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, 1996

                                       OR

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

                        For the transition period from to

                           Commission File No. 0-19153

                           VIMRx PHARMACEUTICALS INC.
             (Exact name of Registrant as specified in its charter)

                               Delaware 06-1192468
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) Identification No.)

                2751 Centerville Road, Wilmington, Delaware 19808
               (Address of principal executive offices) (Zip Code)

                  Registrant's       telephone number, including area code:

                                 (302) 998-1734

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 par value


         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 aggregate market value of the voting stock (Common Stock, $.001 par
value) held by  non-affiliates of the Registrant was approximately $ 143,019,702
on March 17,  1997 based on the closing  sale price of the Common  Stock on such
date.

         The aggregate number of outstanding  shares of Common Stock,  $.001 par
value, of Registrant was 54,429,937 on March 17, 1997.

                      Documents incorporated by reference:

                                      None



<PAGE>




                                     PART I

Item 1.   Business.


General


         VIMRx  Pharmaceuticals Inc. ("VIMRx" or the "Company") is a development
stage company focused on identifying,  evaluating, acquiring and commercializing
scientific  technologies  to be  developed  by the Company in  partnership  with
others.  The Company is engaged in developing  therapeutic and related  products
from synthetic  hypericin  principally for the treatment of viral and retroviral
diseases.  The  Company  also owns  approximately  68% of the  capital  stock of
Innovir Laboratories,  Inc. (Nasdaq:  INVR) ("Innovir") which, together with its
subsidiaries,  is engaged in the research and  development of Oligozymes,  a new
class of  biopharmaceutical  agents for the  treatment  of a wide array of human
diseases.  In order to diversify its potential  product line and  complement the
Company's recent acquisition of a controlling  interest in Innovir,  the Company
has entered into a research agreement with Columbia University, and continues to
seek emerging  innovative  technologies  to diversify its portfolio of potential
products.


Hypericin

         General

         The Company's principal product, VIMRxyn(R), is comprised of chemically
synthesized  hypericin and, in laboratory  tests, has inhibited the infection of
normal  cells by targeted  viruses.  Hypericin is an aromatic  polycyclic  dione
found in the stem and petals of the common  Saint John's wort, a plant which has
been used as a folk  remedy  since the Middle  Ages.  Hypericin  plant  extracts
continue  to be used as lay  treatments  for various  disorders.  The Company is
investigating  utilizing  VIMRxyn  as  a  treatment  for  viral  and  retroviral
diseases,  including the human immune  deficiency  virus  ("HIV"),  which is the
retrovirus  responsible for Acquired Immune Deficiency  Syndrome  ("AIDS"),  and
also is  investigating  utilizing  VIMRxyn as a treatment  for hepatitis C, as a
therapeutic for brain cancer  (glioma),  and as a means of inactivating  HIV and
other lipid-enveloped  viruses in blood collected for transfusions.  The Company
has a  worldwide  exclusive  license  to  commercialize  and  exploit  synthetic
hypericin  compounds for enumerated  purposes  acquired from New York University
and Yeda Research and Development Co., Ltd., an Israeli  corporation  engaged in
the  commercial  exploitation  of  scientific  developments  by  scientists at a
Weizmann  Institute  of  Science  in  Israel  (New  York  University  and  YEDA,
collectively, the "Hypericin Licensors").

         HIV/AIDS Research

         The  Company  has not  established  the  efficacy  of  VIMRxyn in human
clinical  trials for the treatment of AIDS. In 1994, the Company  completed data
analysis of Phase  I/Phase II human  clinical  trials  sponsored by the National
Institutes  of Health  to  determine  the  maximum  tolerated  dose and any side
effects of VIMRxyn as a treatment for AIDS. From the data collected, the results
showed a favorable  pharmacological profile with no major organ or hematological
toxicity,  and with skin  photosensitivity  as the  primary  dose-limiting  side
effect. All of the patients enrolled in the trials experienced varying levels of
skin  photosensitivity  and several experienced  non-life threatening acute skin
photosensitivity which required medical treatment.

                                       2
<PAGE>


         Between  January  and  September  1996,   human  clinical  trials  were
conducted  in  Thailand  by a Dutch  company  retained  by the  Company  under a
protocol  submitted to the U.S. Food and Drug  Administration  (the "FDA") under
the  Company's  existing  investigational  new drug  application  to  identify a
potentially   efficacious   lower  dose  of   VIMRxyn,   having   minimal   skin
photosensitivity,   as  a  treatment  for  AIDS.  The  dosage  administered  was
well-tolerated  by the patients and did not result in untoward  toxicity or skin
photosensitivity  and, based on the measurement criteria used, produced evidence
of anti-HIV activity.  The Company is currently  conducting in vitro interaction
studies  to  determine  how  VIMRxyn  may be  used  in  combination  with  other
anti-retroviral agents.

         HIV Inactivation Blood Studies

         In 1996,  VIMRx  continued  to explore  the  anti-viral  properties  of
VIMRxyn  with  respect  to  whole  red  blood  cells  in  blood   collected  for
transfusions.  The Company's  studies are being conducted under the direction of
Alfred M. Prince,  M.D., of the New York Blood Center.  Studies conducted by Dr.
Prince in 1996 have indicated that VIMRxyn combined with  fluorescent  light can
inactivate  the HIV virus in packed red blood cells.  The Company is  developing
protocols for additional studies to determine the safety, cellular integrity and
efficacy of HIV virus in activation in treated whole red blood cells.

         Hepatitis C Virus

         The  hepatitis  C virus  ("HCV") is a  blood-borne  pathogen  infecting
approximately  200,000 people in the United States each year, with approximately
seventy to ninety percent of such infected  persons (140,000 to 180,000 persons)
becoming chronic carriers of the virus. Chronic carriers of HCV are at high risk
of developing  cirrhosis and liver cancer later in life.  The Center for Disease
Control  estimates  that two and one-half to five million  Americans are chronic
carriers,  and there are an  estimated  400 million  persons  worldwide  who are
chronic  carriers,  most of whom are  located  in the Far East.  Despite  recent
advances  in  blood  screening  techniques,  it is  estimated  that one in 3,000
transfusions in the United States transmits HCV.

