<PAGE>

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


[ X ]     Annual Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934
          For the fiscal year ended December 31, 1997

                                      OR

[   ]     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>

PART I

ITEM 1.  BUSINESS

GENERAL

  Innovir Laboratories, Inc. (together with its subsidiaries, the "Company" or
"Innovir") is a biotechnology company engaged in the research and development of
a new class of biopharmaceutical  agents to fill a growing need in the
pharmaceutical industry for better methods to identify and validate targets for
drug discovery.

  The Company's core technologies are based on the use of several types of
compounds collectively termed oligozymes.  Innovir has defined an oligozyme as a
catalytically interactive oligonucleotide that  participates in the sequence-
specific cleavage of a targeted RNA molecule.

  One of these core technologies is designed to utilize Innovir's proprietary
EGS ("External Guide Sequence") oligozyme technology to direct a cellular
ribozyme to disease-causing RNA, so that the ribozyme will cleave the RNA and
thus render it inactive.  An EGS oligozyme is a small, often chemically modified
oligonucleotide segment that binds to a disease-causing RNA to create a
structure resembling a type of RNA which is cleaved by a specific ribozyme in
cells.  This naturally occurring cellular ribozyme, called RNase P, has been
harnessed to cleave such newly formed structures, thereby destroying the
disease-causing RNA molecules before they can be used to create disease-causing
proteins.  The Company's EGS oligozyme technology is based upon Nobel Prize-
winning research by Sidney Altman, Ph.D., Sterling Professor of Biology at Yale
University.  Dr. Altman is a consultant to the Company and a member of its
Science Advisory Board.  The Company has an exclusive worldwide license from
Yale University to use the EGS technology, for which a United States Patent (No.
5,168,053) was issued in December 1992 and a second in 1996.  Innovir has
further developed independently the EGS oligozyme technology.  Additional
related patent applications by Innovir and Yale either have been issued in other
territories or are pending and the Company has exclusive, worldwide rights to
the Yale patents.

  The Company also has acquired a worldwide exclusive license from the European
Molecular Biology Laboratory for the rights to RILON(TM) oligozymes composed of
certain types of chemically modified oligoribonucleotides. RILON(TM) oligozymes
have the intrinsic ability to cut a targeted RNA in a catalytic manner. The
Company has licensed U.S.,  European, Japanese and Australian patents for this
technology and has additional pending patent applications.

  The Company believes that its oligozyme technologies can be used effectively
for identification and validation of novel targets for drug discovery (drug
target validation). Recent progress in mapping and sequencing the human genome,
and in determining the sequence of certain RNAs that are hyper-expressed in
specific disease states, has increased the likelihood that diagnostics and
therapeutics will be developed for diseases that have been untreatable to date.
The ability to cut and thereby inactivate specific RNAs using oligozyme
technology, together with the improvements in mapping and sequencing of genes,
will allow scientists to determine which genes and gene products are important
for the manifestation of a particular disease state. Innovir believes that,
based on its core technologies, its products being developed for this type of
validation of a specific target for a disease will facilitate the discovery and
development by pharmaceutical and biotechnology companies of novel therapeutics
and may enhance the Company's ability to partner with one or more such companies
to determine the mechanistic bases of various diseases.

  Innovir, a Delaware corporation, was founded in 1989 to engage in the research
and development of novel biopharmaceutical therapeutic agents, based on its EGS
Oligozyme technology, with the potential to treat a wide array of human
diseases. The Company had chosen hepatitis B, psoriasis and bacterial infections
caused by drug-resistant microorganisms as the primary targets of its discovery
and research programs. Over the past several years, the Company had dedicated
significant resources to these discovery and research programs and, in the case
of hepatitis B, had begun a series of animal studies to evaluate formulations of
the EGS oligozyme drug candidates. However, due to the large costs associated
with drug development and the Company's limited financial resources, Innovir has
determined to focus its research and development efforts in the area of drug
target validation

                                       2
<PAGE>

which the Company believes has substantial commercial value and requires
substantially less investment for successful commercialization than does the
development of therapeutics. The Company may resume its therapeutic development
programs in the event it identifies a corporate partner to finance such
programs; however, there can be no assurance that the Company will be able to
identify such a corporate partner.

  In December 1996, in connection with the acquisition by VIMRX Pharmaceuticals
Inc. ("VIMRX") of a majority interest in the Company, the Company acquired all
of the issued and outstanding capital stock of VIMRX's subsidiary, VIMRX
Holdings, Ltd. ("VHL"), which first developed RILON oligozymes.  VHL has two
active wholly-owned subsidiaries, Innovir Ltd. and Innovir GmbH.  See "Certain
Relationships and Related Transactions." Unless the context otherwise requires,
all references herein to the "Company" or "Innovir" shall mean the consolidated
entity of Innovir, VHL and subsidiaries.  VIMRX currently owns approximately 70%
of the Company's stock.  See "Security Ownership of Certain Beneficial Owners
and Management."


APPLICATION OF OLIGOZYME TECHNOLOGY FOR DRUG TARGET VALIDATION

  The Company believes that Innovir's core oligozyme technologies have powerful
applications in the area of drug target validation. Rapid gains made in the last
few years in the field of gene discovery and genome sequencing have resulted in
the identification of a multitude of genes associated, or potentially
associated, with various diseases. Identifying the function of these genes and
their products may prove to be invaluable for the development of therapeutic
agents targeted to diseases with which these genes are associated. An important
step in the elucidation of the function of these genes is the inactivation of
these genes or their products in cell and animal models of these diseases.
Techniques that are currently being used for these purposes are either
cumbersome and time-consuming or are unreliable. The Company believes that
oligozymes can be excellent tools for this application because they can be
readily designed to inactivate any target RNA. They also offer the required
specificity necessary for the selective inactivation of the target RNA. In
addition, the oligozymes are relatively inexpensive and easy to produce for this
purpose, thereby offering the ability to inactivate a large array of target
RNAs. The Company has successfully demonstrated the utility of its Oligozyme
technology in several cell culture and animal models.

  The Company is presently developing products based on its oligozyme technology
which rapidly identify accessible cleavage sites within the mRNA and
simultaneously selects specific oligozymes which cut the target mRNA. This
cleavage rapidly blocks the translation of the mRNA into proteins such as
enzymes or receptors that are associated with specific disease states.
Identification of such cleavage sites has been a difficult challenge. The
limited success with which this challenge has impeded progress in the antisense
and ribozyme research areas for many years. The Company's new technology, called
functional ribozyme selection, ("FRS"), is believed to be particularly effective
because it not only rapidly identifies suitable cleavage sites within the
environment of living cells which is what is required for utility in target
validation. A patent application covering this technology has been filed. The
Company believes this technology may significantly enhance its ability to
develop corporate partnerships in the drug target validation and therapeutic
research areas.


PATENTS, PROPRIETARY TECHNOLOGY AND LICENSES

The Company has an extensive patent estate covering its EGS oligozyme and
RILON(TM) oligozyme technologies.

  In 1990, the Company obtained rights with respect to certain patented
technology entitled "External Guide Sequences for an RNA Enzyme," pursuant to an
exclusive, worldwide license granted to the Company by Yale University.  This
license, which is for a term equal to the life of the patent, relates to the EGS
technology invented by Dr. Altman in his capacity as an employee of Yale
University.  The license, which was subsequently amended in November 1994 and
August 1996, may be terminated in the event that the Company fails to implement
a plan directed at commercialization of products based on the licensed
technology, or if the Company fails to satisfy certain other contractual
obligations. The Company is currently implementing a plan pursuant to the Yale
Agreement and believes


                                       3
<PAGE>

it is in compliance therewith. However, upon termination, all the Company's
licensed rights would revert to Yale University. The termination of the license
would have a material adverse effect on the Company's operations.

  A  U.S. Patent for this EGS oligozyme technology was issued in December 1992
and expires in December 2009.  There are now 5 U.S. patents, one application
pending and corresponding pending and issued foreign patents.  Pursuant to the
license agreement with Yale University, all of these patent applications and
patents have been assigned to and are the property of Yale University. Under the
license agreement, the Company has exclusive commercialization rights under all
of these patents.

  Yale and the Company each have one, and Yale and the Company together have one
(total of three)  pending U.S. patent applications directed to the conversion of
drug resistant organisms to drug sensitive organisms. The Company also has three
pending U.S. patent applications and corresponding foreign applications directed
to the EGS technology. There is one patent covering regulatable EGS oligozymes
and one U.S. patent application,  and corresponding foreign applications are
pending.

  The Company has acquired an exclusive license to European Molecular Biology
Laboratories ("EMBL") patents directed to 2'-O-alkyl modified hammerhead
ribozymes containing as few as six residual ribonucleotides issued in the U.S.
and Australia and pending in Europe, Canada and Japan.  Two U.S. patents, 6
pending applications and corresponding foreign applications pending on other
types of RILON(TM) oligozymes were filed originally by VIMRX and have been
assigned to the Company.

  In July 1993, the Company was issued a U.S. Patent relating to the use of its
delta ribozyme technology, which patent expires July 2010. One U.S. and
corresponding foreign patent applications are pending.

  A U.S. Patent relating to the Company's use of its hepatitis delta virus-based
vectors for the continuous administration in vivo of EGS oligozymes or ribozymes
issued in July 1993, and expires in July 2010.  Two divisional U.S. and
corresponding foreign patent applications are pending.

  The Company also has two U.S. patent applications and corresponding foreign
applications on its InnoPhor(TM) delivery technology. The Company has also
filed, in the U.S., a patent application covering its FRS site selection
technology.

  In summary, the Company owns 8 U.S. patents and allowed U.S. patent
applications and 14 U.S. applications and corresponding foreign applications and
issued patents and has rights to 5 Yale patents and 2 patent applications as
well as corresponding foreign applications and patents for therapeutic uses of
oligozymes, oligonucleotide delivery, and diagnostic applications of ribozymes.

  U.S. Patent No. 4,987,071, called the "Cech Patent," claims the use of
exogenously produced, or nonnatural ribozymes.  The Cech Patent has been
licensed to Ribozyme Pharmaceuticals, Inc. ("RPI") of Boulder, Colorado.  The
Company believes, based on the opinions of counsel, that the use of its EGS
Oligozyme technology  and the RILON(TM) oligozyme technology does not infringe
the Cech Patent.  However, there can be no assurance that infringement
proceedings will not be brought against the Company. Oppositions have been filed
by the Company  and others against the European patent corresponding to the Cech
patent. The European Patent Office Opposition Division has recently issued a
preliminary opinion that certain allowed claims in this patent are not supported
by the applications as originally filed.

