<PAGE>

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


[ 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
 
[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
          For the transition period from _________________ to___________________

                        Commission File Number 0-21972

                          INNOVIR LABORATORIES, INC.
            (Exact name of registrant as specified in its charter)

             DELAWARE                            13-3536290
    (State or other jurisdiction of           (I.R.S. Employer
     incorporation or organization)           Identification No.)

                510 EAST 73RD STREET, NEW YORK, NEW YORK 10021
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code: (212) 249-1100

                             --------------------
       Securities Registered Pursuant to Section 12(b) of the Act:

                         Common Stock, $.013 par value
                               (Title of Class)

       Securities Registered Pursuant to Section 12(g) of the Act:
                                 None

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   X    No 
                                               -----     -----

  Indicate by check mark if disclosure of delinquent filers 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.  [  ]

  The number of shares of the Common Stock of the registrant outstanding as of
March 16, 1998 was 34,830,925.  The number of shares of Common Stock held by
nonaffiliates on such date was 8,083,823 with an aggregate market value of
$3,540,714 based on the closing price on such date of $0.438 per share, as
reported by the Nasdaq SmallCap Market.

<PAGE>




INDEX


PART I  FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 
                                                                                                                Page
                                                                                                           --------------
<S>                                                                                                        <C> 
Independent Auditors' Report                                                                                    F-2
 
Report of Independent Accountants                                                                               F-3

Independent Auditors' Report                                                                                    F-4

Consolidated Balance Sheets at December 31, 1997 and 1996                                                       F-5
 
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996, and for the period
 from January 6, 1995 (inception) through December 31, 1995 and the period from January 6, 1995
 (inception) through December 31, 1997.                                                                         F-6
 
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997 and
 1996, and for the period from January 6, 1995 (inception) through December 31, 1995.                           F-7
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996, and for the period
 from January 6, 1995 (inception) through December 31, 1995 and the period from January 6, 1995
 (inception) through December 31, 1997.                                                                         F-8
 
Notes to Financial Statements                                                                             F-9 to F-27
</TABLE>

                                      F-1
<PAGE>
 
                         Independent Auditors' Report


The Board of Directors and Stockholders
Innovir Laboratories, Inc.:

We have audited the accompanying consolidated balance sheet of Innovir
Laboratories, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended, and for the period
from January 6, 1995 (inception) to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The accompanying financial statements of Innovir
Laboratories, Inc. as of December 31, 1996, were audited by other auditors whose
report thereon dated March 4, 1997, expressed an unqualified opinion on those
statements. The accompanying financial statements of Innovir Laboratories, Inc.
as of December 31, 1995, were audited by other auditors whose reported dated
January 3, 1996, except for note 3(b), and the first paragraph of note 1(b) and
to the retroactive change of the stockholders' capital accounts, for which the
dates are May 22, 1996 and December 23, 1996, respectively, expressed an
unqualified opinion on those statements but included an emphasis of matter
paragraph regarding the Company's dependence on VIMRX Pharmaceuticals Inc. (its
parent company) for financial support. Our opinion on the consolidated
statements of operations, stockholders' equity and cash flows, insofar as it
relates to the amounts included for the period from January 6, 1995 (inception)
to December 31, 1996 is based solely on the reports of other auditors which have
been furnished to us.

We conducted our audit 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 audit and the reports of the other auditors provides a
reasonable basis for our opinion. 

In our opinion, based on our audit and the reports of the other auditors, the
1997 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Innovir Laboratories, Inc. and
subsidiaries (a development stage enterprise) as of December 31, 1997 and the
results of their operations and their cash flows for the year then ended and for
the period from January 6, 1995 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles.


KPMG Peat Marwick LLP


Wilmington, Delaware
March 23, 1998


                                      F-2
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Innovir Laboratories, Inc. and Subsidiaries
(formerly VIMRx Holdings, Ltd. and Subsidiaries):

We have audited the accompanying consolidated balance sheet of Innovir 
Laboratories, Inc. and Subsidiaries, (the "Company") (formerly VIMRx Holdings, 
Ltd. and Subsidiaries) (a development stage enterprise) at December 31, 1996, 
and the related consolidated statements of operations, changes in stockholders' 
equity (deficit) and cash flows for the year then ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of 
December 31, 1996, and the consolidated results of its operations and its 
consolidated cash flows for the year then ended in conformity with generally 
accepted accounting principles.


                                                COOPERS & LYBRAND L.L.P.

New York, New York
March 4, 1997



                                      F-3



<PAGE>
 
INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Innovir Laboratories, Inc.
(formerly VIMRx Holdings, Ltd.)
Wilmington, Delaware

We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Innovir Laboratories, Inc. and
subsidiary (a development stage company) for the period January 6, 1995
(inception) through December 31, 1995. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated results of operations
and consolidated cash flows of Innovir Laboratories, Inc. and subsidiary for the
period from January 6, 1995 (inception) through December 31, 1995, in conformity
with generally accepted accounting principles.

As discussed in Note 1(a) to the financial statements, the Company is dependent 
on VIMRx Pharmaceuticals, Inc. for financial support.


Richard A. Eisner & Company, LLP

New York, New York
January 3, 1996


With respect to the acquisition of Ribonetics in Note 3(b),
May 22, 1996


With respect to the first paragraph of Note 1(b) and to the
retroactive change of the stockholders' capital accounts,
December 23, 1996


                                      F-4





<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)


CONSOLIDATED BALANCE SHEETS
                                                        
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                  ---------------------------------------------
                                ASSETS:                                                     1997                   1996
                                                                                  ---------------------------------------------
<S>                                                                               <C>                    <C> 
Current assets:
     Cash and cash equivalents                                                    $        2,159,000     $        6,412,000
     Prepaid expenses and other current assets                                               184,000                203,000
                                                                                  ---------------------------------------------
                   Total current assets                                                    2,343,000              6,615,000
 
Fixed assets less accumulated depreciation and amortization                                2,345,000              2,439,000
Amount due from VIMRX Pharmaceuticals Inc.                                                        --                535,000
Goodwill, less accumulated amortization of $412,000 at December 31, 1997                     826,000              1,236,000
Other assets                                                                                 220,000                249,000
                                                                                  ---------------------------------------------
                   Total assets                                                   $        5,734,000     $       11,074,000
                                                                                  =============================================
 
                        LIABILITIES AND STOCKHOLDERS' EQUITY:
 
Current liabilities:
   Accounts payable and accrued expenses                                          $        1,274,000     $        1,319,000
   Capital leases                                                                            382,000                472,000
   Term note payable                                                                         130,000                 36,000
                                                                                  ---------------------------------------------
                   Total current liabilities                                               1,786,000              1,827,000
 
Amount due to VIMRX Pharmaceuticals Inc.                                                     838,000                     --
Term note payable                                                                             96,000                227,000
Capital leases                                                                               289,000                463,000
                                                                                  ---------------------------------------------
                   Total liabilities                                                       3,009,000              2,517,000
                                                                                  ---------------------------------------------
 
Commitments and contingencies
 
   
Stockholders' equity:
   Preferred stock, par value $.06; 15,000,000 shares authorized:
        Class B Convertible Preferred Stock; 2,500,000 shares designated;
            280,000 shares issued and outstanding at December 31, 1997,
           (liquidation value  $1,400,000); 297,000 shares issued and                   
            outstanding at December 31, 1996, (liquidation value  $1,485,000)                 17,000                 18,000 
       Class D Convertible Preferred Stock; 8,667,000 shares
           designated, issued and outstanding at December 31, 1996                                --                520,000
           (liquidation value of $13,000,000); none at 1997
Common stock, par value $.013; 70,000,000 shares authorized;
   34,831,000 shares issued and outstanding at December 31, 1997,
   17,946,000 shares issued and outstanding at December 31, 1996                             453,000                233,000
Additional paid-in capital                                                                34,036,000             29,667,000
Cumulative translation adjustment                                                            (40,000)                (8,000)
Unearned compensation                                                                             --               (181,000)
Deficit accumulated during the development stage                                         (31,741,000)           (21,692,000)
                                                                                  ---------------------------------------------
                   Total stockholders' equity                                              2,725,000              8,557,000
                                                                                  ---------------------------------------------
                   Total liabilities and stockholders' equity                     $        5,734,000     $       11,074,000
                                                                                  =============================================
</TABLE>
    

    The accompanying notes are an integral part of the financial statements.