         Studies  funded by the  Company in the  laboratories  of Dr.  Alfred M.
Prince at the New York Blood  Center  and Dr.  Edward  Dubovi at the  Diagnostic
Laboratory  of the New York State  College  of  Veterinary  Medicine  at Cornell
University in Ithaca,  New York have  indicated that VIMRxyn may be effective in
inactivating  HCV. The studies were  conducted  on bovine viral  diarrhea  virus
("BVDV") as a  surrogate  for HCV, as BVDV can be  quantified  in cell  cultures
while HCV can only be  assayed in animal  studies  using  chimpanzees.  In their
studies,  Dr.  Prince and Dr. Dubovi  subjected  BVDV, in the presence of packed
human red blood  cells,  to  varying  concentrations  of VIMRxyn  and  different
periods of exposure to light,  and found that VIMRxyn  inactivated BVDV in doses
of only 1ug/ml  during ten minutes of exposure to light.  Such results  indicate
that VIMRxyn may be effective in inactivating HCV.

         In January  1997,  the Company  commenced  a Phase  I/Phase II clinical
trial to determine the antiviral effectiveness of VIMRxyn in reducing the amount
of HCV in the blood of patients  suffering from infectious  chronic hepatitis C.
The trial is being  conducted  at the Bronx VA  Hospital  in New York  under the
direction of Dr. Jeffrey Jacobson, Associate Professor of Infectious Diseases at
Mt. Sinai School of Medicine.

         Cancer/Malignant Brain Gliomas

         Research  groups  worldwide  are  studying  hypericin  for a variety of
medical uses. One such effort, that of William T. Couldwell,  M.D., Ph.D. in the
Division of  Neurological  Surgery at the University of North Dakota,  School of
Medicine,  demonstrated that hypericin  effectively inhibits the growth of human
brain cancer cells (malignant gliomas). The data suggest that in the presence of
hypericin,  glioma  cell death is due to  apoptosis,  a process by which  normal
cells die, but which is missing in cancer cells.  Hypericin appears to limit the
uninhibited  growth of cancer cells by restoring  the natural  mechanism of cell
death.

                                       3

<PAGE>

         In October  1996,  the Company  commenced  a Phase  I/Phase II clinical
trial at the  North  Dakota  School of  Medicine,  under  the  direction  of Dr.
Couldwell,  to determine  whether VIMRxyn has antiglioma  properties in patients
with malignant brain gliomas.

         The Company also has  initiated  pre-clinical  laboratories  studies to
evaluate  the  effectiveness  of VIMRxyn  against a variety of human cancer cell
lines,  including  non-Hodgkins  B-cell  lymphoma,   endometrial  carcinoma  and
cutaneous  T-cell lymphoma.  In some of these studies,  the Company is examining
the potential use of VIMRxyn as a  light-activated  topically  applied treatment
for dermatological diseases caused by viruses and cancers.

         Relationship with Hypericin Licensors

         Pursuant to an agreement  dated June 1, 1988,  as amended (the "License
Agreement"),  between the Company and the  Hypericin  Licensors,  the  Hypericin
Licensors granted the Company a worldwide exclusive license to commercialize and
exploit  natural  hypericin  and  synthetic  hypericin  compounds to  inactivate
viruses  and  retroviruses,  as a  therapeutic  or  preventative  for  viral  or
retroviral diseases, and for anti-glioma (brain tumor) indications.

         Pursuant  to the  License  Agreement,  the  Company is required to make
royalty and related  payments to the Hypericin  Licensors as follows:  (i) 7% of
net sales of licensed products by VIMRx and/or its affiliates,  (ii) 4.4% of net
sales of licensed products by sublicensees of VIMRx,  (iii) 40% of down payments
and research and development  payments  received by VIMRx from sublicensees with
respect to the licensed products,  and (iv) 12% of all consideration received by
VIMRx as an  investment,  loan or capital  contribution  from an entity  selling
licensed  products (to be offset against 50% of any royalties  payable under (i)
and (ii) above);  50% of the cumulative  patent expenses  incurred by VIMRx will
offset up to 50% of the  foregoing  royalty  payments.  Minimum  annual  royalty
payments of  $100,000  are  required to be made by the Company to the  Hypericin
Licensors under the License Agreement.

         The  Hypericin  Licensors  have  made no  representation  or  warranty,
express or implied,  with  respect to the  research  results or the  efficacy or
possible commercial success of synthetic hypericin compounds.

         The Company is required to indemnify  the  Hypericin  Licensors for all
liability  resulting  from  commercialization  of the  licensed  products  to be
secured,  prior to the  marketing  of any licensed  product,  by  $5,000,000  of
product  liability  insurance  coverage  with the Hypericin  Licensors  named as
additional  insureds,  or by an  indemnity  from an entity  satisfactory  to the
Hypericin  Licensors.  Under the Agreement,  any  improvements,  new inventions,
developments or discoveries by VIMRx,  its employees,  affiliates or consultants
with  respect to the  technology  covered by the license is the  property of the
Hypericin  Licensors.  The exclusive  license is subject to  cancellation in the
event VIMRx fails to comply with its terms and conditions,  including payment of
the royalties and other amounts due thereunder.


                                       4
<PAGE>




Oligozymes; Affiliation with Innovir

         General

         In December  1996, the Company  acquired an  approximate  68% ownership
interest  in  Innovir,  a  biotechnology  company  engaged in the  research  and
development of a new class of biopharmaceutical therapeutic agents, collectively
termed  "Oligozymes"  by  Innovir,  for the  treatment  of a wide array of human
diseases.  An Oligozyme is a chemically modified oligomer,  not composed of RNA,
that  participates in an essential  manner in the  sequence-specific,  catalytic
cleavage of a targeted RNA molecule.  The  management of the Company and Innovir
believe  that   therapeutic   agents  based  upon  Innovir's   proprietary  core
technologies  have  the  potential  to be  cost-effective  and  highly  specific
therapeutics for designated disease targets and that these technologies can also
be used to fill a growing need in the pharmaceutical industry for better methods
to identify and validate  targets for drug  discovery.  VIMRx's  management also
believes that its collaboration with Columbia University may provide synergistic
opportunities  for the  Oligozyme  technology  owned by Innovir.  See  "Research
Agreement with Columbia University."

         EGS Oligozymes

         One of Innovir's two core  technologies,  its External  Guide  Sequence
("EGS") Oligozyme  technology,  directs a naturally  occurring cellular ribozyme
(RNase  P)  to  disease-causing  RNA  so  that  the  RNase  P  will  cleave  the
disease-causing  RNA and  render  it  inactive.  An EGS  Oligozyme  is a  small,
chemically-modified  oligonucleotide segment that binds to a disease-causing RNA
to create a  structure  resembling  a type of RNA which is  cleaved  by RNase P,
which thereby  destroys the  disease-causing  RNA  molecules  before they create
disease-causing proteins. Innovir's EGS Oligozyme technology is based upon Nobel
Prize-winning research by Sidney Altman, Ph.D., Sterling Professor of Biology at
Yale  University,  a consultant to and member of the Science  Advisory  Board of
Innovir, and Innovir has an exclusive worldwide license from Yale University for
the commercial application of such technology.  Innovir is investigating the use
of EGS  Oligozymes as a therapeutic  to combat target viral and other  diseases,
and  currently is focussing on hepatitis B,  hepatitis C, cancer,  psoriasis and
bacterial infections caused by drug-resistant microorganisms.

