                                      F-17
<PAGE>

<TABLE>
<CAPTION>
                                                                        Warrants
                                        ------------------------------------------------------------------------
                                               1997                       1996                      1995
                                        -------------------       --------------------       -------------------
                                        Shares         $          Shares          $          Shares         $
                                        ------      -------       ------       -------       ------      -------
<S>                                    <C>          <C>          <C>           <C>          <C>          <C>
Exercise price equals market value
at date of grant ..................        --       $   --       23,220        $  5.39      1,434,300    $  0.64
Exercise price is less than market
value at date of grant ............    397,000(1)   $  5.91         --         $   --            --      $   --
Exercise price exceeds market value
at date of grant ..................        --       $   --          --         $   --       2,048,217    $  0.29
</TABLE>

      (1) The only  grant  of  warrants  during  1997  was the  extension  of an
officer's  warrant to purchase 397,000 shares of Common Stock. The extension has
been  considered a cancellation  of the original grant and the issuance of a new
below market grant.  Accordingly,  the Company recognized  compensation  expense
consistent with APB Opinion No. 25.

      The fair value of stock  options  and  warrants  was  estimated  using the
Black-Scholes  option pricing model. The Black-Scholes  model considers a number
of variables  including the exercise  price and the expected life of the option,
the current price of the Common Stock, the expected  volatility and the dividend
yield of the underlying Common Stock, and the risk-free interest rate during the
expected  term of the option.  The  following  summarizes  the weighted  average
assumptions used:

<TABLE>
<CAPTION>
                                          Option Plans                                   Warrants
                             ---------------------------------------     ----------------------------------------
                               1997           1996           1995           1997           1996           1995
                             ---------      ---------      ---------     ----------     ----------      ---------
<S>                            <C>             <C>            <C>           <C>           <C>            <C>
Expected life (years) ...      5.0             3.5            2.5           2.0           2.0 (1)          2.0
Interest rate ...........     6.00%           5.00%          5.00%         6.00%           5.00%          5.00%
Volatility ..............     72.29%         85.13%         85.13%         72.29%         85.13%         85.13%
Dividend yield ..........       0%             0%             0%             0%             0%             0%
</TABLE>

(1)   The weighted average expected life does not include the warrants  repriced
      in 1996 as they were exercised  simultaneously.

      The estimated volatility for the year ended December 31, 1997 reflects the
performance of the Company's Common Stock over the  fourteen-month  period ended
March 1998.  The estimated  volatility for the years ended December 31, 1996 and
1995  reflects  the   performance  of  the  Company's   Common  Stock  over  the
twelve-month  period ended  December  1996. The expected life of the options and
warrants  reflects  the  anticipated  holding  period  prior  to  exercise.  The
estimated risk-free interest rate used is based on risk-free investment products
with similar terms.


                                      F-18
<PAGE>

      The  following  table  summarizes  information  concerning  stock  options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                                 Weighted
                                                  Average      Weighted                    Weighted
                                    Number       Remaining     Average         Number      Average
          Range of                Outstanding   Contractual    Exercise     Exercisable    Exercise
       Exercise Prices            at 12/31/97      Term         Price       at 12/31/97     Price
------------------------------    -----------   -----------    --------     -----------    --------
<S>                                 <C>             <C>         <C>            <C>         <C>
$0.563 - 1.063 ...............      413,625         3.61        $ 0.78         358,625     $  0.73
 1.25 - 2.00 .................      329,625         3.42          1.60         319,125        1.61
 3.75 - 5.938 ................      189,000         8.01          5.05         124,002        5.14
 6.00 ........................      302,250         9.90          6.00            --           --
 6.125 - 8.125 ...............      161,626         8.73          7.15          36,502        7.13
 8.30 - 10.00 ................      356,800         8.61          8.63         153,459        8.57
 10.875 - 16.00 ..............      624,169         8.18         10.99         260,060       11.09
                                  ---------                                  ---------
                                  2,377,095         7.03          6.19       1,251,773        4.69
                                  =========                                  =========
</TABLE>

      As of December 31, 1997, the  outstanding  warrants to purchase  2,406,145
common shares were all exercisable.  The weighted average remaining  contractual
term at December 31, 1997 for the 12,300  outstanding  warrants  exercisable  at
$.63 per share is 2.2  years,  the 24,600  exercisable  at $.69 per share is 2.0
years,  the 1,437,525  exercisable at $1.50 per share is 3.1 years,  the 498,500
exercisable  at $3.00 per share is 2.6 years,  the 350,000  exercisable at $5.50
per share is 8.0 years, the 12,000  exercisable at $7.00 per share is 5.5 years,
the 23,220 exercisable at $9.69 per share is 2.0 years, the 6,000 exercisable at
$10.00 per share is 2.9 years, and the 42,000 exercisable at $13.33 per share is
3.3 years.