                                      F-5
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                         PERIOD                       PERIOD
                                                                                     JANUARY 6, 1995             JANUARY  6, 1995
                                FOR THE  YEAR ENDED      FOR THE YEAR ENDED        (INCEPTION) THROUGH         (INCEPTION) THROUGH
                                    DECEMBER 31,            DECEMBER 31,              DECEMBER 31,                 DECEMBER 31,
                                        1997                    1996                      1995                         1997
                               ---------------------    -------------------    --------------------------    -----------------------
<S>                           <C>                      <C>                    <C>                           <C>
Operating Expenses:
Research and development      $           6,399,000    $         1,946,000    $                1,434,000    $             9,779,000
Purchased in process
 research                                        --             17,374,000                            --                 17,374,000
      and development
General and administrative                3,375,000                506,000                       568,000                  4,449,000
Amortization of Goodwill                    412,000                     --                                                  412,000
                              ---------------------    -------------------    --------------------------    ----------------------- 

                                         10,186,000             19,826,000                     2,002,000                 32,014,000
                              ---------------------    -------------------    --------------------------    ----------------------- 

Other (income) expenses:
Interest income                            (136,000)               (13,000)                           --                   (149,000)

Interest expense                            126,000                  4,000                        24,000                    154,000
Other-net                                  (127,000)              (151,000)                           --                   (278,000)

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

                                           (137,000)              (160,000)                       24,000                   (273,000)

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

 
             Net (loss)       $         (10,049,000)   $       (19,666,000)   $               (2,026,000)   $           (31,741,000)

                              =====================    ===================    ==========================    =======================
 
 
 
Loss per share data:
 
Basic loss per share          $               (0.43)   $             (2.03)   $                    (0.21)
                              =====================    ===================    ========================== 
 
 
Weighted average number of
   shares of Common
         Stock outstanding               23,509,000              9,685,000                     9,500,000
                              =====================    ===================    ========================== 
 
Diluted loss per share        $               (0.43)   $             (2.03)   $                    (0.21)
                              =====================    ===================    ==========================
 
 
Weighted average number of
   shares of Common
   Stock and dilutive
   equivalent shares                                                                                
   outstanding                            23,509,000              9,685,000                     9,500,000 
                               =====================    ===================   ===========================
</TABLE>


   The accompanying notes are an integral part of the financial statements.

                                      F-6
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
For the period from January 6, 1995 (inception) to December 31, 1997
Consolidated Statement of Changes in Stockholders' Equity (Deficit)

<TABLE> 
<CAPTION> 


                                          Class B Convertible   Class D Convertible                        
                                            Preferred Stock       Preferred Stock        Common Stock        Additional 
                                          -------------------   -------------------   -------------------     Paid-In  
                                           Shares      Amount    Shares       Amount    Shares      Amount     Capital 
                                          --------    -------   ---------    -------   ---------   -------   ----------
<S>                                       <C>         <C>       <C>          <C>       <C>         <C>       <C> 
Issuance of common stock and              
  Class D Convertible                                                                                                  
  Preferred Stock in consideration                                                                                      
  for cash of $12,000 and the assignment                                                                               
  of certain notes receivable of $60,000       --         --    8,667,000   $520,000   9,500,000  $124,000    $(572,000)
                                                                                                                       
Net loss for the period from January 6,                                                                                
  1995 to December 31, 1995                    --         --          --         --          --        --           -- 
                                          --------    -------   ---------    -------  ----------   -------   ----------       
                                
        Balance at December 31, 1995           --         --    8,667,000    520,000   9,500,000   124,000     (572,000)
                                                                                                                              
Contributed capital resulting from capital                                                                                    
  infusion or forgiveness of inter-company                                                                                    
  liabilities                                  --         --          --         --          --        --     8,400,000       
                                                                                                                              
 Contributed capital resulting from the                                                                                       
  acquisition of Ribonetics GmbH               --         --          --         --          --        --     3,713,000       
                                                                                                                              
Contributed capital resulting from the                                                                                        
  acquisition of Innovir 
  Laboratories, Inc.                       297,000    $18,000         --         --    8,446,000   109,000   17,919,000       
                                                                                                                              
Compensation expense incurred in                                                                                              
  connection with the issuance of stock        --         --          --         --          --        --           --        
  options                                                                                                                     
                                                                                                                              
Cumulative translation adjustment              --         --          --         --          --        --       207,000       
                                                                                                                              
Net loss, for the year ended December 31,                                                                                     
  1996                                         --         --          --         --          --        --           --        
                                          --------    -------   ---------    -------  ----------   -------   ----------       
Balance at December 31, 1996               297,000     18,000   8,667,000    520,000  17,946,000   233,000   29,667,000       
                                                                                                                              
Exercise of options and warrants               --         --          --         --    3,131,000    41,000    1,973,000       
                                                                                                                              
Costs incurred in connection with issuance                                                                                    
  of equity securities                         --         --          --         --          --        --       (24,000)      
                                                                                                                              
Conversion of Class B Convertible Stock    (17,000)    (1,000)        --         --       26,000       --         1,000       
                                                                                                                              
Conversion of Class D Convertible Stock        --         --   (8,667,000) $(520,000)  8,667,000   113,000      407,000       
                                                                                                                              
Issuance of common stock                       --         --          --         --    5,080,000    66,000    1,934,000       
                                                                                                                              
Adjustment for shares held in escrow in                                                                                       
  connection with stockholder's                                                                                               
  litigation                                   --         --          --         --      (19,000)      --           --        
                                                                                                                              
Compensation expense incurred in                                                                                              
  connection with the issuance of                                                                                             
  stock options                                --         --          --         --          --        --        78,000       
                                                                                                                              
Amortization of unearned compensation          --         --          --         --          --        --           --        
                                                                                                                              
Translation adjustment                         --         --          --         --          --        --           --        
                                                                                                                              
Net loss for the year ended December 31,                                                                                      
  1997                                         --         --          --         --          --        --           --        
                                          --------    -------   ---------    -------  ----------   -------   ----------       
Balance at December 31, 1997               280,000    $17,000         --         --   34,831,000  $453,000  $34,036,000       
                                          ========    =======   =========    =======  ==========   =======   ==========       

<CAPTION> 


                                                                                   
                                                                                   
                                                                    Cumulative     
                                                     Unearned       Translation     Deficit
                                                   Compensation     Adjustment      Retained       Total    
                                                   ------------     -----------   -----------  ------------
<S>                                                <C>              <C>           <C>          <C> 
Issuance of common stock and                       
  Class D Convertible                                          
  Preferred Stock in consideration                              
  for cash of $12,000 and the assignment                       
  of certain notes receivable of $60,000                    --               --            --  $     72,000
                                                               
Net loss for the period from January 6,                        
  1995 to December 31, 1995                                 --               --    (2,026,000)   (2,026,000)
                                                                                  -----------   -----------  
        Balance at December 31, 1995                        --                     (2,026,000)   (1,954,000)
                                                               