         RILON Oligozymes

         Innovir's second core technology is its RILON(TM) Oligozyme technology,
which was acquired by Innovir as a result of its  acquisition of VIMRx Holdings,
Ltd.  ("Holdings")  from the  Company  in  December  1996.  See "Item 13 Certain
Relationships  and  Related  Transactions."  RILON  Oligozymes  are  composed of
certain types of chemically modified  oligoribonucleotides,  and are proprietary
to Innovir  through  Holdings'  worldwide  exclusive  license  from the European
Molecular  Biology  Laboratory  and  certain  patents  held  by  Innovir.  RILON
Oligozymes consist of two classes: Type 1 RILON Oligozymes cut specific targeted
RNA  molecules  in a  manner  intrinsic  to the  RILON  Oligozyme.  Type 2 RILON
Oligozymes,  which are  shorter in length than Type 1 RILON  Oligozymes  and are
patented by Innovir's  subsidiary,  VIMRx Holdings,  Ltd.,  participate with the
substrate of the  targeted RNA molecule to form a structure  that results in the
sequence-specific  catalytic  cleavage  of the target RNA  molecule.  Innovir is
evaluating  the  potential  use of RILON  Oligozymes  to combat  viral and other
diseases, including cancer, central nervous system diseases and psoriasis.

         Drug Target Identification and Validation

         Innovir also is investigating the use of its Oligozyme  technologies to
identify and validate  disease targets for new drugs.  Oligozymes can be used in
drug   target   identification   and   validation   as   substitutes   for   the
difficult-to-find  selective inhibitors which otherwise are required in the drug
target  identification  and validation  process.  Such  substitution is possible
because  Oligozymes mimic the effect of select inhibitors at an earlier stage of
the  disease-causing  process  than  inhibitors.  While  inhibitors  inhibit the
production of disease-causing proteins, Oligozymes inhibit the production of the
disease-causing  messenger  RNA  molecules  that  produce  such  disease-causing
proteins and, in both cases, the pharmacological effect is the same.

                                       5
<PAGE>

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

         Management  of the Company and  Innovir do not  anticipate  that any of
Innovir's  proposed  products will be available for commercial  sale for several
years, if at all. Innovir's current capital is insufficient to enable Innovir to
complete the development of any of its products.


Research Agreement with Columbia University

         In March 1997, VIMRx entered into a research  agreement relating to the
discovery,  mapping,  sequencing  and validation of  disease-related  genes with
Columbia  University  ("Columbia"),  whereby VIMRx,  through a newly established
subsidiary,  VIMRx Genomics,  Inc.,  ("Genomics"),  90%-owned by the Company and
10%-owned  by  Columbia,  will  provide $30  million in funding to the  Columbia
Genome Center  established by Columbia,  with $4.7 million to be paid during the
first year in  quarterly  installments.  In exchange,  Genomics  will receive an
exclusive  license  to  develop,  manufacture,  use,  sell  or  market  products
resulting  from any invention  research  information  and  biological  materials
developed  by the  Columbia  Genome  Center  and  funded  under  the  agreement.
Following an initial five-year term, the agreement  automatically will renew for
successive  two-year  terms and, in the absence of an agreement to the contrary,
the amount of funding  will be  increased  at a rate of 9% for every  additional
year.  The  agreement is terminable  by either  Columbia or Genomics  during the
initial  five-year  term upon six months  notice,  but in no event  earlier than
September 7, 1999. Under the agreement,  VIMRx agreed to issue 200,000 shares of
Common Stock to Columbia,  and granted Columbia "piggyback"  registration rights
with respect thereto during the period April 1, 1997 to April 1, 1999.

         The  Columbia  Genome  Center  (the  "Center")  is devoted to  mapping,
sequencing,  gene discovery and  technology  development on the genomes of human
and selected  model  organisms.  The Center  evolved from the work of a group at
Columbia under the joint direction of Drs. I.S. Edelman and A. Efstratiadis over
the last five years. This group has advanced the technology used in fine mapping
of human chromosomes,  generated a detailed cosmid-based map of human chromosome
13,  fabricated  highly  representative  normalized  human  cDNA  libraries  and
contributed  significantly to gene discovery,  e.g., the Cu-transport protein of
Wilson's Disease. The Center is building on this base to develop a comprehensive
genome  center  operating  at the  forefront of this field.  Integrated  genomic
mapping and  sequencing  is used to facilitate  gene  discovery and gene therapy
strategies in collaboration with laboratories throughout the University.

         Investigators  at the  Center  have been  involved  in  localizing  and
identifying  novel human  genes  associated  with  genetically  based  diseases,
including cancer,  late-onset  Alzheimer's Disease,  epilepsy,  manic-depressive
disorder  and  glaucoma.  VIMRx's  management  believes the  collaboration  with
Columbia may also provide synergistic opportunities for the Oligozyme technology
owned by Innovir.  As the Center provides  access to proprietary  gene sequences
implicated  in  disease   processes,   the  Oligozyme   technology  may  aid  in
understanding the function of such genes and potentially lead to the development
of new diagnostic and therapeutic compounds. See "--Oligozymes - General."

         To enhance the commercial potential of the collaboration, VIMRx intends
to seek technology  partnerships with pharmaceutical and/or diagnostic companies
and to solicit equity investments in Genomics from potential technology partners
and other investors.

         Eric A. Rose, M.D. and Michael Weiner,  M.D., directors of the Company,
have affiliations with Columbia. See "Item 13 -Certain Relationships and Related
Transactions."

                                       6
<PAGE>


Patents and Licenses

         The Company has been  granted an  exclusive  license for the  worldwide
rights  to  synthetic  hypericin  compounds  for  viral,  retroviral  and  other
applications by the Hypericin Licensors which have been issued five U.S. patents
for anti-viral and anti-retroviral  applications and manufacturing processes and
have filed  patent  applications  for U.S. and foreign  patents  relating to the
synthesis and therapeutic uses of synthetic  hypericin  compounds.  In addition,
the  Company  has  acquired  a  worldwide   exclusive   license  for  rights  to
commercialize  and exploit  synthetic  catalytic  oligonucleotide  compounds for
pharmaceutical  and  diagnostic  products.  There can be no assurance  that such
patents,  or pending patents if issued,  will provide adequate protection to the
Company.  Infringement  claims may be asserted  against  the Company  and/or the
respective  licensors (with respect to which the Company has agreed to indemnify
the  Hypericin  Licensors ) which,  if  affirmed,  might  require the Company to
acquire licenses from others.