      The  Company  applies  APB  Opinion  25  and  related  Interpretations  in
accounting  for its options and  warrants.  Except as previously  indicated,  no
compensation  cost has been  recognized for its stock option and warrant grants.
Had  compensation  cost for the Company's  stock option  grants been  determined
based on the fair value at the grant dates for awards consistent with the method
of SFAS No.  123,  the  Company's  net loss and loss per share  would  have been
increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                      --------------------------------------------
                                                          1997            1996            1995
                                                      -----------    -------------   -------------
<S>                                                  <C>             <C>             <C>
Net loss to common stockholders    As reported       $(15,654,000)   $ (16,015,000)  $ (9,641,000)
                                   Pro forma          (13,511,000)     (19,653,000)   (11,728,000)

Loss per share                     Basic and diluted:
                                   As reported              (0.67)           (0.83)         (0.72)
                                   Pro forma                (0.58)           (1.01)         (0.88)
</TABLE>

      The pro forma  effect on the loss for the years ended  December  31, 1997,
1996, and 1995 is not  necessarily  indicative of the pro forma effect on future
years  operating  results  since it does  not take  into  effect  the  pro forma
compensation expense related to grants made prior to January 1, 1995.


                                      F-19
<PAGE>

(11) Income Taxes

      The tax effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and December 31, 1996 are presented below.

                                                  December 31,     December 31,
                                                     1997              1996
                                                  ------------     ------------
Deferred tax assets:
   Liability to reacquire IL-6m
     rights and materials ..................     $    262,000      $    863,000
   Research and development
     credit carryforward ...................        2,303,000         1,883,000
   Compensation relating to the
     issuance of stock options
     and warrants ..........................          189,000         2,740,000
   Net operating loss carryforwards ........       52,408,000        44,374,000
   Other ...................................        1,116,000           958,000
                                                 ------------      ------------
Total gross deferred tax assets ............       56,278,000        50,818,000
   Less valuation allowance ................      (56,278,000)      (50,818,000)
                                                 ------------      ------------
   Net deferred tax assets .................             --                --
                                                 ------------      ------------
Deferred tax liabilities:
   Total gross deferred tax
     liabilities ...........................             --                --
                                                 ------------      ------------
   Net deferred tax ........................     $       --        $       --
                                                 ============      ============

      At December 31, 1997, the Company had net operating loss carryforwards for
federal  income tax  purposes  of  approximately  $115,000,000  which  expire at
various  dates from 2000 through  2012.  At December  31, 1997,  the Company had
research  credit  carryforwards  of  approximately  $2,303,000  which  expire at
various  dates  between  years 2001 and 2012.  Pursuant  to  Section  382 of the
Internal  Revenue  Code of 1986,  as  amended,  the  annual  utilization  of the
Company's net operating loss and research credit carryforwards may be limited if
the Company  experiences a change in ownership of more than 50 percentage points
within a three-year  period.  Since 1986, the Company  experienced two ownership
changes.  Accordingly, the Company is significantly limited in utilizing its tax
net operating loss carryforwards arising before such ownership changes to offset
future  federal  taxable  income.   Similarly,   the  Company  is  significantly
restricted  in using its  research  credit  carryforwards  arising  before  such
ownership changes to offset future federal income tax expense.

(12) Commitments

   Leases

      The Company leases  premises under an operating  lease, a portion of which
expired in 1993 and a portion of which expires in 1999. The Company has extended
the 1993  expired  portion of the lease  through 1997 at 85% of each year's fair
market  rental  value and from 1997 to 1999 at 100% of each  year's  fair market
rental value, for a portion of the premises.  The rate for the remaining portion
of the  premises  is  $264,000  annually  through  March 31,  1997 and  $285,000
annually   through  March  31,  1999.  Rent  expense  for  leased  premises  was
approximately $554,000,  $508,000, and $493,000 for the years ended December 31,
1997, 1996 and 1995, respectively. See also Note 7.