  The Company believes that its business objectives can best be met by combining
its in-house research and development efforts with licenses and research
collaborations with scientists at outside academic and clinical research
centers.  These arrangements may commit the Company to fund research to reach
milestones by specific target dates and, upon commercial sale of products, pay
royalties.  The failure of the Company to fulfill its obligations under such
arrangements could result in termination of its rights thereunder, which could
have a material adverse effect on the business of the Company.


                                       4
<PAGE>

  As consideration for the rights granted under the Yale license, the Company is
obligated to pay Yale University earned royalties, a percentage of the fees
received by the Company from sublicensing its rights under the license, and
additional annual payments starting one year after the first sale of any
licensed products.  Failure by the Company to meet its payment obligations would
put the Company in breach of the Yale license.

  In April 1994, the Company (as licensee) also entered into a non-exclusive
licensing agreement with Stanford University ("Stanford") whereby the Company
has the non-exclusive, non-transferable right to use certain technology owned by
Stanford which allows the Company to use recombinant DNA technology for the
development of its products.  According to the terms of the agreement, the
Company paid an initial fee of $7,500 to acquire the license and will be
required to remit royalties on a quarterly basis, at various rates, as defined,
beginning after the first commercial sale of a licensed product, as defined.  In
addition, commencing on February 1, 1995, the Company was required to pay a
minimum annual advance on earned royalties of $10,000, which is nonrefundable,
but may be credited, as defined, against future royalties due Stanford.
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 or the patent expires.


MANUFACTURING

  The Company currently manufactures its own EGS oligozymes and RILON(TM)
oligozymes for research purposes. The Company does not anticipate that its
target validation programs will require manufacturing capacity beyond its
current capabilities.


COMPETITION

  The biomedical industry is highly competitive.  Competition in the field in
which the Company is engaged is intense and expected to increase as knowledge
and interest in the technology and products being developed by the Company
increase.  The Company faces competition from specialized biotechnology
companies, large pharmaceutical companies, academic institutions, government
agencies and public and private research organizations, many of which have
extensive resources and experience in research and development. Some of these
entities have significant research and development activities in areas upon
which the Company's programs focus.  Many of the Company's competitors possess
substantially greater research and development, financial, technical, marketing
and human resources than the Company. It is also possible that other companies
may be developing target validation methods not based on ribozyme technology
which, if effective, could render the Company's proposed products obsolete.

  Several biotechnology companies in the United States and in foreign countries
are dedicated solely to the development of ribozymes as therapeutics and as
tools for target validation.  In the United States, RPI is the licensee of the
Cech Patent and is developing ribozymes for viral diseases and other diseases.
Immusol, Inc., located in La Jolla, California, is developing hairpin ribozymes
for several viral diseases, including HIV, and has a license from Northern
Illinois University for the use of the hairpin ribozyme in the U.S.  Hybridon,
Inc., located in Worcester, Massachusetts, is devoting a portion of its effort
to ribozyme technology; the bulk of its research and development work is focused
on anti-sense.  Other competitors in the biotechnology arena include Gene Shears
Pty Ltd. in Australia. The Company is not aware, at this time, of any major
pharmaceutical company that is developing ribozyme-based drugs independently of
an association with a biotechnology company, although such development may be
taking place.


                                       5
<PAGE>

COLLABORATIVE AGREEMENTS

  From time to time, it may be necessary for, or beneficial to, the Company to
enter into collaborative agreements with third parties with respect to research
and development, manufacturing or marketing and distribution.  The Company
currently is party to a collaborative research and development project, pursuant
to which New York State Science and Technology Foundation (the "Foundation")
provides grant monies to Cornell University Medical College to perform the
project entitled "Screening Messenger RNA Molecules for Regions Susceptible to
Ribozyme Cleavage"  under the direction of Dr. Hugh D. Robertson, a professor at
Cornell, who is also a consultant to the Company and Chairman of the Company's
Science Advisory Board.  The Company, although not a party to the agreement, is
a "cooperating institution" and is responsible for providing a portion of the
total funding for such research project. Project studies are conducted at the
facilities of both Cornell and the Company, with Cornell being required under
the agreement to submit periodic progress reports to the Foundation.  In the
event proprietary technology is developed at Cornell during the course of the
project, Cornell would retain the patent rights to such technology, and the
Company would be eligible to obtain license rights thereto.


EMPLOYEES

  As of March 25, 1998, the Company had 20 full time employees in the United
States, including one (1) executive officer, four (4) scientists who hold Ph.D.
degrees, twelve (12) research associates, one (1) senior administrator, one (1)
administrative assistant and one (1) laboratory administrator.  In Europe, the
Company has 24 full-time employees, including two (2) senior scientist managers,
seven (7) scientists who hold Ph.D. degrees, thirteen (13) research associates
and two (2) administrative assistants.  The Company believes that its relations
with its employees is satisfactory.


RISK FACTORS

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
certain of the risk factors set forth below and elsewhere in this report.

  Development Stage Company; Accumulated Deficit; Continuing Losses;  The
Company is in the development stage and has generated no operating revenues.
Since its formation in 1989, the Company has been principally engaged in
organizational activities, research and development, licensing and patent
activities and financing arrangements.  All of the Company's proposed products
are in the early stages of research and development, and the Company does not
expect to have products commercially available for a number of years.  The
Company's operations are subject to numerous risks associated with development
stage businesses, including, but not limited to, unforeseen problems, expenses,
complications and delays frequently encountered in the early phases of research
and development, rapidly changing technology, exhaustive regulatory scrutiny of
such technology, difficulties in production and marketing and the highly
competitive environment in the biotechnology and pharmaceutical industries.
Many of these factors are beyond the Company's control.  There can be no
assurance that the Company's research and development efforts will be
successful, that the Company will ever have commercially viable products or that
the Company will achieve significant sales of any such products.  At December
31, 1997, the Company had an accumulated deficit of approximately $31,741,000,
and losses have continued to date thus increasing the accumulated deficit.  The
Company does not anticipate generating any revenues from therapeutic products
for a number of years, if ever, and will continue to incur losses as the Company
increases expenditures for product development, research studies and patent
activities.  Since its inception, the Company has experienced negative cash
flows from operations and expects such condition to continue for the foreseeable
future.

  Significant Capital Requirements; Need for Additional Financing; Imminent
Exhaustion of Funds.  The Company will require additional capital to finance its
drug target validation program.  The Company will seek to


                                       6
<PAGE>

obtain additional funds from various sources, including additional public or
private equity financings and collaborative or other arrangements with corporate
partners, which may involve the sale, licensing or spinning off of certain of
the Company's technologies. There can be no assurance that any such financing
can be obtained on terms satisfactory to the Company, if at all. If additional
funds are not obtained when needed, the Company will be required to curtail
significantly its activities or even to cease operations. At December 31, 1997,
the Company's cash and cash equivalents equaled approximately $2,159,000. Based
upon the planned level of operations, and if the Company is unable to consummate
additional financings, the Company will exhaust its cash and cash equivalents
during the first quarter of the year ended December 31, 1999. The Company has no
established banking arrangements through which it can obtain debt financing.

  Technological Uncertainty.  The Company's drug target validation program is at
a very early stage and is subject to the risks inherent in the development of
the program based on innovative technologies.  There can be no assurance that
the Company's technologies will result in commercially viable products or that
such products, if any, will be effective or beneficial for purposes of drug
target validation.  Several other companies are also developing drug target
validation techniques and may be at more advanced stages of development than the
Company.

  Dependence on Patents, Proprietary Technology and Licenses.  The Company's
success is dependent in large measure upon its ability to obtain patent
protection for its products, to maintain confidentiality of its trade secrets
and know-how and to operate without infringing upon the proprietary rights of
third parties.  See "Business-Patents, Proprietary Technology and Licenses."
There can be no assurance that any of the Company's pending patent applications
will be approved or that the Company will develop additional proprietary
products that are patentable.  There can be no assurance that any patents issued
or licensed to the Company will provide the Company with any competitive
advantages or that any of such patents will not be challenged by any third
parties, or that patents issued to others will not have an adverse effect on the
ability of the Company to conduct its business.  Furthermore, because patent
applications in the United States are maintained in secrecy until issue, and
because publication of discoveries in scientific and patent literature often
lags behind actual discoveries, the Company cannot be certain that it was the
first, chronologically, to develop the inventions covered by each of its pending
patent applications or that it was the first to file patent applications for
such inventions.  In the event that a third party also has filed a patent
application for any of such third party's inventions, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in a
denial of the Company's patent, and, even if the eventual outcome is favorable
to the Company, substantial cost to the Company may be incurred.  In addition,
there can be no assurance that any patents which are issued to the Company will
be held to be valid by a court of law reviewing any such patent.  If patents are
issued to other companies which contain claims which are competitive with, or
conflict with, claims contained in the Company's patents or patent applications
and those claims are held valid, the Company may need to license technology
covered by such patents granted to others, and there can be no assurance that
the Company will be able to obtain such licenses at a reasonable cost, if at
all.

  The Company believes, based on the opinion of patent counsel, that the use of
its EGS technology and related applications, for which it has an exclusive
license from Yale University, does not infringe the Cech Patent because external
guide sequences are not ribozymes.  It is possible, however, that an allegation
could be made that the Company's other ribozyme-based technology could be deemed
to infringe the Cech Patent, if the broadest claims of such Cech Patent were
determined by a court of law to be valid.  There can be no assurance that
infringement proceedings will not be brought against the Company.

  Dependence on License.  In 1990, the Company obtained rights with respect to
certain patented technology entitled "External Guide Sequences for an RNA
Enzyme," pursuant to a license granted to the Company by Yale University, and
upon which its EGS technology is based.  The license, as amended, 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.  Upon
termination, all of the Company's licensed rights would revert to Yale
University.  The termination of the license would have a material adverse effect
on the business of the Company.  Moreover, the Yale license requires payment by
the Company of royalties and other fees upon successful commercialization of the
Company's proposed products.  If the Company fails to pay such fees in a timely
manner it could be deemed to be in breach of the license.


                                       7
<PAGE>

  Competition and Technology Change.  Certain domestic and foreign companies are
also pursuing the development of ribozyme-based drug target validation tools.
Many of the Company's competitors (both those utilizing oligonucleotide-based
therapeutic technologies and those utilizing other biotechnological or
traditional drug development methods) have substantially greater capital
resources, research and development staffs and facilities than the Company.
These companies may develop and introduce products and processes competitive
with or superior to those of the Company, and may represent significant long-
term competition for the Company.  For the success of certain of the Company's
proposed products, an important factor may be the timing of market introduction
of these competitive products.  The field of biotechnology in which the Company
is engaged has undergone rapid and significant technological changes.  The
Company expects that the technologies associated with its research and
development will continue to evolve rapidly.  There can be no assurance that the
Company will be able to establish itself in such fields or, if established, that
it will be able to maintain a viable competitive position.  Further, there can
be no assurance that the development by others of new or improved ribozyme-based
products will not make the Company's products, if any, less competitive or
obsolete.