         The Company also has an exclusive license to develop, manufacture, use,
sell or  market  products  resulting  from any  invention  or  research  product
developed by the Columbia Genome Center under its research agreement.  See "Item
1 - Business - Research Agreement with Columbia University."

         Innovir has an exclusive license from Yale University for the worldwide
rights to 22 U.S.  patents  and  patent  applications  for  therapeutic  uses of
Oligozymes,  oligonucleotide delivery, and diagnostic applications of ribozymes.
Corresponding foreign applications are pending or issued.

         The Company is aware of patents in the United States and Europe held by
an unaffiliated  third party relating to catalytic  ribonucleic  compounds which
may be  infringed  by  certain  synthetic  catalytic  oligonucleotide  compounds
licensed to VIMRx Holdings, Ltd., in which event a license from such third party
would be required.  There can be no assurance that VIMRx Holdings, Ltd. would be
able to attain such license on reasonable terms, or at all.

Manufacturing

         VIMRx has no  manufacturing  capability and has contracted with outside
suppliers  to  develop,  produce,  and  package  therapeutic  formulations  of a
synthesized  form of hypericin  for the human  clinical  trials.  The  synthesis
process has been developed at The Weizmann Institute of Science in Israel, using
a  natural  product  available  from a  limited  number  of  specialty  chemical
suppliers as the precursor.  Only limited quantities of synthetic hypericin have
been  manufactured  and the  production  process must be further  developed  and
refined for  commercial  quantities  to be produced,  as to the success of which
there can be no assurance.

         Innovir manufactures EGS Oligozymes and RILON Oligozymes for use in its
test tube, cell culture,  animal testing and target validation programs,  and is
exploring other sources of supply.

                                       7
<PAGE>

Government Regulation

         The  manufacture  and marketing of  therapeutic  products is subject to
extensive  regulation  by the FDA, as well as by state and foreign  authorities.
Prior to the release of VIMRxyn for marketing as a therapeutic product or agent,
its  tolerance,  safety and efficacy as a treatment must be established in human
clinical  trials  and  approval  of a new  drug  application  ("NDA")  obtained.
Although  the  Company-sponsored  Thailand  trials  did not  result in  untoward
toxicity or skin  photosensitivity  and, based on the measurement criteria used,
produced evidence of anti-HIV activity in 10 out of 12 patients, there can be no
assurance that the FDA will accept the clinical results  therefrom.  Among other
additional  regulatory  requirements,  it is possible that additional toxicology
studies will need to be performed in the United  States,  and Phase III clinical
trials, which are both costly and time-consuming,  will need to be undertaken to
obtain an NDA. Prior to its commercialization as a means of inactivating HIV and
other  lipid-enveloped  viruses in blood collected for  transfusions,  a product
license application ("PLA") or an NDA must be obtained.  These are long-term and
costly  processes  as to the  successful  completion  of which  there  can be no
assurance.

         In addition to regulations  enforced by the FDA, the Company's proposed
products also may be subject to  regulation  under the  Occupational  Safety and
Health Act, the Environmental  Protection Act, the Toxic Substances Control Act,
the  Resource  Conservation  and Recovery  Act and other  present and  potential
future, state or local regulations.  Outside the United States, the Company also
is subject to foreign  regulatory  requirements  governing human clinical trials
and  marketing  approval for drugs.  The  requirements  governing the conduct of
clinical trials,  product licensing,  pricing and reimbursement vary widely from
country to country.

         Innovir's  development,  manufacture and sale of therapeutics similarly
is subject to regulation by a variety of governmental authorities.


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  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,   clinical  testing,  manufacturing,
regulatory  affairs,  distribution  and  marketing.  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 and may be in a better position to develop,
manufacture and market products. Current and future treatments for AIDS, and the
use of  combination  therapy in connection  therewith,  may render the Company's
synthetic  hypericia program for treating AIDS obsolete or  non-competitive.  In
addition,  forms of  hypericin  extracted  from  plants  are  being  used as lay
treatments for a variety of disorders,  including AIDS. The Company is similarly
subject  to   substantial   competition   from   pharmaceutical,   chemical  and
biotechnology  firms in the attempt to develop a means of inactivating blood and
other  lipid-enveloped  viruses  in blood  collected  for  transfusions,  and in
seeking to develop  treatments for hepatitis C and therapeutics for brain cancer
(glioma).

         Innovir  is  likewise   subject  to  substantial   competition  in  the
development and marketing of its Oligozyme technologies.


Employees

         At March 1, 1997,  the  Company  had nine  full-time  employees  in the
United States consisting of its five executive  officers,  one financial analyst
and three administrative  assistants. At December 31, 1996, the Company believes
that its relations with its employees is satisfactory.

         Innovir has 27  full-time  U.S.  employees  and 23  full-time  non-U.S.
employees.



                                       8
<PAGE>



Consultants

         The Company is dependent on third  parties for  significant  aspects of
its  research and  development  operations.  Research  with respect to potential
therapeutic  applications for hypericin and certain  analogues  thereof is being
performed by New York  University  Medical Center and the Weizmann  Institute of
Science in Israel (the "Research  Institutions")  under the  supervision of four
principal  researchers  who,  together  with other  scientists  at the  Research
Institutions,  are also  consultants to the Company.  Consultants have also been
retained to assist in  supervising  the IND regulatory  process,  monitoring the
human clinical trials and establishing  the toxicology tests for hypericin.  The
Company also retains  financial  consultants.  The Company's  Medical  Director,
responsible for developing  clinical protocols and monitoring the performance of
these protocols, was also a consultant to the Company through February 28, 1995.

         The  Company's  consultants  are  employed  by and/or  have  consulting
agreements  with entities other than the Company,  some of which may conflict or
compete  with the Company,  and are  expected to devote only a minor  portion of
their time to the affairs of the Company.  Regulations or policies now in effect
or adopted in the future by their respective  employers may limit the ability of
such persons to consult with the Company. The loss of the services of certain of
such persons may adversely affect the Company.