                                      F-20
<PAGE>

      Future minimum lease  payments under the capital and operating  leases are
as follows:

                                                 Capital          Operating
    Years ending December 31,                     Leases            Leases
                                               -----------       -----------
1998  ....................................     $   510,000       $   564,000
1999  ....................................         559,000           323,000
2000  ....................................         505,000             9,000
2001  ....................................         143,000             1,000
2002  ....................................           3,000              --
                                               -----------       -----------
                                                 1,720,000           897,000
Less interest expense ....................        (251,000)             --
                                               -----------       -----------
                                               $ 1,469,000       $   897,000
                                               ===========       ===========

   Supported Research

      The Company has entered into various research and license  agreements with
certain academic  institutions  and others to supplement the Company's  research
activities  and to obtain  for the  Company  rights to certain  technology.  The
agreements  generally  require  the  Company  to fund  the  research  and to pay
royalties  based upon  percentages  of  revenues,  if any,  on sales of products
developed from technology arising under these agreements.

   Consulting Agreements

      The Company  has  consulting  agreements  with  several of its  Scientific
Advisory Board members and other consultants. These agreements generally are for
a term of one year or are terminable at the Company's option.

(13) Retirement Plans

     The Company  maintains a 401(k) retirement plan available to all full-time,
eligible employees.  Employee  contributions are voluntary and are determined on
an individual  basis,  limited to the maximum amount allowable under federal tax
regulations.  The Company, at its discretion,  may make certain contributions to
the plan.  No such  contributions  have been made to the plan  during  the years
ended December 31, 1997, 1996 and 1995.

(14) Supplemental Cash Flow Information and Non-cash Investing and Financing

Activities are as follows:

                                                     Year Ended December 31,
                                                --------------------------------
                                                   1997        1996       1995
                                                ----------  ---------   --------
Cash paid during the year for:
   Interest .................................   $ 707,000   $ 817,000   $504,000
                                                =========   =========   ========
Non-cash investing and finance
 activities:
  Finova capital asset and lease
    obligations additions ...................   1,324,000     421,000       --
                                                =========   =========   ========
  Fair value of Finova warrant ..............        --       125,000       --
                                                =========   =========   ========
  Other capital lease obligations ...........      28,000        --         --
                                                =========   =========   ========
  Unrealized gain (loss) on securities
    available-for-sale ......................     101,000     (49,000)      --
                                                =========   =========   ========
  Extinguishment of Oracle Group
    debt for stock ..........................        --     2,500,000       --
                                                =========   =========   ========
  Extinguishment of director
    debt for stock ..........................        --       180,000       --
                                                =========   =========   ========
  Preferred Stock dividend ..................     163,000        --         --
                                                =========   =========   ========


                                      F-21
<PAGE>

(15) Related Party Transactions

      Through  March 1995,  the Company made  miscellaneous  noninterest-bearing
cash  advances to the President  and CEO of the Company  totaling  approximately
$156,000.  The  officer  provided  the  Company  with a demand  promissory  note
pursuant to which the officer was obligated to repay the debt over a twenty-four
month period  ending April 30, 1997. In March 1997,  the Company  accepted a new
promissory note (the "new promissory  note") in the aggregate amount of $110,000
from the  officer.  The new  promissory  note was payable as to $15,000 no later
than May 15, 1997 and the remainder upon the earlier of on demand by the Company
or December 31, 1997 and bore interest at the rate of 5%  compounded  quarterly.
The new  promissory  note covered the  remaining  balance of the original  note,
interest thereon and additional  miscellaneous cash advances made since the date
of the original note totaling $15,000.  At December 31, 1997, the new promissory
note was paid in full by the officer.

      In January 1996, the Company paid Concord International  Investment Group,
LP,  approximately  $163,000  for  services  rendered  by it to the  Company  in
connection with structuring a contemplated  product related  financing for C225.
Mr.  Robert F.  Goldhammer,  Chairman  of the Board of  Directors,  is a limited
partner of Concord International Investment Group, LP.