  Control by Principal Stockholder.  As of March 18, 1998, VIMRX owned
approximately 70% of the outstanding shares of Common Stock of the Company.  See
"Security Ownership of Certain Beneficial Owners and Management."  Accordingly,
VIMRX effectively controls the affairs of the Company and matters requiring a
stockholder vote, including the election of the Company's directors, the
amendment of the Company's charter documents, the merger or dissolution of the
Company and the sale of all or substantially all of the Company's assets.

  Trading Market; Possible Delisting from NASDAQ. The Common Stock currently
trades on the Nasdaq SmallCap Market ("NASDAQ"). NASDAQ has recently amended its
maintenance standards for continued listing, including a requirement that the
Company maintain a minimum bid price of at least $1.00 per share. On March 23,
1998, the closing bid price for the Company's Common Stock was $0.4375 per
share. NASDAQ recently notified the Company that, if the Company does not regain
compliance, the Company's securities will be delisted from NASDAQ. See "Market
for the Registrant's Common Stock and Related Stockholder Matters." There can be
no assurance that the Company will regain compliance with such minimum bid price
requirement or that the Company will remain in compliance with the other
maintenance standards for continued listing and that the Company's securities
will continue to be listed on NASDAQ. In the event the Company's securities are
so delisted, trading, if any, in the Company's securities may thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold at a given price, but also through delays in the timing of
transactions, reduction in security analysts' and the news media's coverage of
the Company, resulting in lower prices for the Company's securities than might
otherwise be attained and a larger spread between the bid and asked prices for
the Company's securities.

  Dependence on Key Personnel; Possible Conflicts of Interest. The Company is
also dependent on the part-time services of two key consultants, Dr. Sidney
Altman, who is employed by Yale University, and Dr. Hugh D. Robertson, who is
employed by Cornell University and who also is Chairman of the Company's Science
Advisory Board ("SAB") and a former director of the Company. The loss to the
Company of the services of either Dr. Altman or Dr. Robertson would have a
material adverse effect on the Company. Dr. Altman's consulting agreement, which
was renewed in March 1994, expires in March 1998. It is anticipated that Dr.
Altman's agreement will be renewed; however, there can be no assurance Dr.
Robertson's consulting agreement, which was renewed in March 1996, expires March
31, 2000.

  The Company's success also depends in large part on its ability to attract and
retain other qualified scientific and management personnel.  The Company faces
competition for the services of such persons from other companies, academic
institutions, government entities and other organizations.  There can be no
assurance that the Company will be successful in recruiting or retaining other
personnel of the requisite caliber or in adequate numbers to enable it to
conduct its business as proposed.

  The Company's consultants and SAB members are employees of and/or consultants
for universities, research hospitals or other similar institutions; they are
expected to devote only a portion of their time to the Company.  Such
consultants and SAB members may have employment, consulting or other advisory
arrangements with such other


                                       8
<PAGE>

institutions which may conflict or compete with their obligations to the
Company. In addition, while no claim has been asserted by any such institution,
there can be no assurance that such institutions will not assert claims to any
or all of the Company's inventions, technology or products or that if any such
institution does successfully assert such rights, the Company, if it so desires,
will be able to acquire the rights thereto from such institution at a
commercially practical cost, if at all.

  Legal Proceedings.  The Company has been named a defendant in an action
entitled Stanley A. Williams v. Innovir Laboratories, Inc. and Umberto Pace,
         ------------------------------------------------------------------
case number 97 Civ. 8122, filed by a former employee of the Company on or about
October 28, 1997 in the United States District Court for the Southern District
of New York. The complaint alleges that the Company did the following: (1)
discriminated against the plaintiff because of his race; (2) improperly
discharged the plaintiff; and (3) discriminated against plaintiff on the basis
of a disability. See "Legal Proceedings." The Company has denied all of the
claims and intends to vigorously defend against them. While the Company believes
that the litigation will be resolved without a materially adverse effect on the
Company's results of operations or financial position, no assurances can be
given as to the ultimate outcome of or the costs in defending this litigation.

  Use of Toxic and Hazardous Materials.  The Company's research and development
activities involve the controlled use of toxic and hazardous materials,
including chemicals, viruses and radioactive isotopes.  Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated.  In the event of such an accident, the Company could be held liable
for any damage that results and such liability could have a material adverse
effect on the financial condition of the Company.

  Product Liability Claims and Uninsured Risks.  If the Company succeeds in
developing its proposed products, it may be exposed to liability resulting from
the commercial use of such products.  Such liability might result from claims
made by pharmaceutical companies or others utilizing such products.  The Company
does not currently have product liability insurance.  There can be no assurance
that the Company will be able to obtain or afford such insurance, if applied
for, or that any coverage, if obtained, will be adequate to protect the Company
against liability.

  No Marketing and Sales Capability.  The Company has no experience in
marketing, sales or distribution.  To market any of its products directly, the
Company must develop a marketing and sales force with appropriate technical
expertise and supporting distribution capability.  Alternatively, the Company
may seek to obtain the assistance of a pharmaceutical company with a large
marketing system and a large direct sales force.  There can be no assurance that
the Company will be able to establish marketing and sales capabilities if and
when it has a product ready for marketing or be successful in gaining market
acceptance for its products or that it will be able to reach agreement with one
or more pharmaceutical companies to assist in or to undertake these efforts.

  Potential Volatility of Stock Price.  There has been significant volatility in
the market price of securities of  biomedical companies in general.
Announcements of technological failures, innovations or new commercial products
by the Company or its competitors, developments concerning proprietary rights or
public concern as to the safety, efficacy or costs of biomedical products and
period to period fluctuations in financial results may have a significant impact
on the Company's business and on the market price of the Company's securities.

  Preferred Stock.  The Company's Certificate of Incorporation provides that up
to 15,000,000 shares of  preferred stock may be issued by the Company from time
to time in one or more series.  The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series, without any vote or action by the Company's stockholders.  The Board of
Directors may authorize and issue preferred stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock. In addition, the potential issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock.


                                       9
<PAGE>

  Cash Dividends Not Likely.  The Company has not paid any cash dividends on its
Common Stock.  For the foreseeable future it is anticipated that earnings, if
any, which may be generated from the Company's operations will be used to
finance the growth of the Company and that cash dividends will not be paid to
holders of Common Stock.



ITEM 2.  PROPERTIES

  As of December 31, 1997, the Company sublets approximately 8,500 square feet
of space in New York, New York for its laboratory and executive offices at a
monthly rent of $26,416, with annual 4% increases for the remainder of the lease
term.  The sublease expires on May 31, 1999.

  The Company may be considered to be in violation of the terms of its sublease
by not obtaining the required approval from the owner of the property prior to
the consummation of the transactions with VIMRX in December 1996.  See "Certain
Relationships and Related Transactions" and notes to the Company's consolidated
financial statements.  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, which breach may be deemed to
constitute a breach by the Company of its sublease.  While the Company believes
that these matters may be resolved without a materially adverse effect on the
Company's business or financial position, no assurances can be given as to the
ultimate outcomes.

  The Company's indirect subsidiary in Great Britain, Innovir Ltd., occupies
approximately 5,000 square feet of space in Cambridge, England, under a monthly
lease at a rental of approximately $8,250.  The Company's indirect subsidiary in
Germany, Innovir GmbH, presently occupies approximately 4,000 square feet of
space in Rosdorf, Germany, under which it pays $5,000 rent per month.  The lease
commenced in January 1997 and expires on June 30, 2001.


ITEM 3.  LEGAL PRECEEDINGS

  The Company has been named a defendant in an action entitled Stanley A.
                                                               ----------
Williams v. Innovir Laboratories, Inc. and Umberto Pace, case number 97 Civ.
-------------------------------------------------------
8122, filed by a former employee of the Company on or about October 28, 1997 in
the United States District Court for the Southern District of New York. The
complaint alleges that the Company did the following: (1) discriminated against
plaintiff because of his race in violation of Title VII of the Civil Rights Act
of 1964 and similar state and local anti-discrimination laws; (2) discharged
plaintiff for disclosing that the Company failed to account for the disposal of
radionucleotides, which posed a potential safety hazard to the public, in
violation of New York's "Whistle Blower" statute, Labor Law Section 740, et
seq.; and (3) discriminated against plaintiff on the basis of a disability in
violation of the Americans With Disabilities Act. The Company has denied all of
the claims and intends to vigorously defend against them.

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

There were no items submitted to a vote during the fourth quarter of the fiscal
year ended December 31, 1997.



                                      10
<PAGE>

                                    PART II

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

  Since September 14, 1993, the completion date of the Company's initial public
offering ("IPO"), the Common Stock has been traded in the NASDAQ under the
symbol "INVR."

  NASDAQ recently notified the Company that it was not in compliance with the
new minimum bid price requirement of at least $1.00 per share.  If the Company
does not regain compliance with this requirement by May 28, 1998, NASDAQ will
issue a delisting letter, setting forth the review procedures available to the
Company.  In the event the Company's securities are so delisted, trading, if
any, in the Company's securities may thereafter be conducted in the "pink
sheets" or the "Electronic Bulletin Board."

  For the period from March 31,1996 through December 31, 1997, the high, low and
closing bid prices for the Common Stock on NASDAQ were as follows:

         QUARTER ENDING:            HIGH              LOW             CLOSE
                                    ----              ---             -----
         March 31, 1996             $5.00             $2.13           $4.38
         June 30, 1996              $4.88             $1.63           $2.00
         September 30, 1996         $2.00             $0.75           $1.44
         December 31, 1996          $1.25             $1.03           $1.19
         March 31, 1997             $1.25             $0.75           $0.75
         June 30, 1997              $1.25             $0.75           $1.09
         September 30, 1997         $1.31             $0.69           $0.87
         December 31, 1997          $0.84             $0.31           $0.38


  Such quotations represent prices between dealers, without adjustment for
retail mark-ups, mark-downs or commissions, and may not necessarily reflect
actual transactions.

  As of March 16, 1998, the Company's common stock was held by 2,000
stockholders of record, and the Company estimates there are approximately 600
beneficial stockholders.  No dividends have been declared or paid on the Common
Stock, and the Company does not contemplate the payment of cash dividends in the
foreseeable future.