Contributed capital resulting from capital                     
  infusion or forgiveness of inter-company                     
  liabilities                                                                --            --     8,400,000
                                                                                                 
 Contributed capital resulting from the                        
  acquisition of Ribonetics GmbH                            --               --            --     3,713,000
                                                               
Contributed capital resulting from the                         
  acquisition of Innovir 
  Laboratories, Inc.                                  (181,000)              --            --    17,865,000
                                                               
Compensation expense incurred in                               
  connection with the issuance of stock                     -- 
  options                                                                    --            --       207,000
                                                               
Cumulative translation adjustment                           --           (8,000)           --        (8,000)
                                                               
Net loss, for the year ended                                   
  December 31, 1996                                         --               --   (19,666,000)  (19,666,000)
                                                   ------------     -----------   -----------   -----------  
Balance at December 31, 1996                          (181,000)          (8,000)  (21,692,000)    8,557,000
                                                               
Exercise of options and warrants                            --               --            --     2,014,000
                                                               
Costs incurred in connection with issuance                     
  of equity securities                                      --               --            --       (24,000)
                                                               
Conversion of Class B Convertible Stock                     --               --            --            --
                                                               
Conversion of Class D Convertible Stock                    --                --            --            --
                                                               
Issuance of common stock                                    --               --            --     2,000,000
                                                               
Adjustment for shares held in escrow in                         
  connection with stockholder's litigation                  --               --            --            --
                                                                
Compensation expense incurred in                                
  connection with the issuance of                               
  stock options                                             --               --            --        78,000
                                                                
Amortization of unearned compensation                   181,000              --            --       181,000
                                                                
Translation adjustment                                      --          (32,000)           --       (32,000)
                                                             
Net loss for the year ended December 31,                       
  1997                                                      --               --   (10,049,000)  (10,049,000)
                                                   ------------     ------------  -----------   -----------   
Balance at December 31, 1997                                --      $   (40,000) $(31,741,000) $  2,725,000
                                                   ============     ============  ===========   ===========   
</TABLE> 
 

                                      F-7
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
 
 
                                                                                             January 6,         January 6,
                                                                                               1995               1995
                                                          For the year    For the year     (Inception)         (Inception)
                                                             ended            ended          through             through
                                                          December 31,    December 31,     December 31,       December 31,
                                                             1997             1996            1995               1997
                                                       -------------     -------------     ------------     ------------- 
<S>                                                    <C>               <C>               <C>              <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:

    Net (loss)                                          $(10,049,000)     $(19,666,000)     $(2,026,000)     $(31,741,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
    Depreciation                                             795,000           146,000            4,000           945,000
    Amortization of goodwill                                 412,000                --               --           412,000
    Purchased in process research and development                 --        17,374,000               --        17,374,000
    Provision for losses on notes receivable                      --                --           85,000            85,000
    Non cash compensation                                    259,000           207,000               --           466,000
 
Changes in operating assets and liabilities:
    (Increase) in other current assets                        (7,000)          (37,000)          (3,000)          (47,000)
    (Increase) in other assets                                (1,000)               --               --            (1,000)
    (Decrease) increase in accounts payable and
     accrued expenses                                        (40,000)          540,000           43,000           543,000
                                                       -------------     -------------     ------------     -------------  
        Net cash (used in) operating activities           (8,631,000)       (1,436,000)      (1,897,000)      (11,964,000)
                                                       -------------     -------------     ------------     ------------- 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of equipment                                   (664,000)         (605,000)         (49,000)       (1,318,000)
    Cash acquired in acquisitions                                 --         3,532,000                          3,532,000
                                                       -------------     -------------     ------------     ------------- 
        Net cash (used in) provided by investing
         activities                                         (664,000)        2,927,000          (49,000)        2,214,000
                                                       -------------     -------------     ------------     ------------- 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of common stock, net                3,990,000                --           12,000         4,002,000
    Advances and contributed capital from VIMRX
               Pharmaceuticals Inc.                        1,372,000         4,864,000        2,002,000         8,238,000
    Repayment of capital leases                             (390,000)               --               --          (390,000)
                                                       -------------     -------------     ------------     ------------- 
        Net cash provided by financing activities          4,972,000         4,864,000        2,014,000        11,850,000
                                                       -------------     -------------     ------------     ------------- 
    Effect of exchange rate changes on cash                   70,000           (11,000)              --            59,000
                                                       -------------     -------------     ------------     ------------- 
 
        Net (decrease) increase in cash and cash
          equivalents                                     (4,253,000)        6,344,000           68,000         2,159,000
 
Cash and cash equivalents at beginning or period           6,412,000            68,000               --                --
                                                       -------------     -------------     ------------     -------------  
 
Cash and cash equivalents at end of  period             $  2,159,000      $  6,412,000      $    68,000      $  2,159,000
                                                       =============     =============     ============     =============  
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
     Cash paid for interest                             $    126,000      $      3,000               --      $    129,000
                                                       =============     =============     ============     ============= 
 
For non-cash transactions, see Notes 3 & 5.
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                     F-8
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


NOTE 1 THE BUSINESS

  (a)  Operations

       Innovir Laboratories, Inc. ("Innovir") is a biotechnology company
       developing a new class of biopharmaceutical agents based on proprietary
       technology for the treatment and prevention of diseases and also for
       genomic and pharmaceutical research.  As a development stage enterprise,
       all of the Company's efforts, to date, have been devoted to research and
       development, raising capital, acquiring equipment, setting up research
       laboratories, and financial planning.  The Company's research
       laboratories are located in the United States, the United Kingdom and
       Germany.

       The Company has no product sales to date, and has limited capital
       resources and recurring net operating losses.  The Company is dependent
       upon receipt of additional capital investment or other financing to fund
       its planned research activities. Assuming that the Company can obtain
       sufficient financing to complete development of marketable products, the
       Company may ultimately need to enter into collaborative agreements with
       others to obtain regulatory approvals, fund early operating losses, and
       if deemed appropriate, establish manufacturing, marketing and sales
       capabilities.

       The Company has sustained operating losses and negative cash flows from
       operations since its inception and expects these conditions to continue
       for the foreseeable future. Management believes that existing liquid
       assets combined with commitments from VIMRX Pharmaceuticals, Inc.,
       ("VIMRX") will enable the Company to continue to operate through the
       first quarter of 1999. After that date, the Company will need to raise
       additional financing through public or private equity financings or other
       arrangements to finance operations. In the event the Company is unable to
       raise additional capital, operations after that date will need to be
       scaled back or discontinued.

  (b)  Ownership

       The Company's shares are publicly traded on NASDAQ under the symbol
       "INVR". On November 21, 1996, Innovir, VIMRX, and certain stockholders of
       Innovir executed agreements (the "Transaction") whereby VIMRX acquired
       68% of Innovir and Innovir would acquire all of the issued and
       outstanding shares of VIMRX Holdings, Ltd. ("VHL"), a wholly-owned
       subsidiary of VIMRX. The transaction was consummated on December 23,
       1996. As further discussed in Note 3, for financial reporting purposes,
       the Transaction has been accounted for as a reverse acquisition in which
       VHL is deemed to be the acquirer of Innovir and the surviving company. In
       connection therewith, VHL's capital accounts were retroactively
       recapitalized to reflect the capital accounts of Innovir. VHL then
       assumed the name of Innovir Laboratories, Inc. and Subsidiaries (the
       "Company").

       In December 1997, through an additional investment of approximately
       $2,000 for 5,080,000 shares of Common Stock, VIMRX increased its
       ownership in the Company to approximately 70%.