         In  August  1995,  the  Company  entered  into a  financial  consulting
arrangement  with Lindsay A. Rosenwald,  M.D. (who was elected a director of the
Company in June 1996) in  consideration  for the grant of an option to  purchase
2,000,000  shares of Common  Stock at  approximately  $.53 per share  commencing
August 7, 1996 (one year from the date of grant)  and  expiring  August 7, 1998,
and in  November  1995,  entered  into  consulting  arrangements  with Donald G.
Drapkin and Eric A. Rose, M.D., directors of the Company, pursuant to which each
was granted options to purchase  650,000 shares of Common Stock at approximately
$.94 per  share,  exercisable  cumulatively  at the rate of 25% of the number of
underlying shares per year commencing one year from the date of grant. See "Item
13 - Certain Relationships and Related Transactions."


Item 2.   Properties.

         The  Company  occupies  5,266  square  feet  of  office  space  at 2751
Centerville  Road,  Suite 210,  Wilmington,  Delaware under a lease at a monthly
rent of $9,009.  The lease  expires on August 31, 1999,  with an option to renew
for five years.

         Innovir  sublets  approximately  8,500 square feet of space in New York
City for its laboratory and executive offices,  approximately  5,000 square feet
of space in  Cambridge,  England,  approximately  2,500  square feet of space in
Gottingen,  Germany  and  approximately  4,000  square feet of space in Rosdorf,
Germany.


Item 3.   Legal Proceedings.

         None.


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

         None.


<PAGE>



                                       9
<PAGE>




                                                       PART II

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


         The Company's Common Stock is traded in the over-the-counter  market on
The Nasdaq Stock  Market's  National  Market  System under the symbol VMRX.  The
following  table  sets  forth for the  Company's  Common  Stock the high and low
closing  sales  prices for each  calendar  quarter  from January 1, 1995 through
March 17, 1997. Prior to December 31, 1996, the Company's Common Stock traded on
The Nasdaq Stock Market's Small-Cap Market.

                                           High                      Low
1995
First Quarter................              25/32                     3/8
Second Quarter...............               5/8                     13/32
Third Quarter................             1 5/16                    7/16
Fourth Quarter...............             1 3/16                    25/32

1996
First Quarter................             3 1/32                    1 1/8
Second Quarter...............              6 1/4                   2 25/32
Third Quarter................             4 15/16                     3
Fourth Quarter...............             3 13/16                  2 9/32

1997
First Quarter (through
  March 17, 1997)............             3 1/2                    2 15/32


         On March 17,  1997,  there  were  approximately  14,000  holders of the
Company's  Common Stock,  including  beneficial  owners of shares  registered in
nominee or street name.

         The Company is in the development  stage,  has not paid a cash dividend
and does not anticipate the payment of cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

         On May 23, 1996, the Company issued to Dr. Herbert Stadler  warrants to
purchase  365,000  shares of the Company's  Common Stock at an exercise price of
$.01 per share, as part of the consideration paid by VPI Holdings,  Ltd. (then a
subsidiary of the Company but subsequently sold to Innovir  Laboratories,  Inc.)
to Dr. Stadler for acquiring all of the issued and outstanding  capital stock of
Ribonetics  GmbH.  Dr.  Stadler  was  also  paid  $1,500,000  in  cash  in  such
transaction.


                                       10
<PAGE>

         On June 21, 1996, the Company completed a private placement pursuant to
a  subscription  agreement  dated March 21, 1996,  to a group of  investors,  of
2,799,991  shares  of Common  Stock  and  1,399,993  Common  Stock  Subscription
Warrants,  for an  aggregate  purchase  price of  $4,199,987.  Each Common Stock
Subscription  Warrant is exercisable through June 20, 2006 to purchase one share
of  Common  Stock at an  exercise  price of $1.50  per  share.  Pursuant  to the
subscription  agreement,  the private placement investors agreed not to transfer
their shares of Common Stock or warrants prior to June 21, 1997, and the Company
agreed to register the shares of Common Stock and warrants for public sale under
the Securities Act of 1933 subsequest thereto.  Concurrently with the closing of
the  private  placement,  1,000,000  warrants  issued  in  conjunction  with the
Company's December 1995 bridge loan financing  automatically were converted into
1,000,000 Common Stock Subscription Warrants.

         On December  23,  1996,  the Company  issued an  aggregate of 3,000,000
shares of Common  Stock to The Aries  Fund,  a Cayman  Island  trust (the "Aries
Trust"), and The Aries Domestic Fund, L.P., a Delaware limited partnership ("The
Aries  Limited  Partnership"  and,  together  with the Aries  Trust,  the "Aries
Funds"), as part of the consideration for 9.5 million shares of the Common Stock
of Innovir  Laboratories,  Inc. See "Item 13 Certain  Relationships  and Related
Transactions."

         The foregoing transactions of the Company were exempt from registration
under the  Securities Act of 1933, as amended,  under  Sections  4(2),  2(3) and
3(a)(9) thereunder,  and all stock and warrant certificates issued in connection
therewith were legended to reflect their restricted status.


                                       11
<PAGE>





Item 6.   Selected Financial Data.

         The  following  selected  financial  data  have been  derived  from the
Company's  audited  financial  statements.  The  Statements of  Operations  Data
relating  to the  fiscal  years  1994,  1995 and 1996  and for the  period  from
inception  through December 31, 1996 and the Balance Sheets Data at December 31,
1995 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 Operations," included elsewhere in this Annual Report on Form 10-K.


Statements of Operations Data:

<TABLE>
<CAPTION>

                                                                                December 30, 1986
                                                    Year Ended December 31,       (Inception) to
                                           1996          1995             1994   December 31, 1996
                                           ----          ----             ----
<S>                                     <C>            <C>            <C>         <C>

Operating expenses:
    Research and development..          $2,950,000      $2,840,000    $1,463,000  $15,939,000
    Purchased research and
      development.............          14,484,000          -            -         14,484,000
       General and administrative        4,300,000       2,272,000     1,646,000   13,782,000
                                        ----------    ------------    ----------   ----------
                                        21,734,000       5,112,000     3,109,000   44,205,000
                                        ----------      ----------    ----------   ----------

Other (income) expense:
    Royalty payments..........           100,000           100,000       100,000      300,000
    Interest (income).........        (1,792,000)         (160,000)     (189,000)  (2,951,000)
    Interest expense..........           329,000             2,000                    413,000
    Provision for losses (recovery)
      on notes receivable.....               -               -            -           135,000
    Minority interest in consolidated
       subsidiary...................    (116,000)            -            -          (116,000)
    Investment in and advances to
      research and development
      entities charged to expense            -             185,000       515,000      700,000
    Other - net....................     (395,000)            1,000        74,000     (315,000)
                                    ------------      -------------   ----------     ---------
                                      (1,874,000)          128,000       500,000   (1,834,000)
                                   -------------      -------------   ----------   -----------