ITEM 6.  SELECTED FINANCIAL DATA

  The following selected financial data have been derived from the Company's
audited financial statements. The Statement of Operations Data relating to the
fiscal years 1997, 1996, and 1995 and for the period from January 5, 1995
(inception) through December 31, 1997 and the Balance Sheet Data at December 31,
1997 and 1996 should be read in conjunction with the Company's audited financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" included elsewhere in this Annual Report on Form 10-K.


                                      11
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
                                           Year Ended December 31,         January 6, 1995     January 6, 1995
                                     ---------------------------------    (inception) to      (inception) to
                                        1997                      1996    December 31, 1996   December 31, 1997
                                     --------------     --------------    -----------------   -----------------
<S>                                 <C>               <C>                <C>                         <C>
Operating expenses:
    Research and development        $     6,399,000     $    1,946,000           1,434,000            9,779,000
    Purchased research and                       --         17,374,000                  --           17,374,000
     development
    General,  administrative and          3,787,000            506,000             568,000            4,861,000
        amortization
                                     --------------     --------------    ----------------    -----------------
                                         10,186,000         19,826,000           2,002,000           32,014,000
                                     --------------     --------------    ----------------    -----------------

Other (income) expense:
    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)
                                     ==============     ==============    ================    =================

Basic  (loss) per share             $         (0.43)    $        (2.03)              (0.21)
                                     ==============     ==============    ================

Weighted average number of               23,509,000          9,685,000           9,500,000
 shares of Common Stock
 outstanding
                                     ==============     ==============    ================

Diluted loss per share                 $      (0.43)      $      (2.03)        $    (0.21)
                                     ==============     ==============    ================


Weighted average number of               23,509,000          9,685,000           9,500,000
      shares of Common Stock
       and dilutive equivalent
       shares outstanding
                                     ==============     ==============    ================

                                                         December 31,
                                    -----------------------------------------------------
                                          1997               1996               1995
                                    ---------------     --------------     --------------
<S>                                 <C>                <C>                      <C>
Balance Sheet Data
Cash and cash equivalents           $     2,159,000     $    6,412,000     $        68,000
Total assets                              5,734,000         11,074,000             341,000
Total current liabilities                 1,786,000          1,827,000              43,000
Amount due to VIMRX
 Pharmaceuticals Inc.                       838,000                --            2,252,000

Deficit accumulated during the
 development stage                      (31,741,000)       (21,692,000)         (2,026,000)

Stockholders' equity (deficit)            2,725,000          8,557,000          (1,954,000)

</TABLE>

  To date, the Company has not paid any cash dividends, nor does it expect to
pay any cash dividends in the foreseeable future.


                                      12
<PAGE>

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

      This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans to differ including those risks discussed under the heading
Risk Factors elsewhere in this report.

      The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained herein.

BACKGROUND

      On December 23, 1996, Innovir,  VIMRX and certain stockholders of Innovir
("The Aries Funds") consummated a transaction (the "Transaction") whereby VIMRX
acquired 68% of the outstanding stock of Innovir and  Innovir acquired all of
the issued and outstanding shares of VHL. Innovir'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 and Emerging Issues
Task Force Issue No. 90-13, (Accounting for Simultaneous Common Control Mergers)
(EITF No. 90-13").  The application of APB No. 16 and EITF No. 90-13 requires
that the Transaction be accounted as a reverse acquisition and accordingly, for
accounting purposes, (i) VHL is deemed to be the acquirer and surviving entity,
(ii) because 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, (iii) Innovir has fair valued its assets and liabilities to the
extent acquired by VIMRX (68%) and (iv) the assets and liabilities of VHL are
carried at VHL's historic cost.  Since VHL is deemed to be the surviving entity,
the statement of operations includes the operations of VHL for the period from
January 6, 1995 (inception) through December 31, 1995 and for the years ended
December 31, 1997 and 1996. The operations of Innovir are included only since
the date of acquisition, i.e., for the period from December 23 to December 31,
1996 and for the year ended December 31, 1997.  For accounting purposes, VHL
assumed the name of Innovir Laboratories, Inc. and Subsidiaries.


   On Febuary 11, 1997, Innovir elected to change its fiscal year end date from
September 30 to December 31 of each year. This change was made to conform its
fiscal year end date with that of VHL.



RESULTS OF OPERATIONS

      Since its inception, substantially all of the Company's resources have
been applied to research and development, patent and licensing matters and other
general and administrative matters.  The Company has no commercially viable
products and does not anticipate having any for several years.  The Company has
had no significant operating revenues to date and has sustained net losses since
its inception. The Company expects losses to continue for the foreseeable
future.

Year ended December 31, 1997 vs. December 31, 1996
--------------------------------------------------

   Research and development expenses increased $4,453,000; $3,760,000 of which
was due to the acquisition of Innovir's operations in December 1996 and $693,000
of which was due to an increase in spending in the European operations.

   The 1996 charge for purchased in-process research and development consists of
$3.5 million related to the acquisition by VHL of Ribonetics GmbH ("Ribonetics")
in May 1996 and $13.8 million related to the transaction between Innovir and
VIMRX described above and in the financial statements. These charges to the
statement of operations reflect the value placed on the ongoing research and
development of the Company's product candidates and technologies.

   General and administrative expenses increased $2,869,000 principally due to
the acquisition of Innovir ($2,852,000).

   Amortization of goodwill relates to the asset recorded in the transaction
with VIMRX, described under "Background" above.


                                      13
<PAGE>

   Interest income increased $123,000 due to increased cash balance after the
transaction.

   Interest expense increased $122,000 due to the capital equipment leases
acquired with Innovir.

   Other income consists of government grants and miscellaneous revenue received
from collaborators.



Year ended December 31, 1996 vs. the period January 6, 1995 (inception) through
-------------------------------------------------------------------------------
December 31, 1995
-----------------


   Other income consists of government grants and miscellaneous revenue received
from collaborators.

      Research and development expenses increased $512,000 or 36% resulting from
an increase in operations in Europe and the inclusion of approximately $300,000
in costs related to Innovir.

      General and administrative costs decreased $62,000 or 11% reflecting a
decrease in legal fees, due primarily to costs related to finalizing a research
and development agreement, offset by increases in administrative cost related to
the operations in Europe.


LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 1997, the Company had cash and cash equivalents of
$2,159,000 as compared to $6,412,000 at December 31, 1996.  The Company had
working capital of $557,000 at December 31, 1997 as compared to working capital
of $4,788,000 at December 31, 1996.  The decrease in cash and working capital
positions resulted principally from cash used in operations ($8,631,000) and
purchases of equipment ($664,000) offset by sales of common stock (approximately
$4,000,000) and advances and contributed capital from VIMRX ($1,372,000).

      Except for payments on existing capital leases, planned operations for
1998 currently contemplate no expenditures for capital assets.

      Pursuant to an agreement, dated December 31, 1997, between the Company and
VIMRX (the "VIMRX Agreement"), the Company sold to VIMRX an aggregate of
5,080,436 shares of the Company's Common Stock for an aggregate purchase price
of $2,000,000.  In addition, the Company issued to VIMRX a warrant to purchase
1,000,000 shares of Common Stock at an exercise price per share of $0.394.
Pursuant to the VIMRX Agreement, the Company may require, from time to time
until December 31, 1999, that VIMRX purchase from the Company up to $5,000,000
of Common Stock at a purchase price per share equal to the lower of (i) the
average closing bid price per share of Common Stock during the preceding fifteen
(15) days and (ii) $1.30; provided, however, that VIMRX will not be required to
so purchase any Common Stock in the event it ceases to own at least 50% of the
outstanding shares of Common Stock.

  The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its proposed
products. As of December 31, 1997, the Company had cash and cash equivalents of
$2,159,000. Based on current projections, which are subject to change (such
change may be significant), the Company's management believes that this, along
with the funds available under the VIMRX Agreement, will be sufficient to fund
its operations into the first quarter of the year ended December 31, 1999.
Thereafter, the Company will require additional funds, which it may seek to
raise through public or private equity or debt financing, collaborative or other
arrangements with corporate sources, or through other sources of financing,
which may involve the sale, licensing or spinning off of certain of the
Company's technologies. Other than pursuant to the VIMRX Agreement, there are
presently no specific commitments by VIMRX to continue to fund the Company's
operations. There can be no assurance that any additional financing can be
obtained on terms reasonable to the Company, if at all. In the event the Company
is unable to raise additional capital, planned operations would need to be
scaled back or discontinued during 1998


                                      14
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The financial statements and financial statement schedule of the Company
required by this item are included herein as exhibits and listed under Item
14(a).

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

  The Company has previously reported a change of independent accountants on
Form 8-K dated May 16, 1997 and filed May 20, 1997.


                                      15
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company and their ages as of March
16, 1998 are as follows:

        NAME                  AGE            POSITION

Thomas R. Sharpe, Ph.D.....  58  President, Chief Executive Officer and Director
David A. Jackson, Ph.D.....  55  Chairman of the Board
Francis M. O'Connell, CPA..  51  Chief Financial Officer and Director
William T. McCaffrey.......  61  Director
Richard L. Dunning.........  52  Director
Laurence D. Fink...........  45  Director
Stanley Knowlton...........  71  Director

     Thomas R. Sharpe, Ph.D., President and Chief Executive Officer, was elected
to the Board of Directors in October 1997. Dr. Sharpe served as a consultant to
VIMRX prior to his appointment to Innovir. He formerly served as President and
CEO of OsteoArthritis Sciences, Inc. of Cambridge, Massachusetts, where he
provided overall leadership to the Company, served as a member of the Board of
Directors, and led the research efforts resulting in the discovery of novel
approaches for the treatment of osteoarthritis and wound healing. Previously,
Dr. Sharpe spent more than 25 years in research and development as well as
management positions with The DuPont Company and The DuPont Merck Pharmaceutical
Company, serving most recently as the Senior Director of Chemical and Physical
Sciences of DuPont Merck. Dr. Sharpe earned his Ph.D. in Organic Chemistry from
the University of Illinois and an A.B. in Chemistry from the University of
Evansville in Indiana.

     David A. Jackson, Ph.D.,  the Chairman of the Board, was elected to the
Board in December 1996. Dr. Jackson has served as Executive Vice President and
Chief Scientific Officer of VIMRX since September 1996. Prior to joining VIMRX,
Dr. Jackson was with the DuPont Merck Pharmaceutical Company since 1991, most
recently serving as Director, Cancer and Molecular Biology Research. Dr. Jackson
earned his Ph.D. in Molecular Biology from Stanford University and an A.B. in
Biological Sciences from Harvard College.