                                      F-9
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data

  (c)  Risks

       The Company is subject to those risks associated with development stage
       enterprises.  There can be no assurance that the Company's research and
       development will be successfully  completed, that any products developed
       will obtain necessary government regulatory approval, or that any
       approved product will be commercially viable.  In addition, the Company
       operates in an environment of rapid technological change, and is
       dependent upon the services of its employees and consultants.
 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a)  Basis of  Presentation

       The financial statements have been prepared on a going concern basis,
       which contemplates  the realization of assets and the satisfaction of
       liabilities in the normal course of business. The Company expects to
       incur substantial expenditures in the foreseeable future related to
       research, development and commercialization of its proposed products.
       Based on current projections, which are subject to change (such change
       may be significant), the Company's management believes that the cash and
       cash equivalents on hand at December 31, 1997 and commitments for
       additional financing by VIMRX will be sufficient to fund its operations
       into the first quarter of the year ending December 31, 1999.  Thereafter,
       the Company will require additional funds, which it may seek to raise
       through public or private equity or debt financings, collaborative or
       other arrangements with corporate sources, or through other sources of
       financing, which may include the sale, licensing or spinning off of
       certain of the Company's technologies. There can be no assurance that
       such additional financing will be obtained on terms reasonable to the
       Company, if at all. In the event that the Company is unable to raise
       additional capital, planned operations would need to be scaled back or
       discontinued during 1999.

  (b)  Principles of Consolidation

       The consolidated financial statements include the financial statements of
       the Company and its three wholly-owned subsidiaries, VHL, Innovir Ltd.,
       Ribonetics GmbH and Innovir GmbH. All significant intercompany balances
       and transactions have been eliminated in consolidation.

  (c)  Foreign currency translation

       Financial statements of foreign subsidiaries are translated into US
       dollars using the year-end rate for net assets, and average exchange
       rates for revenue and expense accounts. Adjustments resulting from these
       translations are reflected directly in stockholders' equity.

                                      F-10
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data

  (d)  Cash and Cash Equivalents

       Cash and cash equivalents of $2,159 and $6,412 at December 31, 1997 and
       1996, respectively, consist of money market deposits, bank deposits, and
       a mutual fund which invests in short duration bonds. For purposes of the
       statements of cash flows, the Company considers all highly liquid debt
       instruments with original maturities of three months or less to be cash
       equivalents.  The Company holds no collateral for these financial
       instruments.

  (e)  Fixed assets

       Fixed assets, which consist principally of office equipment, laboratory
       equipment, and leasehold improvements, are stated at cost. Fixed assets
       under capital lease are stated unless it is under a capital lease, 
       at the present value of minimum lease payments.

       Depreciation of equipment is calculated on the straight-line method over
       the estimated useful lives of the assets which range from 4 to 15 years.
       Equipment held under capital leases and leasehold improvements are
       amortized on a straight line basis over the shorter of the lease term 
       or estimated useful life of the asset.

       Expenditures for maintenance and repairs which do not materially extend
       the useful lives of the assets are charged to operations as incurred.
       The cost and related accumulated depreciation or amortization of assets
       retired or sold are removed from the respective accounts, and any gain or
       loss is recognized in the statement of operations.

  (f)  Goodwill

       Goodwill of $1,236 arose on the Transaction.  This goodwill represents
       the excess of purchase price paid by VIMRX over 68% of the fair value of
       net assets acquired and purchased in-process research and development, 
       which is amortized on a straight-line basis over the period of expected
       benefit which is 3 years.

       The carrying value of goodwill is reviewed periodically by assessing the
       advancement of Innovir's technology and the continued employment of
       Innovir's workforce and consultants.  Should such a review indicate that
       the value of goodwill will not be realized, the Company's carrying value
       of the goodwill will be reduced.

  (g)  Other assets

       Other assets consist principally of security deposits and deferred
       financing costs.  Deferred financing costs  associated with obtaining
       debt financing have been capitalized and are being amortized on a basis
       which approximates the interest method, over the term of the loan.

  (h)  Research and Development

       Research and development costs are expensed as incurred.  In the event of
       a business combination, purchased research and development is valued and
       included in the allocation of the purchase price.  If technological
       feasibility of the acquired technology can not be

                                      F-11
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


       established at the date of acquisition and the technology has no future
       alternative uses, the amount is immediately charged to expense.

   (i) Income Taxes

       Income taxes are accounted for under the asset and liability method in
       accordance with the Statement of Financial Accounting Standards No. 109
       ("SFAS 109"). 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. Deferred tax assets
       may be reduced, if necessary, by a valuation allowance for any tax
       benefits which are not expected to be realized. 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) Stock-Based Compensation

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

  (k)  Net loss per share

       Basic net loss per share is computed using the weighted average number of
       shares of common stock outstanding during the period. Diluted net loss
       per share is computed using the weighted average number of shares of
       common and potentially dilutive shares outstanding during the period.
       Potentially dilutive common shares consist of stock options and warrants
       and convertible preferred stock using the treasury stock method and are
       excluded if their effect is antidilutive.

       Effective December 31, 1997, the Company adopted Statement of Financial
       Accounting Standards No. 128 ("SFAS 128") Earnings Per Share ("EPS").
       SFAS 128 establishes and simplifies the standards for computing earnings
       per share previously found in Accounting principles Board Opinion No. 15,
       Earnings Per Share ("APB 15") and makes them comparable to international
       EPS standards. The adoption of SFAS 128 did not have a material impact on
       prior year financial statements.

                                     F-12
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


       For all periods presented, the net loss per share is computed assuming
       that the recapitalization discussed in Note 3 had occurred on January 6,
       1995.

  (l)  Commitments and Contingencies

       Liabilities for loss contingencies arising from claims, assessments,
       litigation, fines and penalties, and other sources are recorded when it
       is probable that a liability has been incurred and the amount of the
       assessment can be reasonably estimated.

 (m)   Impairment of Long-Lived Assets

       The Company reviews its long-lived assets for impairment when events or
       changes in circumstances indicate that the carrying amount of a long-
       lived asset may not be recoverable. Such asset is deemed impaired and
       written down to its fair value if expected future cash flows are less
       that its carrying amount.

  (n)  Use of Estimates

       The preparation of financial statements in accordance with generally
       accepted accounting principles requires management to make estimates and
       assumptions that affect the reported assets and liabilities as well as
       the disclosure of contingencies.  Actual results could differ from those
       estimates.

  (o)  Reclassifications
 
       Certain prior year amounts have been reclassified to conform with current
       year presentation.

  (p)  New Accounting Pronouncements

       In June 1997, the FASB issued Statement of Financial Standards No. 130,
       Reporting Comprehensive Income  ("SFAS 130"). SFAS 130  requires that all
       items are required to be recognized under accounting standards as
       components of comprehensive income be reported in a financial statement
       that is displayed with the same prominence as other financial statements.
       SFAS 130 is effective for fiscal years beginning after December 15, 1997.
       The Company plans to adopt this accounting standard as required. The
       adoption of SFAS 130 will have no impact on the Company's earnings,
       financial condition or liquidity, but will require the Company to
       classify items of other comprehensive income in a financial statement and
       display the accumulated balance of other comprehensive income in a
       financial statement and display the accumulated balance of other
       comprehensive income separately in the equity section of the balance
       sheet.

                                     F-13
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


       In June 1997, the FASB also issued Statement of Financial Standard No.
       131, Disclosures about Segments of an Enterprise and Related Information
       ("SFAS 131"). SFAS 131 supersedes Statement of Financial Standards No.
       14, Financial Reporting for Segments of a Business Enterprise, and
       establishes new standards for reporting information about operation
       segments in interim financial reports. SFAS 131 also establishes
       standards for related disclosures about products and services, geographic
       areas and major customers. SFAS 131 is effective for periods beginning
       after December 15, 1997. SFAS 131 affects reporting in financial
       statements only and will have no impact on the Company's results of
       operations, financial condition or liquidity.