      In  August  1995 and  January  1996,  the  Company  paid  Delano & Kopperl
Financial Advisors,  Inc. a total of approximately $69,000 for services rendered
by it to the Company in  connection  with  structuring  a  contemplated  product
related  financing  for C225.  Paul B.  Kopperl,  a director of the Company,  is
President, director, and 25% shareholder of Delano & Kopperl Financial Advisors,
Inc.

      In  January  1998,  the  Company   accepted  a  promissory  note  totaling
approximately  $131,000  from  its  President  and CEO in  connection  with  the
exercise of a warrant to purchase  87,305 shares of the Company's  Common Stock.
The note is due no later than two years from issuance and bears annual  interest
at the rate of 8.5%.

(16) Fair Value of Financial Instruments

      For the years ended December 31, 1997 and 1996, the following  methods and
assumptions  were used to  estimate  the fair value of each  class of  financial
instrument:

Cash  and  cash  equivalents,   accounts  payable,  accrued  and  other  current
liabilities

      The carrying amounts  approximate fair value because of the short maturity
of those instruments.

Long-term debt

    Discounted  cash flow  analyses  were used to  determine  the fair  value of
long-term  debt  because  quoted  market  prices  on  these   instruments   were
unavailable.  The fair  value of these  instruments  approximated  the  carrying
amount.


                                      F-22
<PAGE>

(17) Summary of Quarterly Results of Operations (Unaudited)

      The following  unaudited  quarterly  financial  information  includes,  in
management's  opinion, all normal and recurring  adjustments necessary to fairly
present the Company's  results of  operations  and related  information  for the
periods presented.

<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                              ---------------------------------------------------------
                                                March 31        June 30     September 30    December 31
                                              ------------   -----------    ------------    -----------
<S>                                           <C>            <C>            <C>            <C>
Year ended December 31, 1997:
 Revenues .................................   $    75,000    $ 3,196,000    $   742,000    $ 1,335,000
 Operating expenses .......................     6,478,000      4,529,000      4,359,000      6,445,000
                                              -----------    -----------    -----------     ----------
 Operating loss ...........................    (6,403,000)    (1,333,000)    (3,617,000)    (5,110,000)
 Net interest and other income ............       (50,000)      (295,000)      (283,000)      (344,000)
                                              -----------    -----------    -----------     ----------
 Net loss .................................    (6,353,000)    (1,038,000)    (3,334,000)    (4,766,000)
 Preferred stock dividends
   (including incremental
   yield of $51,000)  .....................          --             --             --          163,000
                                              -----------    -----------    -----------     ----------
 Net loss to common stockholders ..........   $(6,353,000)   $(1,038,000)   $(3,334,000)   $(4,929,000)
                                              ===========    ===========    ===========    ===========
 Basic and diluted net loss
   per common share .......................   $     (0.30)   $     (0.04)   $     (0.14)   $     (0.20)
                                              ===========    ===========    ===========    ===========
Year ended December 31, 1996:
 Revenues .................................   $    75,000    $    75,000    $    75,000    $   375,000
 Operating expenses .......................     3,066,000      3,438,000      3,714,000      5,225,000
                                              -----------    -----------    -----------     ----------
 Operating loss ...........................    (2,991,000)    (3,363,000)    (3,639,000)    (4,850,000)
 Net interest and other expense
   (income) ...............................       154,000        (61,000)       (97,000)       (91,000)
                                              -----------    -----------    -----------     ----------
 Loss before extraordinary item ...........    (3,145,000)    (3,302,000)    (3,542,000)    (4,759,000)
 Extraordinary loss on
   extinguishment of debt .................          --        1,267,000           --             --
                                              -----------    -----------    -----------     ----------
 Net loss .................................   $(3,145,000)   $(4,569,000)   $(3,542,000)   $(4,759,000)
                                              ===========    ===========    ===========    ===========
 Basic and diluted net loss per
   common share:
 Loss before extraordinary item ...........   $     (0.18)   $     (0.17)   $     (0.18)   $     (0.24)
 Extraordinary loss on extinguishment
   of debt ................................          --             0.06           --             --
                                              -----------    -----------    -----------     ----------
 Net loss per common share ................   $     (0.18)   $     (0.23)   $     (0.18)   $     (0.24)
                                              ===========    ===========    ===========    ===========
</TABLE>

                                      F-23