     Francis M. O'Connell, CPA  was elected to the Board in December 1996 and
has served as Chief Financial of the Company since April 1997.  Mr. O'Connell
has served as Chief Financial Officer of VIMRX since February 1995 and since May
1997, serves as VIMRX's Vice President, Finance and Controller.  From June 1994
to February 1995, Mr. O'Connell was Director of Litigation Support in the New
York office of J.H. Cohn & Company, a CPA firm.  From March 1992 to June 1994,
Mr. O'Connell was Vice President of Hickock Associates Inc., a financial
consulting company, and for 17 years prior thereto, was an employee and partner
with KPMG Peat Marwick LLP (formerly KMG Main Hurdman).

     William T. McCaffrey was elected to the Board in June 1994.  Since July
1987, Mr. McCaffrey had been the Senior Executive Vice President and Chief
Operating Officer of The Equitable Companies Incorporated and its subsidiary,
The Equitable Life Assurance Society of the United States; Mr. McCaffrey
resigned from such offices in February 1998.  He began his career with that
company in 1954.  Mr. McCaffrey received a B.S. degree from New York University
and an M.S. degree from the Columbia University Graduate School of Business.

     Richard L. Dunning has been a Director since December 1996.  Mr. Dunning is
currently President and Chief Executive Officer and a director of VIMRX since
April 1996.  Prior to April 1996, Mr. Dunning served as Executive Vice President
and Chief Financial Officer of The DuPont Merck Pharmaceutical Company since
1991.

     Laurence D. Fink was elected to the Board in December 1996.  Mr. Fink has
been Chairman and Chief Executive Officer and Director of BlackRock Financial
Management (investment advisor) since 1988.  Mr. Fink is


                                      16
<PAGE>

a director of the closed end funds for which BlackRock serves as investment
advisor. Mr. Fink also serves as a director of VIMRX.

     Stanley Knowlton was elected to the Board of Directors in January 1997.
Since June 1989, Mr. Knowlton has been president of Knowlton Brothers, Inc.  In
addition, since May 1992, Mr. Knowlton has been an associate at Melhado, Flynn &
Associates, Inc.

     All directors hold office until the next annual meeting of stockholders and
until their successors are elected and qualified.  Executive officers are
elected by, and serve at the discretion of, the Board of Directors.

     The Company's Certificate of Incorporation provides that no director shall
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty except for: (a) any breach of the duty of loyalty, (b)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) improper distributions to stockholders or loans to
officers or directors, or (d) any transactions from which a director derives an
improper personal benefit.  The Company currently maintains insurance to
indemnify directors and officers.


CONSULTANTS

     The Company is dependent upon the part-time services of the following three
consultants:

     Hugh D. Robertson, Ph.D., is a co-founder of the Company and Chairman of
the Science Advisory Board ("SAB") and has been a consultant to the Company
since its inception.  Since 1989, he has been a full-time faculty member of the
Cornell University Medical College and a member of The Rockefeller University
adjunct faculty. From 1972 through 1988, Dr. Robertson was a full-time member of
the faculty of The Rockefeller University, where he worked on RNA structure and
function and the mechanism of replication of viroids and viroid-like pathogens.
Dr. Robertson received his B.S. degree in biology at Harvard College and his
Ph.D. in genetics at The Rockefeller University. He was a postdoctoral Helen Hay
Whitney Fellow in cell biology and nucleic acid chemistry at the MRC Laboratory
of Molecular Biology in Cambridge, England, which work led to the discovery,
with Drs. Sidney Altman and J.D. Smith, of the RNase P enzyme and the enzymatic
properties of the RNA subunit of that enzyme.

     Dr. Robertson's consulting agreement with the Company, dated April 1, 1992,
as amended April 1, 1996, terminates March 31, 2000.  Pursuant to this
agreement, Dr. Robertson provides scientific consulting services on a when
requested basis, up to one day per week, taking into consideration his
obligations as an employee of Cornell University Medical College.  Dr.
Robertson's agreement contains a provision restricting Dr. Robertson from
performing work relating to the Company's technology for others, again taking
into consideration his obligations to Cornell.  For his services, Dr. Robertson
was paid $75,000 per year through March 31, 1994,  $90,000 per year through
March 31, 1996, and is currently being paid $95,000 per year through March 31,
2000.  In addition, the Company has agreed to pay Dr. Robertson $10,000 upon the
issuance of any patent for which he is named inventor or co-inventor and which
patent is assigned to the Company, and has agreed it may award Dr. Robertson
additional compensation from time to time.  Dr. Robertson's agreement contains
confidentiality and non-compete provisions, and an agreement that his inventions
and other works conceived in connection with his services for the Company will
become the property of the Company.

     Sidney Altman, Ph.D., has been a consultant to the Company since 1990.
Since 1980, Dr. Altman has been a Professor of Biology at Yale University, and
from 1971 to 1980 was an Assistant Professor at such institution.  In 1989, he
received, together with Thomas R. Cech, the Nobel Prize in Chemistry for their
independent discoveries relating to the catalytic properties of RNA.  Dr. Altman
received a B.S. degree in physics at Massachusetts Institute of Technology and
his Ph.D. in biophysics at the University of Colorado Medical Center.  He was a
postdoctoral fellow in molecular biology at Harvard University.  He took a
second postdoctoral fellowship at the MRC Laboratory in Cambridge, England with
Drs. Sydney Brenner and Francis Crick which led to the discovery, with


                                      17
<PAGE>

Drs. Hugh Robertson and J.D. Smith, of RNase P and the enzymatic properties of
that enzyme. Dr. Altman is a member of the National Academy of Sciences of the
United States.

     The Company has a consulting agreement with Dr. Altman dated as of April 1,
1992, which as amended in March 1994, terminates March 31, 1998. It is
anticipated that Dr. Altman's agreement will be renewed. Pursuant to the
agreement, Dr. Altman is required to spend approximately 15 days per year
providing scientific consulting services (including participation on the SAB)
concerning the use of EGSs to target RNAs for cleavage by RNase P and the use of
hepatitis delta viruses to inactivate RNAs, for which he is paid $75,000 per
year until March 31, 1996 and $90,000 per year thereafter.  Dr. Altman's
agreement contains provisions protecting him against conflicts with his
obligations as an employee of Yale University, an agreement by Dr. Altman and
the Company not to disclose proprietary information obtained from each other,
and an agreement by the Company to indemnify Dr. Altman against claims arising
in connection with his services to the Company.

     Timothy W. Nilsen, Ph.D. is a member of the Company's Science Advisory
Board and is also a consultant to the Company effective November 1, 1997. Dr.
Nilsen is Professor of Molecular Biology and Microbiology and of Medicine and is
also Director of the Center for RNA Biology at the Case Western Reserve
University School of Medicine where he has been since 1982. His primary areas of
expertise are in ribosomal RNA processing in eukaryotic cells and molecular
mechanisms of gene expression in parasitic nematodes. Dr. Nilsen received his
undergraduate education at Fordham University and Ph.D. in molecular biology
from the State University of New York at Albany.

     Pursuant to the consulting agreements, Dr. Nilsen provides scientific
leadership within the Company's Functional Ribozyme Selection research area. For
his consulting, Dr. Nilsen is paid $2500 per month for a minimum of four days
per month and an additional $500 per day for each additional day over the
minimum. In addition to this compensation, in 1997, the Company granted to Dr.
Nilsen options to purchase 40,000 shares of the Company's common stock at $
0.6875 per share, which will vest in four equal installments at the end of each
of the subsequent four years.

SCIENCE ADVISORY BOARD

     The Company has a Science Advisory Board ("SAB") which advises the Company
from time to time with respect to the Company's scientific research and
development programs.  The members of the SAB are compensated through the
payment of fees and the grant of stock options.

In addition to Dr. Robertson, Dr. Altman and Dr. Nilsen,  the members of the
Company's SAB are as follows:

  Allan R. Goldberg, Ph.D., a co-founder of the Company, is an adjunct professor
at The Rockefeller University, and was a full-time member of their faculty from
1971 to 1989.  He was a full-time employee of the Company since its inception in
1989 until his resignation in September 1997.   His primary research focused on
the mechanism of cell transformation by retroviruses.  Dr. Goldberg's areas of
expertise include virology, genetics, biochemistry and molecular biology, and
cell biology.

  David A. Jackson, Ph.D., Chairman of the Board of the Company, has been
Executive Vice President and Chief Scientific Officer of VIMRX since September
1996. For the 10 years prior to joining VIMRX, he held a series of research and
development management positions with DuPont Pharmaceuticals and the DuPont
Merck Pharmaceutical Company, the most recent being Senior Director of Discovery
Research for Virology, Cancer and Molecular Biology. From 1980 through 1985, he
was Senior Vice President for Research and Development and Chief Scientific
Officer for Genex Corporation. From 1972 through 1980, he held appointments as
Assistant and Associate Professor of Microbiology at the University of Michigan
Medical School. Dr. Jackson received an A.B. degree in biology from Harvard
College and a Ph.D. degree in Molecular Biology from Stanford University.


                                      18
<PAGE>

  Maurice R. Hilleman, Ph.D., D.Sc., is past Senior Vice President for Virus and
Cell Biology Research, Merck Research Laboratories and served as a director of
the Company from June 1996 to December 1996.  During his tenure at Merck, Dr.
Hilleman pioneered the development of numerous vaccines including those for
hepatitis A, both plasma-derived and recombinant hepatitis B, measles, mumps,
rubella, MMR, pneumococcus, meningococcus and Marek's disease.  He personally
directed these programs through early research and clinical development to the
commercialization stage.  He is a member of the U.S. National Academy of
Sciences, the American Academy of Arts and Sciences, and the Institute of
Medicine of the National Academy of Sciences, and received the Lasker Medical
Research Award in 1983 and was awarded the National Medal of Science by
President Ronald Reagan.

  Tony Hunter, Ph.D., has been a member of the faculty of the Salk Institute
since 1975, where he is now Professor. Dr. Hunter's areas of expertise include
mechanisms of cell transformation and retrovirology.  Dr. Hunter received his
undergraduate and graduate education at the University of Cambridge, England.

  Thomas J. Kindt, Ph.D., has been the Chief of the Laboratory of Immunogenetics
at the National Institute of Allergy and Infectious Diseases in Bethesda,
Maryland since 1977 and is also Director, Division of Intramural Research,
National Institute of Allergy and Infectious Diseases since 1995. He is an
Adjunct Professor in the department of microbiology and pediatrics at the
Georgetown University School of Medicine and Dentistry.  Dr. Kindt received his
B.S. in chemistry from Thomas Moore College in Kentucky and his Ph.D. in
biochemistry from the University of Illinois in Urbana.