       In February, 1998, the Financial Accounting Standards Board issued 
       Statement of Financial Accounting Standards No. 132, Employers' 
       Disclosures about Pensions and Other Postretirement Benefits (SFAS 132)
       which amends the disclosure requirements of Statements No. 87, Employers'
       Accounting for Pensions (SFAS 87). The Company does not believe that 
       adoption of SFAS 132 will have a material impact on its financial 
       position.


NOTE 3 ACQUISITIONS

  (a)  Change in Control / Reverse Acquisition

       As discussed in Note 1, Innovir, VIMRX and certain stockholders of
       Innovir (the "Aries Fund") entered into the Transaction whereby VIMRX
       acquired 68% of Innovir, and Innovir acquired 100% of the outstanding
       capital stock of VHL.  On December 23, 1996, in consideration for the
       acquisition of VHL, Innovir issued 8,666,666 shares of a newly designated
       series of preferred stock, Class D Convertible Preferred Stock and
       warrants to purchase two million shares of the Company's common stock.
       The warrants expire after five years.  The exercise price for the first
       million warrants is $1 per share.  The remaining warrants have an
       exercise price of $2 per share.

       Simultaneous with Innovir's acquisition of VHL, VIMRX, in exchange for
       $3,000 and three million shares of VIMRX's common stock, acquired 9.5
       million shares of Innovir's common stock from the Aries Fund, thereby
       increasing VIMRX's ownership interest in Innovir to 68%.  In addition,
       VIMRX and the Aries Funds entered into an agreement whereby VIMRX
       obtained the right to vote 2,500,000 shares of Innovir's common stock
       held by the Aries Fund, thereby effectively giving VIMRX voting control
       of an aggregate of 18,666,666 shares of Innovir's stock.

       The Company's acquisition of VHL and VIMRX's partial acquisition of
       Innovir have been accounted for as a purchase in accordance with APB
       Opinion No. 16, Business Combinations, ("APB 16"), and Emerging Issues
       Task Force Issue No. 90-13, Accounting for Simultaneous Common Control
       Mergers, ("EITF 90-13").  The application of APB 16 and EITF 90-13
       requires that the Transaction be accounted for as a reverse acquisition,
       and accordingly, for accounting purposes:

          (a)  VHL is deemed to be the acquirer and the surviving company;
          (b)  since Innovir is deemed to be the legal acquirer, VHL's historic
               capital accounts have been retroactively restated
               ("recapitalized") to reflect Innovir's capital accounts and the
               equivalent number of shares received by VIMRX in the Transaction;
          (c)  to the extent VIMRX has acquired Innovir (68%), Innovir has
               revalued its assets and liabilities to fair value; and
          (d)  the assets and liabilities of VHL are carried at VHL's historic
               cost.



       VIMRX's purchase price for 68% of Innovir totaled approximately $17,000
       which was allocated as follows:

                                     F-14
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data



          Tangible assets                        $ 3,700
          Liabilities                             (1,800)
          In-process research and development     13,800
          Goodwill                                 1,300
                                                 -------
                                                 $17,000
                                                  ======


       In-process research and development was immediately expensed since
       technological feasibility had not yet been established, and there was no
       alternative future use.

  (b)  Acquisition of Ribonetics GmbH

       During 1996, VHL acquired 100% of the capital stock of Ribonetics GmbH
       ("Ribonetics") in consideration for approximately $1,600 cash and a
       warrant to purchase 365,000 shares of VIMRX's common stock at an exercise
       price of $.01 per share (the "Acquisition").  The Acquisition was
       accounted for as a purchase, and the operating results of the Company
       include those of Ribonetics for the seven months ended December 31, 1996.
       The total purchase price aggregated $3,714 and was allocated as follows:


          Tangible assets                        $475
          Liabilities                            (289)
          In-process research and development   3,528
                                               ------
                                               $3,714
                                                =====

       In-process research and development was immediately expensed since
       technological feasibility had not yet been established, and there was no
       alternative future use.

  (c)  Pro Forma Results of Operations (Unaudited):

       The following pro forma unaudited results of operations have been
       prepared as if the Transaction and the Acquisition discussed above had
       occurred at the beginning of the respective periods ending December 31.


                                                            Period from  
                                                        January 6, 1995
                                        Year ended  (Inception) through
                                 December 31, 1996    December 31, 1995
                                       (unaudited)          (unaudited)
           Other income                    $   338               $1,360
           Expenses                         12,532                9,698
                                           -------               ------
           Net loss                        $12,194               $8,338
                                           =======               ======
           Basic and diluted             
            loss per share                 $  0.68               $ 0.46
                                           =======               ====== 

       The pro forma results of operations above includes adjustment for the
       amortization of intangibles and exclude non-recurring charges related to
       purchase in-process research and development arising from the Transaction
       and the Acquisition.

                                     F-15
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data

       The pro forma financial information is not necessarily indicative of the
       operating results that would have occurred had the Transaction and the
       Acquisition been consummated at the beginning of the respective period,
       nor are they necessarily indicative of future operating results.
 
NOTE 4 FIXED ASSETS

       Fixed assets as of December 31, 1997 and 1996 are comprised of the
       following:
 
                                                          1997    1996
                                                         ------  ------
 
       Office and laboratory equipment                   $2,666  $1,900
       Leasehold improvements                               561     689
                                                         ------  ------
                                                          3,227   2,589
       Less accumulated depreciation and amortization       882     150
                                                         ------  ------
 
       Net fixed assets                                  $2,345  $2,439
                                                         ======  ======
 

       Depreciation and amortization expense on fixed assets was $795 and $146
       for the years ended December 31, 1997 and 1996, respectively, and $4 for
       the period from January 6, 1995 (Inception) through December 31, 1995.
 
NOTE 5 LEASES

       The Company is obligated under various capital leases, some of which are
       with VIMRX,  that expire at various dates during the next five years.  At
       December 31, 1997 and 1996, the gross amount of equipment and related
       accumulated amortization recorded under capital leases were as follows:

                                                  1997             1996

Equipment                                        $1,513           $1,387
Less accumulated amortization                       842              405
                                                 ------           ------ 
                                                 $  671           $  982
                                                 ======           ======


       Amortization of assets held under capital leases is included with
       depreciation expense.

       The Company also has several noncancelable operating leases, primarily
       office space, that expire over the next three years.  These leases
       generally contain renewal options and require the Company to pay all
       executory costs such as maintenance and insurance. Rental expense totaled
       approximately $493, $170, and $27 for the years ended December 31, 1997
       and 1996, and the period from January 5, 1995 through December 31, 1995,
       respectively.

       Future minimum lease payments under noncancelable operating leases (with
       initial or remaining lease terms in excess of one year) and future
       minimum capital lease payments as of December 31, 1997 are:

                                     F-16
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data

<TABLE> 
<CAPTION> 
 
 
                                                                         Capital  Operating
                                                                         Leases    Leases
                                                                         -------  ---------
<S>                                                                      <C>      <C>
       Year ending December 31,
             1998                                                          $422       $493
             1999                                                           232        302
             2000                                                            80         63
             2001                                                            51         30
             2002                                                             -          -
                                                                           ----       ----
 
       Total minimum lease payments                                         785       $888
                                                                                      ====
       Less amount representing interest                                    114
                                                                           ----
 
       Present value of net minimum capital lease payments                  671
       Less current installments of obligations under capital leases        382
                                                                           ----
 
       Obligations under capital leases,
        excluding current installments                                     $289
                                                                           ====
 
</TABLE>

       During 1997, the Company began leasing certain equipment from VIMRX, its
       principal shareholder.  The leases, which range in duration from 36 to 48
       months, have been classified as capital leases since Innovir is entitled
       to purchase the related assets at a bargain price, upon expiration of the
       lease.  The implicit interest rate in the lease is 12.5% which
       approximates what a third party would have charged the Company.  For the
       year ended December 31, 1997, payments to VIMRX under these leases
       totaled $19, which was comprised of principal repayments of $14, and
       interest of $5.