Net loss.....................        $19,860,000        $5,240,000    $3,609,000   $42,371,000
                                     ===========      ============  ============   ===========

Net loss per share............         $.50              $.27           $.19
                                       ====              ====           ====

Weighted average number of
    shares of Common Stock
    outstanding...............     39,398,644           19,747,595    19,066,754
                                 ============           ==========   ===========

Balance Sheets Data:
<CAPTION>
                                                    December 31,
                                   --------------------------------------------
                                    1996            1995           1994
                                    ----            ----           ----
<S>                            <C>              <C>             <C>

    Working capital...........  $ 44,848,000     $ 391,000     $ 4,742,000
    Total assets..............    51,692,000     2,958,000       5,249,000
    Total liabilities.........     3,101,000     2,698,000         116,000
    Minority interest in
        subsidiary............    2,381,000
    Deficit accumulated during
       development stage......   (42,371,000)   (22,511,000)    (17,271,000)
    Stockholders' equity......    46,210,000        260,000       5,134,000
</TABLE>



                                       12
<PAGE>

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

Years Ended December 31, 1996 and 1995

         Total  operating   expenses   increased  by  325%   ($16,622,000)   due
principally to a $14,484,000  purchased research and development  charge, an 89%
($2,028,000)  increase  in  general  and  administrative   expenses  and  an  4%
($110,000) increase in research and development expenses.

         The $14,484,000  purchased  research and development charge consists of
$3.5  million  from the  acquisition  of  Ribonetics  GmbH in May 1996 and $10.9
million net of a gain of $2,889,000 on the sale of VIMRx Holdings,  Ltd. ("VHL")
from the acquisition of an approximate 68% interest in Innovir in December 1996,
in connection with the acquisition of a controlling  interest in Innovir.  These
charges to the statement of operations  reflect the value placed on the on-going
research and  development  of the Oligozyme  technologies.  Approximately  $13.5
million of this expense is non-cash  incurred  through the issuance of 3,000,000
shares of Common Stock and warrants to purchase 365,000 shares of Common Stock.

         General  and   administrative   expenses   increased  89%  ($2,028,000)
principally due to  approximately  $1 million  non-recurring  costs  principally
related  to   employees,   recruiting,   and  bridge  loan  finance   costs  and
approximately  $1  million  increases  in  recurring  expenses  for  public  and
stockholder  relations,  consulting  fees and costs  related  to VHL's  European
operations and Innovir.

         Research and development  expenses increased 4% ($110,000)  principally
due to an increase in salaries and expenses related to VHL's European operations
and $350,000 write-down on Epoch Investment, offset by a $464,000 termination of
agreement  credit  resulted from the  termination of the Company's  research and
development with Ribonetics in 1996.

         Interest income  increased $1.6 million in 1996 as compared to 1995 due
to an increase in funds  available for  investments  (see  Liquidity and Capital
Resources) and a higher  effective  interest rate.  Interest expense of $327,000
related  principally  to the December  1995 bridge loan which was repaid in June
1996.

         Other  income  increased  $396,000 due to capital  gains on  short-term
investments.

         The foregoing resulted in a 279% ($14,620,000) increase in the net loss
for the year ending December 31, 1996.


Years Ended December 31, 1995 and 1994

         Total operating  expenses  increased by 64%  ($2,003,000)  due to a 94%
increase in research and development expenses, and a 38% increase in general and
administrative expenses.

         Research and development expenses increased 94% ($1,377,000) due to (1)
$1,053,000  paid to  Ribonetics  in  1995  under  the  Ribonetics  research  and
development  agreement,  (2) a $464,000  expense for the accrual of common stock
due to Ribonetics under the Ribonetics research and development  agreement (this
accrual  was  reversed  in the  first  quarter  of 1996 when the  agreement  was
terminated),  (3) a $317,000 increase in research and development administrative
salaries,  (4) a $76,000  increase in consulting and other  expenses  related to
research in the United Kingdom,  partially offset by (5) $125,000,  $213,000 and
$126,000  decreases in expenses related to CambES Ltd., drug production  support
and drug production  development,  respectively,  and (6) a $69,000  decrease in
miscellaneous research and development expenses.


                                       13
<PAGE>

         General and administrative expenses increased 38% ($626,000) due to (1)
a $449,000  increase in legal fees for the acquisition of intellectual  property
from  Ribonetics,  (2) a $37,000  increase  in rent  expense  as a result of the
Company's  lease in the third  quarter  of 1994 of new  space for its  executive
offices  and new space for the newly  formed U.K.  subsidiary  company and (3) a
$90,000 increase in legal fees for patents,  partially offset by (4) $24,000 net
decreases in recruiting, relocating, consulting and other expenses.

         Other  (income)  expense  decreased  by $372,000  principally  due to a
decrease in  investments in and advances for research and  development  entities
charged to expense.

         The foregoing  resulted in a 45% ($1,631,000)  increase in the net loss
for the year ended December 31, 1995.


Liquidity and Capital Resources

         The Company is in the  development  stage,  has  realized no  operating
revenues and has financed its operations through the sale of its securities.

         The Company had  $46,911,000 in cash,  cash  equivalents and marketable
securities  held for sale at December 31,  1996,  as compared to  $2,219,000  at
December 31, 1995 and working  capital of  $44,848,000  at December 31, 1996, as
compared  to $391,000 at December  31,  1995.  The  increase in cash and working
capital  position  results from the net proceeds  upon exercise of the Company's
Redeemable  Class A and  Class B  Warrants  and a  private  placement  financing
offset, in part, by funds used in the operations of the Company.

         On April 9,  1996,  the  Company  exercised  its  right to  redeem  all
outstanding  Redeemable  Class Warrants (the "Class A Warrants") on May 10, 1996
(the  "Redemption  Date").  Between  January  1, 1996 and the  Redemption  Date,
approximately  13,900,000 Class A Warrants were exercised resulting in the issue
of one share of Common  Stock and one  Redeemable  Class B Warrant (the "Class B
Warrant") resulting in net proceeds of approximately $20.1 million.


         On April 25,  1996,  the  Company  exercised  its  rights to redeem all
outstanding  Redeemable  Class  B  Warrants  on June  13,  1996,  (the "B  Class
Redemption  Date").  Between  January 1, 1996 and the B Class  Redemption  Date,
approximately  14,200,000  Class B Warrants  were  exercised,  resulting  in the
issuance  of one  share of Common  Stock  for  $2.25.  The  exercise  of Class B
Warrants yielded net proceeds of approximately $30.7 million.