  Richard M. Krause, M.D., has been Professor of Epidemiology and Professor of
Medicine at Washington University School of Medicine and Professor and Senior
Physician at The Rockefeller University.  He was the Director of the National
Institute of Allergy and Infectious Disease at the NIH.  From 1984 to 1988, he
was Dean of Emory University School of Medicine and since that time has been
Senior Scientific Advisor at the Fogarty International Center (National
Institutes of Health).  Dr. Krause received his undergraduate education from
Marietta College and his M.D. at Case Western Reserve University School of
Medicine.

  David A. Shafritz, M.D., has been a faculty member at the Albert Einstein
College of Medicine in New York, where he is currently Professor of Medicine and
Cell Biology, Chief of the Molecular Hematology Unit of the G.I.-Liver Disease
Division and, since 1976, Director of the Marion Bessin Liver Research Center.
During the last 20 years his academic career has focused on the application of
molecular biology to understanding basic disease processes.  Dr. Shafritz
received his B.S. in chemistry at the University of Pennsylvania College of Arts
and Sciences and his M.D. from the University of Pennsylvania School of
Medicine.

  Members of the SAB may be employed by or have consulting agreements with
entities other than the Company, some of which may conflict or compete with the
Company, or which may limit a particular member's availability to the Company.
Certain of the institutions with which the SAB members are affiliated may have
regulations or policies which are unclear with respect to the ability of such
personnel to act as part-time consultants or in other capacities for a
commercial enterprise.  Regulations or policies now in effect or adopted in the
future might limit the ability of the SAB members to consult with the Company.
The loss of the services of certain of the SAB members could adversely affect
the Company.

  Inventions or processes discovered by any SAB member, unless otherwise agreed,
will not become the property of the Company but will remain the property of such
person or of such person's full-time employers.  In addition, the institutions
with which the SAB members are affiliated may make available the research
services of their scientific and other skilled personnel, including the SAB
members, to entities other than the Company.  In rendering such services, such
institutions may be obligated to assign or license to a competitor of the
Company patents and other proprietary information which may result from such
services, including research performed by an advisor or consultant for a
competitor of the Company.


                                      19
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  Based solely upon a review of Form 3 and 4 and amendments thereto, if any,
furnished to the Company during fiscal year 1997 and Forms 5 and the amendments
thereto, if any, furnished to the Company with respect to fiscal year 1997, the
Company confirms that all reports required by Section 16(a) of the Securities
Exchange Act of 1934, as amended, were filed on a timely basis, except for a
Form 4 for Francis M. O'Connell.


ITEM 11.  EXECUTIVE COMPENSATION

  The following table sets forth information concerning all cash and non-cash
compensation paid or to be paid by the Company as well as certain other
compensation awarded, earned by and paid, during the fiscal years indicated, to
the Chief Executive Officer and each of the other most highly compensated
executive officers of the Company who earned in excess of $100,000 for such
period in all capacities in which they served.

<TABLE>
<CAPTION>

                               SUMMARY COMPENSATION TABLE
                                                                                                      Long Term
                                                                                                    Compensation
                                                                                                       Awards
                                 Annual Compensation
                                                                           Other             Restricted
      Name and                                                             Annual               Stock         Options/
      Principal                             Salary        Bonus          Compensation          Award(s)          SARs
      Position                Year            ($)          ($)              ($)(3)                ($)             (#)
      ---------              ----           ------        -----          ------------         ----------       --------
<S>                         <C>           <C>           <C>             <C>                  <C>              <C>
Thomas R. Sharpe/1/          1997          $ 40,500      $20,000                  --              --            300,000
President and Chief
Executive Officer

Allan R. Goldberg/2/         1997          $199,222           --              $50,000             --                --
Chairman and Chief           1996           200,000           --                  --              --             51,429
Executive Officer/2/         1995           188,750           --                  --              --             37,000

</TABLE>


(1) Dr. Sharpe commenced employment on October 1, 1997

(2) Dr. Goldberg resigned in September 1997.

(3) Represents consulting fees paid to Dr. Goldberg subsequent to his
    resignation.


The Company has no stock appreciation rights plan or long-term incentive plan.


                                      20
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

  The following table provides information related to options granted to the
named executive officers during fiscal 1997.
<TABLE>
<CAPTION>



                                         Individual Grants
                           -------------------------------------------------

                                             % of total
                                           Options Granted
                                           to Employees in      Exercise or                           Grant Date
                            Options            Fiscal            Base Price         Expiration       Present Value
Name                     Granted (#)(1)        Year             ($/share)             Date                $
-----                    ---------------  -----------------     -----------     ------------------  ---------------
<S>                       <C>             <C>                 <C>               <C>                 <C>
Thomas R. Sharpe             300,000             27%               .844             10/01/02            $81,000

-----------------------------------------
(1)  Options to acquire shares of Common Stock.

</TABLE>

<TABLE>
<CAPTION>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

                                                                 Number of Unexercised           Value of Unexercised
                                                                      Options at                In-the-Money Options at
                               Shares                             Fiscal Year End (#)           Fiscal Year End ($) (1)
                              Acquired    Value Realized     -----------------------------   -----------------------------
Name                        on Exercise         ($)          Exercisable     Unexercisable    Exercisable    Unexercisable
------                      ------------  --------------     -----------     -------------    -----------    -------------
<S>                         <C>           <C>                <C>             <C>              <C>            <C>
Thomas R. Sharpe                -0-             -0-             -0-            300,000            -0-             -0-

Dr. Allan R. Goldberg(2)        -0-             -0-           166,667           33,333            -0-             -0-

</TABLE>
-----------------------------------------
(1)  The Closing Price of the Company's Common Stock as reported by NASDAQ on
     December 31, 1997 was $0.375. Value is calculated on the basis of the
     difference between the exercise price and $0.375 multiplied by the number
     of shares of Common Stock underlying the option.

(2)  In connection with his resignation and separation from the Company, Dr.
     Goldberg retained an option to purchase at an exercise price per share of
     $1.30 an aggregate of 200,000 shares of Common Stock, which option is
     immediately exercisable with respect to 166,667 shares.  The balance of the
     option vests on October 1, 1998.


                                      21
<PAGE>

DIRECTORS' COMPENSATION

  While there is no formal policy pursuant to which the Company's directors
receive fees for their services, from time to time they may receive compensation
in the form of cash or securities, and they are reimbursed for expenses incurred
by them in connection with the Company's business. Non-employee, non-VIMRX
directors each receive a stipend of $500 per each directors' meeting attended in
person and $250 for each telephonic meeting.  See "Non-Employee Director Stock
Option Plan."


COMPENSATION PURSUANT TO PLANS

1993 Stock Option Plan
----------------------

  In May 1993, the Company adopted its current stock option plan (as amended,
the "Plan"). Under the Plan, 3,000,000 shares of Common Stock (subject to
adjustment to cover stock splits, stock dividends, recapitalizations and other
capital adjustments) are reserved for issuance upon exercise of options granted
to officers, employees and directors of and advisors and consultants to the
Company.  The Plan provides that options granted thereunder will be designated
as either incentive stock options or non-incentive stock options.  Options
designated as incentive stock options are intended to qualify as incentive stock
options as defined in the Internal Revenue Code of 1986, as amended (the
"Code").  The Plan will terminate in 2003, unless sooner terminated by the Board
of Directors.

  Subject to the limitations set forth in the Plan, the Board of Directors or a
committee of the Board has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each option,
to determine whether an option is to be an incentive stock option or a non-
incentive stock option, to establish vesting schedules and, subject to certain
restrictions, to specify other terms of the options.  The maximum term of
options granted under the Plan is ten years.  Options granted under the Plan
generally are non-transferable and expire three months after the termination of
an optionee's employment or directorship with the Company.  In general, if an
optionee dies, is permanently disabled or retires while employed or retained by
the Company, such person's option may be exercised up to three months after his
or her death or termination of employment due to disability or retirement.

  The exercise price of options granted under the Plan is determined by the
Board of Directors (or its committee) at the time of grant.  The exercise price
of incentive stock options must equal at least the fair market value of the
Common Stock on the date of grant.  The exercise price of incentive stock
options granted to any person who at the time of grant owns stock possessing
more than 10% of the total combined voting power of all classes of stock must be
at least 110% of the fair market value of such stock on the date of grant and
the term of these options cannot exceed five years.  The exercise price of non-
incentive stock options may be less than 100% of the fair market value of the
Common Stock on the date of grant. In November 1996, the Board of Directors
authorized the cancellation of 1,443,925 then existing options and the grant of
1,473,889 new options under the Plan at an exercise price of $1.30 per share
(the "Repricing"). As of March 16, 1998, options to purchase an aggregate of
2,167,488 shares of Common Stock at prices ranging from $0.84 to $9.75 have been
granted and are outstanding under the Plan.

Non-Employee Director Stock Option Plan
---------------------------------------

  During 1994, the Company adopted a Non-Employee Director Stock Option Plan (as
amended, the "Director's Plan").  Under the Director's Plan, as amended by the
Board in November 1996, 270,000 shares of the Company's Common Stock have been
reserved for stock option awards.  Each new non-employee director is
automatically granted an option to purchase 30,000 shares of common stock, on
the date on or after June 1, 1994 on which he or she is initially appointed or
elected as a director.  The exercise price is equal to the fair market value on
the date of grant.  Such options vest ratably, at six month intervals over a
three year period. In March 1996, and July 1996, subject to shareholder
approval, the Company's Board of Directors amended the Director's Plan to allow
for automatic grants of an option to purchase 10,000 shares at each director's
second anniversary, and at each anniversary thereafter, with


                                      22
<PAGE>

vesting to be 50% at the eighteenth month following grant, and 50% to be at the
twenty-fourth month following grant. In connection with the Repricing, the Board
of Directors canceled 130,000 then existing options. At March 16, 1998 options
for 85,000 shares were outstanding under this plan and 185,000 shares were
available for future grants. Presently, two (2) directors are eligible to
participate in the Directors' Plan.


COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS

  The report of the Compensation Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this report into
any filing under the Securities Act or the Exchange Act, except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.

Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------

  The Company currently has a Compensation Committee, which was first formed in
October 1993 and consists of William T. McCaffrey and Stanley Knowlton. The
Compensation Committee regularly reviews and, with any changes it believes
appropriate, approves the Company's compensation program.

Compensation Philosophy
-----------------------

  The Company believes that executive compensation should be closely related to
increased stockholder value.  Accordingly, the Company's executive compensation
program is designed to provide competitive compensation, support the Company's
strategic business goals and reflect Company performance.

  The compensation programs reflect the following principles:

     .  Compensation should encourage increased stockholder value.
     .  Compensation programs should support the short- and long-term
        strategic business goals and objectives of the Company.
     .  Compensation programs should reflect and promote the Company's
        values, and reward individuals for outstanding contributions toward
        business goals.
     .  Compensation programs should enable the Company to attract and
        retain highly qualified professionals.