       Certain capital leases contain various covenants including a requirement
       that the Company must maintain a minimum cash balance (as defined in the
       lease agreement) during the term of the lease.  This covenant indirectly
       restricts the Company's ability to pay dividends.


NOTE 6 SUPPLEMENTAL BALANCE SHEET INFORMATION

       Accounts payable and accrued expenses are comprised of the following at
       December 31:
 
                                               1997     1996
                                             -------  -------
 
       Accounts payable                         490      764
       Accrued expenses                         402      341
       Accrued payroll related costs              8       42
       Severance payable                        233        -
       Legal and accounting fees payable        141      172
                                             ------   ------
                                             $1,274   $1,319
                                             ======   ======


NOTE 7 TERM NOTES PAYABLE


       At December 31, term notes payable is comprised of:

                                     F-17
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


                                                            1997   1996
                                                            ----   ----
       Term notes payable, including accrued interest
         of $39 and $44 at December 31, 1997 and
         1996, respectively                                  226   263
                                                             ---   ---


       The term note provides for interest, payable quarterly, at a rate of 8%
       per annum.  The noteholder holds a lien on all the assets of the Company.
       In connection with the issuance of the term note, the Company issued a
       warrant which provides the holder the right to acquire an aggregate of
       40,000 shares of the Company's common stock at $6.25 per share.  Any
       accrued and unpaid interest related to the term note may also be used to
       acquire additional shares of common stock at a price of $6.25 per share.
       The warrant expired on February 10, 1998.

       In November 1996, the note was amended ("Amended Note"), and related
       accrued and unpaid interest as of that date was deferred.  In
       consideration for the amendment, the Company issued a second warrant,
       which entitles the holder to purchase 20,000 shares of the Company's
       common stock at a price of $1.50 per share.  This warrant expires in
       November, 2001.  Upon issuance of the warrant, the Board determined the
       fair value to be $16.  Such amount is being amortized as deferred
       financing costs over the remaining life of the Amended Note.


       Pursuant to the Amended Note, future payments of principal and deferred
       interest are as follows:


       For the years ended December 31,

                            1998                $130
                            1999                  96
                                                  --
                                                $226
                                                 ===

       Interest expense related to the term note payable was not material to any
       of the periods presented.


NOTE 8 INCOME TAXES

       There is no provision (benefit) for federal, state or local income taxes
       for all periods presented, since the Company has incurred operating
       losses since inception and has established a valuation allowance equal to
       the total deferred tax asset.

       The tax effect of net operating loss carryforwards, temporary differences
       and research and experimental tax credit carryforwards as of December 31,
       1997 and 1996 were as follows:

                                     F-18
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


 
                                                               1997     1996
                                                               ----     ----
       Deferred tax assets:
       Net operating loss carryforwards                      15,765   13,117
       Research and experimental tax credit carryforwards       820      570
       Others                                                    33      147
                                                             ------   ------
          Total deferred tax assets                          16,618   13,834
          Valuation allowance                               (16,618) (13,834)
                                                             ------   ------
            Net deferred taxes                                    -        -
                                                             ======   ======
 
       As of December 31, 1997, the Company has available for tax purposes the
       following net operating loss carryforwards:
 
       United States (expires in various years from 2005 to 2012)    32,092
       Germany (no expiration date)                                   2,300
       United Kingdom (no expiration date)                            1,786

       The Company's research and experimental tax credit carryforward expires
       in various years from 2005 through 2012.

       The ownership change described in Note 3 will limit the use or continued
       availability of the Company's carryforwards.


NOTE 9 STOCK OPTION PLANS

       The Company maintains two stock incentive plans: the Employee Stock
       Option Plan, and the Non-Employee Director Stock Option Plan (the
       "Plans").  In aggregate, the Plans authorize grants of options to
       purchase up to 3,270,000 shares of authorized but unissued common stock.

       Employee Stock Option Plan

       In connection with the Transaction described in Note 3, the Company
       adopted Innovir's stock option plan (the "Employee's Plan") effective
       December 23, 1996.  Pursuant to the Employee's Plan the Company's Board
       of Directors may grant stock options to employees, directors, advisors,
       and consultants ("participants").  The Employee's Plan authorizes grants
       of options to purchase up to 3,000,000 shares of authorized but unissued
       common stock.  Such amount is subject to adjustment for stock splits,
       stock dividends and other capital adjustments as defined in the
       Employee's Plan.  The options will be awarded by the Board or a committee
       that will determine the option price and vesting period, which may not
       exceed 10 years.  Generally, awards vest on a pro rata basis over two to
       five years, have a term of ten years, and except as noted below, have
       exercise prices equal to the market value on the date of grant. The
       Employee's Plan terminates during March 2003.

       Non-Employee Director Stock Option Plan

       The Company adopted a Non-Employee Director Stock Option Plan (the
       "Director's Plan"). Under the Director's Plan, 270,000 shares of the
       Company's common stock have been reserved for stock option

                                     F-19
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data


       awards. Each new non-employee director is automatically granted an option
       to purchase 30,000 shares of common stock on the date on which the non-
       employee director is initially appointed or elected as a director
       ("Initial Option Grant"). Additionally, each non-employee director who
       continuously serves on the Board for a two year period following their
       initial appointment or election is automatically granted, on the non-
       employee director's second anniversary and each anniversary thereafter,
       an option to purchase an additional 10,000 shares of common stock
       ("Anniversary Option Grant"). For each grant, the exercise price is equal
       to the fair market value of the Company's common stock on the date of
       grant, and the term of the option is five years from the date of grant.
       The Initial Option Grant vests ratably at six month intervals over a
       three year period. The Anniversary Option Grant vests 50% on the
       eighteenth month following the date of grant, and 50% two years following
       the date of grant.

       At December 31, 1997, there were 958,873 additional shares available for
       grant under the Plans.  The per share weighted-average fair value of
       stock options granted during 1997 and 1996 was $0.30 and $1.29 on the
       date of grant using the Black Scholes option-pricing model with the
       following weighted-average assumptions:  1997 - zero dividend yield,
       expected volatility of 109%, risk-free interest rate of 6.2%, and an
       expected life of 4 years;  1996 - zero dividend yield, expected
       volatility of 83%, risk-free interest rate of 5.7%, and an expected life
       of 4 years.

       The Company applies APB Opinion No. 25 in accounting for its Plans and,
       accordingly, no compensation cost has been recognized for its stock
       options in the financial statements.  Had the Company determined
       compensation cost based on the fair value at the grant date for its stock
       options under SFAS No. 123, the Company's net loss would have been
       increased to the pro forma amounts indicated below:
 
                                           1997      1996
                                         --------  --------
       Net loss:       
       As reported                       $10,049   $19,666
       Pro forma                          10,286    20,188
                       
       Loss per share: 
       As reported - basic and diluted      (.43)    (2.03)
       Pro forma - basic and diluted        (.44)    (2.08)
 

          Since all options were issued effective December 23, 1996, the pro
       forma net loss includes the full impact of calculating compensation cost
       for stock options under SFAS No. 123.