         On June 21, 1996, the Company completed a private placement pursuant to
a  subscription  agreement  dated March 21, 1996,  to a group of  investors,  of
2,799,991  shares  of Common  Stock  and  1,399,993  Common  Stock  Subscription
Warrants,  for an aggregate  purchase price of  approximately  $4,199,987.  Each
Common  Stock  Subscription  Warrant is  exercisable  through  June 20,  2006 to
purchase  one share of Common  Stock at an  exercise  price of $1.50 per  share.
Pursuant to the subscription  agreement,  the private placement investors agreed
not to transfer their shares of Common Stock or warrants prior to June 21, 1997,
and the Company  agreed to register  the shares of Common Stock and warrants for
public sale under the Securities Act of 1933  subsequent  thereto.  Concurrently
with  the  closing  of the  private  placement,  1,000,000  warrants  issued  in
conjunction with the Company's December 1995 bridge loan financing automatically
were converted into 1,000,000 Common Stock Subscription Warrants.


                                       14
<PAGE>


         The  Company   expects  to  incur   substantial   expenditures  in  the
foreseeable future for the research and development and commercialization of its
proposed products.  Based on current  projections,  which are subject to change,
the  Company's  management  believes  that the  present  balance  of cash,  cash
equivalents  and marketable  securities held for sale, is sufficient to fund its
operations  for over two years,  assuming no capital  infusions  or revenues are
received (it is management's  belief,  however,  that such capital infusions and
revenues will occur).  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.




Item 8.   Financial Statements and Supplementary Data.

         See Index to Financial Statements on page F-1.

         No financial  statement  schedules  are  required  because they are not
applicable  or the  information  is disclosed  in the  financial  statements  or
related notes.

         Item 302 - Supplementary Financial Information of Regulation S-K is not
applicable.

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

         None.




                                       15
<PAGE>





                                    PART III


Item 10.   Directors and Executive Officers of the Registrant.

         The directors and executive officers of VIMRx are as follows:


 Name                                 Age                       Position
 Richard L. Dunning                   51      President and Chief Executive
                                              Officer
 Francis M. O'Connell                 51      Vice President, Finance and Chief
                                              Financial Officer
 David A. Jackson, Ph.D.              54      Executive Vice President and Chief
                                              Scientific Officer
 Alfonso J. Tobia, Ph.D.              54      Vice President, Research and
                                              Development
 Donald G. Drapkin                    48      Director (1)
 Laurence D. Fink                     48      Director (2)
 Jerome Groopman, M.D.                44      Director
 Linda G. Robinson                    43      Director (2)
 Eric A. Rose, M.D.                   45      Director (1)
 Lindsay A. Rosenwald, M.D.           41      Director (1)
 Michael Weiner, M.D.                 50      Director (2)

---------------------------
(1)  Member of Compensation Committee.
(2)  Member of Audit Committee.


         RICHARD L. DUNNING has been  President and Chief  Executive  Officer of
the Company since April 1996.  Prior to joining the Company,  Mr. Dunning served
as Executive  Vice  President  and Chief  Financial  Officer of the DuPont Merck
Pharmaceutical Company since 1991.

         FRANCIS M. O'CONNELL, CPA, has served as Chief Financial Officer of the
Company since February  1995.  Prior to joining the Company,  Mr.  O'Connell was
Director of Litigation  Support in the New York office of J.H. Cohn & Company, a
C.P.A.  firm, from June 1994 to February 1995, and was  Vice-President of Hickok
Associates Inc., a financial  consulting company,  from March 1992 to June 1994,
and for 17 years prior thereto,  was a partner with KPMG Peat Marwick  (formerly
KMG Main Hurdman).

         DAVID A. JACKSON,  Ph.D.,  has served as Executive  Vice  President and
Chief  Scientific  Officer of VIMRx  Pharmaceuticals  Inc. since September 1996.
Prior to joining VIMRx, Dr. Jackson was with DuPont Merck Pharmaceutical Company
since 1991,  most  recently  serving as Senior  Director,  Cancer,  Virology and
Molecular Biology Research.


                                       16
<PAGE>

         ALFONSO J. TOBIA, Ph.D. was elected an executive officer of the Company
in March  1995,  having  joined the  Company  as Vice  President,  Research  and
Development  in June 1994.  Prior to joining  VIMRx,  Dr.  Tobia  served as Vice
President   of   Scientific   Affairs  at  Great   Valley   Pharmaceuticals,   a
biopharmaceutical  company, from April 1993 to June 1994. From 1990 to 1991, Dr.
Tobia  served  as  Senior  Director  of  R.W.  Johnson  Pharmaceutical  Research
Institute; from 1985 to 1990, as Director of Pharmacology at Johnson & Johnson's
Ortho Pharmaceutical  Corporation;  and from 1974 to 1977 as Senior Scientist at
SmithKline Laboratories.

         DONALD G. DRAPKIN was elected a director of the Company on November 17,
1995.  Since March 1987,  Mr. Drapkin has served as Vice Chairman and a director
of  MacAndrews  & Forbes  Holdings  Inc.,  and was a partner  in the law firm of
Skadden,  Arps, Slate,  Meagher & Flom in New York City for more than five years
prior  thereto.  Mr.  Drapkin  also  serves  as  a  director  of  the  following
corporations which file reports pursuant to the Securities Exchange Act of 1934:
The Coleman Company, Inc., Coleman Holdings Inc., Coleman Worldwide Corporation,
Marvel Entertainment Group, Inc., Marvel Holdings Inc., Marvel (Parent) Holdings
Inc.,  Marvel III Holdings Inc., Revlon Consumer  Products  Corporation,  Revlon
Worldwide Corporation and Toy Biz, Inc.

         LAURENCE  D. FINK was  elected a director  of the Company in June 1996.
Mr. Fink has been Chairman and Chief Executive Officer and Director of BlackRock
Financial Management  (investment advisor) since 1988. Mr. Fink is a director of
the closed end funds for which BlackRock serves as investment advisor.

         JEROME  GROOPMAN,  M.D.  was  elected a director of the Company in June
1996.  Dr.  Groopman has been a professor of Medicine at Harvard  Medical School
since 1993.  Dr.  Groopman  has been an  attending  physician  and member of the
executive  committee of New England Deaconess  Hospital since 1989. Dr. Groopman
is director of the  following  corporations  which file reports  pursuant to the
Exchange Act: Advance Tissues Sciences.

         LINDA G.  ROBINSON  was elected a director of the Company in June 1996.
Ms. Robinson has been Chairman,  Chief Executive Officer and Partner of Robinson
Lerer  Sawyer  Miller  (strategic  communications)  for more  than the past five
years.  Ms.  Robinson is a director  of the  following  corporation  which files
reports  pursuant  to  the  Exchange  Act:  Laboratory  Corporation  of  America
Holdings.