Pay Mix and Measurement
-----------------------

  The Company's executive compensation is comprised of two components, base
salary and incentives, each of which is intended to serve the overall
compensation philosophy.

Base Salary
-----------

  The Company's salary levels are intended to be consistent with competitive pay
practices and  level of responsibility, with salary increases reflecting
competitive trends, the overall financial performance and resources of the
Company, general economic conditions as well as a number of factors relating to
the particular individual, including the performance of the individual
executive, and level of experience, ability and knowledge of the job.


                                      23
<PAGE>

Incentives
----------

  Stock options are granted from time to time to reward key employees'
contributions.  The grant of options is based primarily on a key employee's
potential contribution to the Company's growth and profitability.  Options are
granted at the prevailing market value of the Company's Common Stock and will
only have value if the Company's stock price increases.  Generally, grants of
options vest over a period of time, and executives must be employed by the
Company for such options to vest.

  In addition, from time to time, the Company may award cash bonuses to certain
key employees.  Cash bonuses, if any, represent a variable component of a key
employee's compensation and give the Company certain flexibility in such
compensation program.  In determining cash bonuses, the Compensation Committee
may consider factors such as relative performance of the Company during the year
and the individual's contribution to the Company's performance.

Chief Executive Officer 1997 Compensation
-----------------------------------------

  The base annual salary for Dr. Sharpe, the Company's current President and
Chief Executive  Officer, was $162,000 during the Company's fiscal year ended
December 31, 1997.  Dr. Sharpe commenced his employment with the Company on
October 1, 1997 and received an aggregate of $40,500 in salary for 1997.  In
addition, Dr. Sharpe received a cash bonus of $20,000 in 1997.  In connection
with his employment, the Company granted Dr. Sharpe options to purchase an
aggregate of 300,000 shares of Common Stock, exercisable at $.844 per share,
vesting in equal installments over four years.

  The base annual salary for Dr. Goldberg, the Company's former Chairman of the
Board and Chief Executive Officer, was $200,000 during the Company's fiscal year
ended December 31, 1997, (the same as his salary for the previous fiscal year).
Until his resignation in September 1997, Dr Goldberg received an aggregate of
$199,200 in salary for 1997, including accrued vacation. The Company did not
grant Dr. Goldberg any additional options in 1997.

  The aggregate compensation paid to the Chief Executive Officers was deemed
appropriate by the Compensation Committee considering the overall performance of
the Company and such executive.

Tax Effects
-----------

  Changes made in 1993 to the Code impose certain limitations on the
deductibility of executive compensation paid by public companies.  In general,
the Company may not deduct annual compensation paid to certain executive
officers in excess of $1,000,000 except to the extent that such compensation
qualifies as "performance-based compensation."  Non-deductibility would result
in additional tax cost to the Company.  It is possible that at least some of the
cash and equity-based compensation paid or payable to the Company's executive
officers will not qualify for the "performance-based compensation" exclusion
under the deduction limitation provisions of the Code.  Nevertheless, the
Committee anticipates that in making compensation decisions it will give
consideration to the net cost to the Company (including, for this purpose, the
potential limitation on deductibility of executive compensation).

  The Compensation Committee believes that linking executive compensation to
corporate performance results in a better alignment of compensation with
corporate business goals and stockholder value.  In view of the Company's
performance and achievement of goals and competitive conditions, the
Compensation Committee believes that compensation levels during 1996 adequately
reflect the Company's compensation goals and policies.


                            Compensation Committee
                            William T. McCaffrey
                            Stanley Knowlton


STOCK PRICE PERFORMANCE COMPARISON


                                      24
<PAGE>

  The Stock Price Performance Graph below shall not be deemed incorporated by
reference by any general statement incorporating by reference this report into
any filing under the Securities Act or the Exchange Act, except to the extent
the Company specifically incorporates this information by reference, and shall
not otherwise be deemed filed under such Acts.

  The graph below compares cumulative total return of the Company's Common Stock
with the cumulative total return of (i) the Index for the NASDAQ Stock Market
(U.S. Companies) and (ii) an industry peer group index consisting of the NASDAQ
Pharmaceutical Index (the "Nasdaq Pharma Peer Index").  The graph assumes $100
was invested on the day the Company's Common Stock was first traded on Nasdaq in
each of the Company's Common Stock, the stocks comprising the Index for the
NASDAQ Stock Market (U.S. Companies) and the stocks comprising the Nasdaq Pharma
Peer Index, and the reinvestment of dividends.


                         [GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
Measurement period                                        NASDAQ
(Fiscal Year Covered)           INVR          NASDAQ      PHARMA
---------------------           --------     --------    --------
<S>                             <C>          <C>         <C>
Measurement PT -
09/30/93                        $100.00      $100.00     $100.00

FYE 12/31/93                    $151.5152    $ 94.3537   $108.3766
FYE 12/31/94                    $209.0909    $ 92.2300   $ 81.5686
FYE 12/31/95                    $101.5152    $130.4328   $149.2200
FYE 12/31/96                    $ 28.8485    $160.5111   $149.6750
FYE 11/31/97                    $ 14.3030    $200.0981   $158.3123

</TABLE>


                                      25
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


<TABLE>
<CAPTION>
                                                                               Number             Percentage
                Name and Address                                              Owned (1)           Of Class
                ----------------                                         -------------------  -----------------
<S>                                                                      <C>                  <C>
The Aries Domestic Fund, L.P. (2)......................................       2,500,000                7.2%
  c/o Paramount Capital Asset Management, Inc.
  787 Seventh Avenue
  New York, NY 10019

The Aries Fund, A Cayman Island Trust (3)..............................       2,500,000                7.2%
  c/o MeesPierson (Cayman) Limited
  P.O. Box 2003
  British American Centre
  Phase 3
  Dr. Roy's Drive
  George Town, Grand Cayman

VIMRX Pharmaceuticals Inc. (4).........................................      28,747,102               78.1%
  2750 Centerville Road, Suite 210
  Little Falls II
  Wilmington, DE 19808

Richard L. Dunning (5).................................................             500                 *
  VIMRX Pharmaceuticals Inc.
  2751 Centerville Road, Suite 210
  Little Falls II
  Wilmington, DE 19808

Laurence D. Fink (6)...................................................           5,000                 *
  BlackRock Financial Management, Inc.
  345 Park Avenue
  New York, NY 10154

Allan R. Goldberg (7)..................................................         192,892                 *
  200 East 66th Street, Apt. E1607
  New York, New York 10021

David A. Jackson.......................................................               0                ---
  VIMRX Pharmaceuticals Inc.
  2751 Centerville Road, Suite 210
  Little Falls, II
  Wilmington, DE 19808

Stanley Knowlton (8)...................................................          20,000                 *
  Knowlton Brothers, Inc.
  530 Fifth Avenue
  New York, NY 10036

William T. McCaffrey (9)...............................................          62,603                 *
  c/o Innovir Laboratories, Inc.
  510 East 73rd Street
  New York, New York 10021

Francis M. O'Connell (10)..............................................               0                ---
</TABLE>

                                      26

<PAGE>
<TABLE>
<S>                                                                      <C>                  <C>
  VIMRX Pharmaceuticals Inc.
  2750 Centerville Road, Suite 210
  Little Falls II
  Wilmington, DE 19808

Thomas R. Sharpe (11)..................................................               0                ---
  Innovir Laboratories, Inc.
  510 East 73rd Street
  New York, New York 10021

All officers and directors as a group (7 persons) (12).................          88,103                 *
</TABLE>

*    Less than 1%.

(1)  Unless otherwise indicated below, all shares are owned beneficially and of
     record, and all options and warrants are exercisable within 60 days of
     December 31, 1997.
(2)  Includes 1,750,000 shares of Common Stock owned by The Aries Fund, A Cayman
     Island Trust, an affiliate of the securityholder ("The Aries Trust" and,
     together with the securityholder, "The Aries Funds").  Paramount Capital
     Asset Management, Inc. ("Paramount Capital") is the general partner of the
     securityholder and the investment manager of The Lindsay A. Rosenwald, M.D.
     is the sole shareholder of Paramount Capital and a member of the Board of
     Directors of VIMRX Pharmaceuticals Inc. ("VIMRX").  In December 1996, The
     Aries Funds granted to VIMRX an irrevocable three-year proxy to vote their
     shares of Common Stock.  See "Certain Relationships and Related
     Transactions."
(3)  Includes 750,000 shares of Common Stock owned by The Aries Domestic Fund,
     L.P., an affiliate of the securityholder ("The Domestic Fund").  Paramount
     Capital is the investment manager of the securityholder and the general
     partner of The Domestic Fund; Lindsay A. Rosenwald, M.D. is the sole
     shareholder of Paramount Capital and a member of the Board of Directors of
     VIMRX.  In December 1996, The Aries Funds granted to VIMRX an irrevocable
     three-year proxy to vote their securities.  See "Certain Relationships and
     Related Transactions."
(4)  Includes warrants to purchase 2,000,000 shares of Common Stock.  Also
     includes an aggregate of 2,500,000 shares of Common Stock owned by The
     Aries Funds; in December 1996, The Aries Funds granted to VIMRX an
     irrevocable three-year proxy to vote their securities.  See "Certain
     Relationships and Related Transactions."
(5)  Consists of 500 shares of Common Stock which are owned by Mr. Dunning's
     wife; Mr. Dunning disclaims beneficial ownership of these shares.  Mr.
     Dunning is President and Chief Executive Officer of VIMRX.
(6)  Includes options to purchase 5,000 shares of Common Stock.  Does not
     include options to purchase 25,000 shares of Common Stock which are not
     exercisable within 60 days of December 31, 1997.
(7)  Includes options to purchase 166,667 shares of Common Stock.  Does not
     include options to purchase 33,333 shares of Common Stock which are not
     exercisable within 60 days of December 31, 1997.
(8)  Includes options to purchase 10,000 shares of Common Stock.  Does not
     include options to purchase 20,000 shares of Common Stock which are not
     exercisable within 60 days of December 31, 1997.
(9)  Includes Class B Warrants to purchase 16,810 shares of Common Stock and
     options to purchase 20,000 shares of Common Stock.  Does not include
     options to purchase 20,000 shares of Common Stock which are not exercisable
     within 60 days of December 31, 1997.
(10) Does not include options to purchase 75,000 shares of Common Stock which
     are not exercisable within 60 days of December 31, 1997.
(11) Does not include options to purchase 300,000 shares of Common Stock which
     are not exercisable within 60 days of December 31, 1997.
(12) Includes the shares described in footnotes (5), (6) and (8) through (11)
     above.