                                     F-20
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 
 

        Stock option activity for the Employee's Plan during the periods
        indicated is as follows:
 
<TABLE> 
<CAPTION> 
 

                                                            Weighted-
                                            Exercise          Average    Number of
                                         Price Range   Exercise Price       Shares
                                         ------------  --------------  -----------
<S>                                      <C>           <C>             <C>
 
       Outstanding options as of date
          of the Transaction,            $2.25-$12.00           $4.27   1,501,625
       Granted(a)                        $       1.30           $1.30   1,860,089
       Canceled(a)                       $2.25-$12.00           $4.31  (1,451,925)
                                                                -----  ----------
 
       Balance outstanding,
           December 31, 1996             $ 1.30-$9.75           $1.35   1,909,789
 
       Granted                           $.6875-$1.30           $1.18   1,135,300
       Canceled (b)                      $       1.30           $1.30    (922,601)
                                                                -----  ----------
 
       Balance outstanding,
           December 31, 1997             $  .84-$9.75           $1.16   2,122,488
                                                                =====  ==========
 
</TABLE>
(a)  Upon completion of the Transaction discussed in Note 3, the Company's Board
     approved the cancellation  and regranting of approximately 1.4 million
     options.  The repriced options vest over a four year period and have an
     exercise price of $1.30.  The fair market value of the Company's common
     stock on the date of repricing was approximately $1.15.
(b)  In connection with severance of certain employees, options which had been
     granted to the employee, but were not yet vested, were canceled.  The
     exercise term for options in which the employee was vested was extended.
     All other features of the options were unchanged.

                                     F-21
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 


       Stock option activity for the Director's Plan during the periods
       indicated is as follows:
<TABLE>
<CAPTION>
 
                                                        Weighted
                                            Exercise     Average      Number of
                                         Price Range  Exercise Price    Shares
                                         -----------  --------------  ----------
<S>                                      <C>          <C>             <C>
 
       Outstanding options as of date
          of the Transaction,            $0.97-$7.75           $3.51    145,000
       Granted                           $      1.16           $1.16    120,000
       Canceled                          $0.97-$7.75           $3.02   (130,000)
                                                               -----   --------
 
       Balance outstanding,
           December 31, 1996             $1.16-$7.75           $1.89    135,000
 
       Granted                           $0.88-$0.94           $0.92     40,000
       Canceled                          $      1.16           $1.16    (90,000)
                                                                        -------
 
       Balance outstanding
           December 31, 1997             $0.88-$7.75           $2.21     85,000
                                                                       ========
</TABLE>
        At December 31, 1997, weighted-average remaining contractual life of
        outstanding options was 9 years.

        At December 31, 1997 and 1996, the number of options exercisable under
        the Plans was 723,697 and 293,390, respectively.  958,873 and 1,121,572
        shares of the Company's common stock were reserved for future awards
        under the Plans at December 31, 1997 and 1996, respectively.

NOTE 10 COMMITMENTS

        In addition to the leases described in Note 5, the Company has made
        several commitments which are described below:

        Severance Agreement

        The Company had an employment contract with an officer/stockholder which
        was to expire in November, 1999.  Effective October 1, 1997 (the
        "Separation Date"), the Company and officer entered into a separation
        agreement.  In connection with the separation agreement, the Company
        agreed to pay the officer $200 in twelve equal monthly installments. The
        full amount was charged to expense at the separation date. Payments of
        $33 have been made through December 31, 1997; the remaining $167 is
        included in accrued expenses on the balance sheet.

        The Company entered into Separation Agreements with two other employees.
        In connection with these agreements, severance payments totaling $85
        were charged to expense. At December 31, 1997 $66 is included in accrued
        expenses, and will be paid during the first half of 1998.

                                     F-22
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 

       Consulting Agreements

       On November 1, 1997 the Company entered into has an agreement with a
       consultant under which the Company pays the Consultant a fee of $2.5 per
       month for a minimum commitment of four days per month. The Consultant is
       paid an additional $0.5 for each additional day over the minimum. The
       term of the Agreement continues until October 31, 2001, although either
       party may terminate the agreement at any time provided they give 60 days
       notice of their intent. In addition to the remuneration, the Consultant
       received options to purchase 40,000 shares of the Company's common stock
       at $.6875 per share, which was the market value at the date of grant. The
       options vest in four equal installments at the end of each year through
       October 31, 2001.

       The Company has several agreements with consultants, two of whom are
       stockholders ("stockholder/consultants").  The consultants perform
       services for the Company in consideration for certain fees.  The
       consultants have also agreed to assign the Company any inventions, ideas,
       patents, and copyrights conceived,  related to the Company's business and
       provide other services as defined in the agreement.  To date, payments
       under these agreements has not been material.  Future minimum quarterly
       payments to the stockholders/consultants are approximately $46 through
       March, 1998 and $24, hereafter until March 31, 2000.  Under certain
       conditions, the Company may have to pay additional amounts ("Patent
       Awards") in the event the research performed by one of the consultants
       leads to the issuance of a patent.  Patent Awards to date have not been
       material.

       The Company had various other consulting agreements, all of which either
       expired during 1997, or have no significant payments due.

       Collaborative Research Agreement

       In conjunction with the New York State Science and Technology Foundation
       (the "Foundation"), the Company has agreed to support collaborative
       research at a University.  Under the terms of this agreement, which is a
       renewal of a previous one-year contract, the Company and the Foundation
       have agreed to reimburse the University for $125 of direct costs, split
       60%/40% between the Company and the Foundation, plus certain indirect
       costs.  The agreement covers the period from July 1, 1997 through June
       30, 1998.  As of December 31, 1997, the Company had made payments
       totaling approximately $45, and expects to make two additional payments,
       which should aggregate $45. The Company expects that the agreement will
       be extended for an additional one-year period.

       Licensing Agreements

       The Company (as licensee) has entered into an exclusive worldwide
       licensing agreement with Yale  University  whereby the Company has the
       exclusive right to use certain technology owned by the University.
       According to the terms of the agreement, as amended, the Company is
       required to pay royalties which commence one year after the first sale of
       a product developed from the licensed technology. Such royalties are
       based upon the greater of annual minimum royalties, as defined, or a
       percentage of net sales of licensed products and a portion of
       sublicensing income as defined. Annual minimum royalties are not
       material. The licensing agreement expires on a country by country basis
       as the underlying patents expire in such country.  In addition, the
       license may be terminated in the event that the Company fails to
       implement a plan directed at development and commercialization of
       products based on the licensed technology or if the Company fails to
       satisfy certain other contractual obligations. In the event of
       termination, all licensing rights under the agreement would revert to the

                                     F-23
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 


        university. The termination of the license would have a material adverse
        effect on the business of the Company. Although the Company intends to
        use its best efforts to comply with the terms of the license, there can
        be no assurance that the licensing agreement will not be terminated. The
        Company believes, based on the opinion of counsel, that the use of this
        licensed technology does not infringe on a patent held by a third party.
        Nevertheless, there can be no assurance that infringement proceedings
        will not be brought against the Company.

        In April 1994, the Company (as licensee) entered into another non-
        exclusive licensing agreement with a university whereby the Company has
        the non-exclusive, non-transferable right to use certain technology
        owned by the university. According to the terms of the agreement, the
        Company is required to remit royalties on a quarterly basis, at various
        rates, as defined. In addition, the Company is required to pay a minimum
        annual advance on earned royalties ("Advance") of $10 which is non-
        refundable, but may be credited, as defined, against future royalties
        due to the university. Advances paid to date have not been material.
        Royalties shall continue to be payable, irrespective of the termination
        of this license agreement, until such time as all sales of licensed
        products shall have ceased.