                                      27
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  On August 30, 1996, the Company completed a private placement whereby The
Aries Fund, A Cayman Island Trust and The Aries Domestic Fund, L.P.
(collectively, "The Aries Funds"), two affiliated investment funds which
specialize in the biotechnology industry.  The Aries Funds invested a total of
$2,000,000 in exchange for 4,000,000 shares of newly issued common stock of the
Company and Class C Warrants to purchase an aggregate of 4,000,000 shares of the
Common Stock exercisable at $.50 per share.  In addition, the Company issued to
The Aries Funds unit purchase options to purchase 2,000,000 shares of Common
Stock and Class C Warrants to purchase an aggregate of 2,000,000 shares of
Common Stock, for a total option purchase price of $1,000,000.  Upon
consummation of this private placement, The Aries Funds became the beneficial
owner of more than 5% of the Company's voting securities.  In connection with
this private placement, The Aries Funds designated two directors to the
Company's Board of Directors.

  On December 23, 1996, the Company completed its acquisition from VIMRX of all
of the issued and outstanding shares of the capital stock of VHL.  In
consideration for the shares of VHL, the Company issued to VIMRX shares of Class
D Convertible Preferred Stock, convertible into an aggregate of 8,666,666 shares
of Common Stock, and warrants to purchase 2,000,000 shares of Common Stock at
exercise prices of $1.00 per share with respect to 1,000,000 shares and $2.00
per shares with respect to 1,000,000 shares.  Simultaneously with the Company's
acquisition of VHL, (i) The Aries Funds exercised for an aggregate purchase
price of $3,000,000 Class C Warrants and unit purchase options to purchase an
aggregate of 6,000,000 shares of Common Stock and Class C Warrants to purchase
2,000,000 shares of Common Stock and (ii) VIMRX, in exchange for $3,000,000 and
3,000,000 shares of VIMRX's common stock, acquired from The Aries Funds
9,500,000 shares of Innovir's Common Stock.  In connection with the transaction
between VIMRX and The Aries Funds, VIMRX received from The Aries Funds a three-
year proxy granting VIMRX all voting rights with respect to the 500,000 shares
of Common Stock and Class C Warrants to purchase 2,000,000 shares of Common
Stock retained by The Aries Funds, which proxy does not restrict The Aries Funds
from selling such securities; upon such a sale, the proxy will lapse with
respect to any securities so sold.  Prior to the consummation of these
transactions, each of The Aries Funds' two designees to the Company's Board of
Directors resigned from the Company's Board of Directors.  Prior, and
subsequent, to the consummation of these transactions, The Aries Funds were, and
are, beneficial owners of more than 5% of the Company's voting securities.  In
connection with these transactions, VIMRX designated four directors to the
Company's Board of Directors.  Upon consummation of these transactions, VIMRX is
the beneficial owner of a majority interest of the Company's voting securities.
See "Security Ownership of Certain Beneficial Owners and Management."

  VIMRX currently provides to the Company all financial management and other
support services.  Both Mr. O'Connell, the Chief Financial Officer of the
Company, and Dr. Jackson, Chairman of the Board of the Company, are employees
of, and compensated by, VIMRX.  Mr. Dunning, a director of the Corporation, is
the President and Chief Executive Officer of VIMRX.  In addition, Mr. Dunning
and Mr. Fink, also a director of the Company, are directors of VIMRX.

  On December 31, 1997, the Company and VIMRX entered into the VIMRX Agreement
pursuant to which the Company sold to VIMRX an aggregate of 5,080,436 shares of
the Company's Common Stock for an aggregate purchase price of $2,000,000.  In
addition, the Company issued to VIMRX a warrant to purchase 1,000,000 shares of
Common Stock at an exercise price per share of $0.393667.  Pursuant to the VIMRX
Agreement, the Company may require, from time to time until December 31, 1999,
that VIMRX purchase from the Company up to $5,000,000 of Common Stock at a
purchase price per share equal to the lower of (i) the average closing bid price
per share of Common Stock during the preceding fifteen (15) days and (ii) $1.30;
provided, however, that VIMRX will not be required to so purchase any Common
Stock in the event it ceases to own at least 50% of the outstanding shares of
Common Stock.

                                      28
<PAGE>

                                    PART IV

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


(a)  The following documents are filed as part of this report:

  Financial Statements
  --------------------
     The financial statements and financial statement schedule filed as part of
     this report are listed in the Index to Financial Statements on page F-1.

     All other schedules are omitted because they are not applicable or the
     required information is included in the financial statements or notes
     thereto.

  (b)  Reports on Form 8-K
       -------------------

     During the last quarter of the period covered by this report, the Company
     filed a report on Form 8-K, dated October 3, 1997, regarding  changes
     in management; no financial statements were filed in connection with
     such report.

  (c)  Exhibits
       --------

       Exhibit
          No.         Description
        -------       -----------
          3.1         Certificate of Incorporation, as amended/(1)/
          3.2         By-laws, as amended/(2)/
          3.3         Certificate of Designation, Number, Powers, Preferences
                      and Relative, Participating, Optional and Other Special
                      Rights and the Qualifications, Limitations, Restrictions
                      and Other Distinguishing Characteristics of Class D
                      Convertible Preferred Stock of the Company, as filed on
                      December 12, 1996/(7)/
          4.1         Specimen Certificate for Common Stock/(2)/
          4.2         Form of Class A Warrant/(2)/
          4.3         Form of Class B Warrant/(2)/
          4.4         Form of Unit Purchase Option/(2)/
          4.5         Form of Warrant Agreement/(2)/
          10.1        Form of Research Agreement, dated as of October 18, 1995,
                      between the Company and Rockefeller University/(3)/
          10.2        [Intentionally left blank]
          10.3        [Intentionally left blank]
          10.4        [Intentionally left blank]
          10.5        Form of Subscription Agreement by among the Company and
                      the parties therein relating to the private placement
                      conducted pursuant to Regulation S, including form of the
                      related Registration Rights Agreement, in November and
                      December 1995/(3)/
          10.6        [Intentionally left blank]
          10.7        [Intentionally left blank]
          10.8        [Intentionally left blank]
          10.9        Form of Research Collaboration Agreement, effective as of
                      March 18, 1996, by and between the University of
                      Pennsylvania and the Company/(4)/
          10.10       Amendment No. 1 to Employment Agreement by and between the
                      Company and Allan R. Goldberg, dated as of April 1,
                      1996/(5)/
          10.11       Amendment No. 1 to Consulting Agreement between the
                      Company and Dr. Hugh Robertson, dated as of April 1,
                      1996/(5)/

                                      29
<PAGE>

          10.12       Form of Research Collaboration Agreement between the
                      Company and Scripps Research Institute, effective as of
                      April 6, 1996/(5)/
          10.13       Consulting Agreement, dated as of July 2, 1996, between
                      the Company and Meyers Pollock Robbins Inc./(6)/

                                      30
<PAGE>


          10.14     Form of Research Agreement, dated as of July 2, 1996,
                    between the Company and Instituto di Ricerche di Biologia
                    Molecolare P. Angeletti/(6)/
          10.15     Second Amendment to License Agreement, entered into as of
                    August 29, 1996, by and between the Company and Yale
                    University/(6)/
          10.16     Common Stock and Warrant Purchase Agreement, dated as of
                    August 30, 1996, by and among the Company, The Aries Fund, A
                    Cayman Island Trust and The Aries Domestic Fund, L.P./(6)/
          10.17     Agreement, dated as of November 21, 1996, among VIMRX
                    Pharmaceuticals Inc. and the Company/(8)/
          10.18     Agreement and Waiver, dated December 23, 1996, by and
                    among VIMRX Pharmaceuticals Inc., the Company and The Aries
                    Fund, A Cayman Island Trust and The Aries Domestic Fund,
                    L.P./(8)/
          10.19     Services Agreement, dated December 23, 1996, by and
                    between VIMRX Pharmaceuticals Inc. and the Company/(8)/
          10.20     Amended and Restated Employment Agreement, made as of
                    December 1, 1996, between the Company and Allan R.
                    Goldberg/(8)/
          10.21     Form of Research Agreement, effective as of March 18,
                    1997, between the Company and Albert Einstein College of
                    Medicine of Yeshiva University/(9)/
          10.22     Separation Agreement, dated September 1997, by and between
                    the Company and Allan R. Goldberg/(10)/
          10.23     Agreement, made as of December 31, 1997, by and between
                    VIMRX Pharmaceuticals  Inc. and the Company
          23        Consent of Independent Accountants
          27        Financial Data Schedule

(1)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarterly period ended March 31, 1996.
(2)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (Reg. No. 33-63142), declared effective on August 12, 1993.
(3)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended September 30, 1995.
(4)  Incorporated by reference to the Company's Post-Effective Amendment No.3 to
     Registration Statement on Form S-1 (Reg. No. 33-63142).
(5)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarterly period ended June 30, 1996.
(6)  Incorporated by reference to the Company's Current Report on Form 8-K,
     dated August 30, 1996, as filed September 18, 1996.
(7)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended September 30, 1996.
(8)  Incorporated by reference to the Company's Current Report on Form 8-K,
     dated December 23, 1996, as filed January 7, 1997.
(9)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarterly period ended March 31, 1997.
(10) Incorporated by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended September 30, 1997.

                                      31
<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),
Mary 22, 1998

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  $1,485,000); 297,000 shares issued and
   outstanding at December 31, 1996                                                           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>

SIGNATURES

  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.


                                      INNOVIR LABORATORIES, INC.


                                      By:  /s/ Thomas R. Sharpe
                                           -----------------------------
                                           Thomas R. Sharpe, Ph.D.
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


                                      By:  /s/ Francis M. O'Connell
                                           ------------------------------
                                           Francis M. O'Connell
                                           Chief Financial Officer
                                           (Principal Financial and
                                           Accounting Officer)

Date:  March 25, 1998
<PAGE>

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.


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


/s/ Thomas R. Sharpe               Director             March  31, 1998
------------------------
Thomas R. Sharpe


/s/ William T. McCaffrey           Director             March  31, 1998
------------------------
William T. McCaffrey


/s/ Richard L. Dunning             Director             March  31, 1998
------------------------
Richard L. Dunning


/s/ David A. Jackson               Director             March  31, 1998
------------------------
David A. Jackson


/s/ Francis M. O'Connell           Director             March  31, 1998
------------------------
Francis M. O'Connell


/s/ Laurence D. Fink               Director             March  31,  1998
------------------------
Laurence D. Fink


/s/ Stanley Knowlton               Director             March  31,  1998
------------------------
Stanley Knowlton