        During 1996, the Company entered into a research collaboration and
        licensing agreement  with a pharmaceutical company ("Pharmaceutical
        Company"). Under the terms of the agreement, the Pharmaceutical Company
        and the Company will jointly develop certain technology and the
        Pharmaceutical Company obtained certain rights to the technology or will
        receive a defined royalty in the event the Company licenses the
        technology to the third party. The agreement also provides for the
        Pharmaceutical Company to make defined payments to the Company upon the
        occurrence of certain events related to the technology's development and
        the achievement of defined milestones. The agreement is for one year
        unless extended by both parties.  During the years ended December 31,
        1997 and 1996, the Company received $108 and $40 respectively, from the
        Pharmaceutical Company in accordance with the agreement. Such amounts
        have been included in Other Income.

NOTE 11 CONTINGENCIES

        The Company is aware of patents in the United States and Europe and
        related pending patent applications in other countries held by an
        unaffiliated third party relating to certain technology which may be
        infringed by certain of the Company's compounds, in which event a
        license from such third party would be required. The Company is
        currently evaluating its patent position.

        The Company may be considered to be in violation of the terms of its
        office and laboratory sublease by not obtaining the required approval
        from the owner of the property prior to the consummation of the
        Transaction described in Note 3.  In addition, the owner of the property
        has alleged, and the Company's sublandlord disputes, that the
        sublandlord may also be in breach of its lease with the owner of the
        property. If the sublandlord is evicted, the Company would lose its
        right to occupy its current space. While the Company believes these
        matters may be resolved without a materially adverse effect on the
        Company's business or financial position, the ultimate outcome can not
        be predicted.

NOTE 12 STOCKHOLDERS' EQUITY

        After the recapitalization described in Note 3 and subsequent Board
        resolutions, the Company is authorized to issue 15 million shares of
        preferred stock and  70 million shares of common stock.  The Company's
        Board, at its sole discretion, can issue series of preferred stock with
        each series having

                                     F-24
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 


        rights, privileges, and qualifications determined by the Board. As of
        December 31, 1997, the Company has outstanding Class B Convertible
        Preferred Stock whose rights are as follows:

           Holders of Class B Preferred Stock have no voting rights and are
           entitled to receive dividends equal to those of common stockholders
           on a per share basis as if Class B Preferred Stock had been converted
           to common stock.  Class B Preferred Stockholders also have a
           liquidation preference of $5.00 per share, or such greater amount as
           determined by the Board, in the event of a liquidation, dissolution,
           or winding-up of the Company.  The Class B Preferred Stock's
           conversion feature provides for each share of Class B Preferred Stock
           to be converted into shares of common stock, at the option of the
           holder, at a floating rate equal to the result of dividing $5.00 by
           65% of the average of the closing bid prices of the common stock for
           the five days preceding conversion, as defined. The average closing
           bid price to be used in the calculation shall not be less than $5.00.

       The Company also has outstanding an aggregate of 7,957,306 warrants.  The
       warrants were issued in connection with debt and equity financings, and
       in consideration for services and a license.  The exercise prices of the
       warrants range from $0.05 to $9.50 and expire at various dates from 1998
       to 2006.  As of December 31, 1997, the weighted average exercise price of
       the warrants was $4.72, and all 7,957,306 of the warrants are
       exercisable.  In connection with warrants issued in 1996 in consideration
       for the debt financing, services and a license, the Company recorded the
       fair value of the warrants as an increase to paid-in capital with a
       corresponding increase in deferred financing cost, for debt financing, or
       a charge to operations for services and licensing fees.  In situations
       where warrants have been issued in advance of the rendering of services,
       the Company classified such amount ("Unearned Compensation") as a
       reduction to stockholders equity. On December 31, 1997, the Company
       issued to VIMRX a warrant to purchase 1,000,000 shares of common stock at
       a price of $0.394/share. Additionally, all services related to warrants
       issued in 1996 were rendered in 1997, so at December 31, 1997 there is no
       longer any Unearned Compensation included in stockholders' equity.

       In August 1997, warrants to purchase 1,000,000 shares of Common Stock at
       $1.00 per share were exercised by VIMRX.  In addition, at December 31,
       1997, VIMRX owns warrants to purchase an additional 1,000,000 shares of
       Common Stock at an exercise price of $2.00 per share and another
       1,000,000 shares of common stock at an exercise price of $0.394/share.
       In August 1997, warrants to purchase 2,000,000 shares of Common Stock at
       $0.50 per share were exercised by certain other shareholders.  On
       December 30, 1997, VIMRX purchased an additional 5,080,436 shares of
       previously unissued Common Stock at $0.39 per share, which was the market
       price for the Company's publicly traded shares on that date.  At December
       31, 1997, VIMRX owns approximately 70% of the Company's common stock.

       At December 31, 1996, the Company also had 8,666,667 shares of Class D
       Preferred Stock outstanding. As described in Note 16, the shares were
       automatically converted to 8,666,667 shares of common stock on July 1,
       1997. There were no Class D Preferred Shares outstanding at December 31,
       1997.

                                     F-25
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 


NOTE 13 EMPLOYEE BENEFIT PLANS

        The Company operates two defined contribution retirement plans (the
        "Plans").  The terms of the Plans, among other things, allow certain
        eligible employees who have met certain age and service requirements to
        participate in the Plans.  The Company contributes defined amounts,
        generally equal to 50 cents on the dollar for the first 6% of the
        employees salary.  In addition, the Company may make discretionary
        contributions to the Plans.  Contributions to date have not been
        material.

NOTE 14 RELATED PARTY TRANSACTIONS

        At of December 31, 1997, the Company owed VIMRX $838 which represents
        cash advances from VIMRX and expenses paid by VIMRX on behalf of the
        Company. The amount due bears no interest and has no set payment dates.
        At December 31, 1996, the balance was related to obligations which arose
        from the Transaction discussed in Note 3. In addition, an agreement (the
        "Agreement") with VIMRX permits the Company to issue a put notice to
        VIMRX on a monthly basis to cover cash needs. Under the terms of the
        Agreement, within 15 trading days of the put notice, VIMRX will purchase
        up to $5,000 of Innovir common stock at a price equal to the average
        closing bid price for the 15 days prior to the date the put notice was
        issued or $1.30/share, whichever is lower. Other related party
        transactions are described in Notes 1, 3, 5, 6 and 12.

NOTE 15 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

        Carrying values of cash and cash equivalents, employee loan receivables,
        accounts payable and accrued interest approximate fair value because of
        the short term maturity of these instruments.
 
        The carrying amount of the term note payable and debt related to capital
        leases approximates fair value because the Company believes the
        instruments could be exchanged in a current transaction for the carrying
        amount.

NOTE 16 NONCASH FINANCING AND INVESTING ACTIVITIES

        Capital lease obligations of $126, $545 and $0 were incurred in 1997,
        1996 and 1995, respectively, when the Company entered into leases for
        new equipment.

        During 1997, the Company converted 17,000 shares of Class B Convertible
        Preferred Stock into 26,000 shares of Common Stock.  All of the
        outstanding shares of Class D Convertible Preferred Stock ("D Preferred
        Stock") were automatically converted to 8,666,667 shares of Common Stock
        on July 1, 1997.

NOTE 17 GEOGRAPHIC INFORMATION

        Information on the Company's geographic operations is set forth below:

                                     F-26
<PAGE>
 
INNOVIR LABORATORIES, INC. and SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
All amounts in thousands except share and per share data 

 
                                        1997     1996   1995
                                       -------  ------  -----
       Operating loss:
          United States                $ 7,294  18,131     --
          Europe                         2,755   1,535  2,026
                                       -------  ------  -----
            Total operating loss       $10,049  19,666  2,026
                                       =======  ======  =====
 
       Identifiable assets:
          United States                $ 4,283  10,021     --
          Europe                         1,451   1,053    341
                                       -------  ------  -----
            Total identifiable assets  $ 5,734  11,074    341
                                       =======  ======  =====

                                     F-27
<PAGE>