         ERIC A. ROSE,  M.D.  was  elected a director of the Company in November
1995. Dr. Rose is  Surgeon-In-Chief at Columbia  Presbyterian  Medical Center in
New York, a position he has held since  August  1994,  has served as Chairman of
the  Department of Surgery at the College of Physicians and Surgeons of Columbia
University since 1994 and as Director of the Division of Cardiothoracic  Surgery
of the Department since 1990. Dr. Rose is a past president of the  International
Society for Heart and Lung Transplantation.

     LINDSAY A.  ROSENWALD,  M.D.  was elected a director of the Company in June
1996.  Dr.  Rosenwald  has been the  Chairman  and Chief  Executive  Officer  of
Paramount Capital,  Incorporated  (investment bank) since 1992. Dr. Rosenwald is
also chairman of Paramount  Capital  Investments,  LLC,  Paramount Capital Asset
Mgt.,  Inc.  and The Castle  Group.  Dr.  Rosenwald  serves as a director of the
following  corporations  which file reports pursuant to the Exchange Act: Ansan,
Inc., Amgen, Inc., Atlantic  Pharmaceuticals,  Inc.,  BioCryst  Pharmaceuticals,
Inc.,  Interneuron  Pharmaceuticals,  Inc.,  Neose  Technologies,  Inc.,  Sparta
Pharmaceuticals, Inc., Titan Pharmaceuticals, Inc. and Xenometrix, Inc.


                                       17
<PAGE>

         MICHAEL  WEINER,  M.D.  was  elected a director  of the Company in June
1996.  Dr.  Weiner has been the  Hellinger  Professor of Clinical  Pediatrics at
Columbia  University  College of Physicians  and Surgeons since January 1996 and
has been an attending pediatrician at Columbia Presbyterian Medical Center since
January  1996.  Dr.  Weiner  has  served as  Associate  Director  of  Pediatrics
Hematology/Oncology  and Associate  Attending  Physician of  Hackensack  Medical
Center and an  Associate  Attending  Pediatrician  UMDNJ  Division of  Pediatric
Hematology/Oncology, since 1987.
                          ----------------------------

         All directors hold office until the next annual meeting of shareholders
and until  their  successors  are elected and  qualified.  Officers  are elected
annually and serve at the pleasure of the Board of Directors, subject to rights,
if any, under contracts of employment.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16 of the Securities Exchange Act of 1934, as amended, requires
that  officers,  directors  and  holders  of more than 10% of the  Common  Stock
(collectively,  "Reporting  Persons")  file reports of their  trading in Company
equity securities with the Securities and Exchange Commission. Based on a review
of Section 16 forms filed by the Reporting  Persons during the last fiscal year,
Eric Rose,  M.D.,  a director of the  Company,  filed his Form 5  reporting  the
exercise of warrants approximately one month late; the Company believes that the
Reporting  Persons  otherwise  timely  complied with all  applicable  Section 16
filing requirements.


Item 11.   Executive Compensation.

Summary Compensation

         The following  table sets forth a summary of the  compensation  for the
year ended December 31, 1996 earned by the Company's Principal Executive Officer
and be each other executive officer whose compensation  exceeded $100,000 during
1996:
<TABLE>
<CAPTION>

                                             SUMMARY COMPENSATION TABLE

                                                                                Long-Term
                                                   Annual Compensation         Compensation
                                                -------------------------        Awards
Name and Principal Position              Year      Salary        Bonus           Options            Compensation
<S>                                      <C>      <C>           <C>              <C>                <C>     <C>

Richard L. Dunning                       1996     $133,833      $40,000           800,000 (1)        $4,500 (2)
    President and Chief                  1995        --           --                --                   --
    Executive Officer                    1994        --           --                --                   --

Francis M. O'Connell                     1996     $123,800      $35,000             --                   --
    Vice President, Finance and          1995     $ 96,125        --              100,000 (3)            --
    Chief Financial Officer              1994        --           --                --                   --

Alfonso J. Tobia, Ph.D.                  1996     $147,272      $50,000
    Senior Vice President                1995     $130,000      $12,500             --                   --
                                         1994      $59,696        --              150,000 (4)        $25,000 (5)
</TABLE>

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

                                       18
<PAGE>

(1)       Number of shares of Common  Stock  purchasable.  See  Option  Grant
          Table below for exercise price and vesting terms.

(2)       Reimbursement of personal medical and health care insurance.

(3)       Number of shares of Common Stock purchasable at $.44 per share.

(4)       Number of shares of Common Stock purchasable at $.69 per share.

(5)       Consists of a one-time relocation fee.


Option Grant Table

         The following table sets forth certain  information  concerning options
granted in 1996 to the individuals named in the Summary Compensation Table:

                                INDIVIDUAL GRANTS
<TABLE>
<CAPTION>

                                                            % of Total
                               Number of Securities       Options Granted to          Exercise
                                Underlying Options        Employees in Fiscal        Price Per      Expiration Date
           Name                      Granted                     Year                  Share
<S>                                <C>                           <C>                  <C>               <C>

Richard L. Dunning                  800,000(1)                   54.4                   $2.56            4/2/01
</TABLE>

--------------------------
(1)  Granted  pursuant  to  Mr.  Dunning'sagreement. See "Employment
     Arrangements" below.

Option Exercises and Value Table

         The following table sets forth certain  information  concerning options
exercised during 1996, and the number of unexercised  options as at December 31,
1996 held, by the individuals named in the Summary Compensation Table:
<TABLE>
<CAPTION>

                                   OPTION EXERCISE AND VALUES AT DECEMBER 31, 1996

                                                        Number of Unexercised
                                                             Options at             Value of Unexercised
                              Shares                      December 31, 1996         In-the-Money Options
                             Acquired On      Value        Exercisable(E)/                    at
       Name                   Exercise      Realized       Unexercisable(U)          December 31, 1996(1)
       ----                   --------      --------       ---------------           --------------------
<S>                                                          <C>                            <C>
Richard L. Dunning...........                                800,000(U)                     $650,000
Francis M. O'Connell.........                                 25,000(E)                      $73,438
                                                              75,000(U)                     $220,313
Alfonso J. Tobia, Ph.D.                                       75,000(E)                     $201,375
                                                              75,000(U)                     $201,375
</TABLE>

                                       19
<PAGE>

(1)      Based upon the $3 7/16 closing sale price of the Common Stock on The
         Nasdaq Stock Market on December 31, 1996.


Employment Arrangements

         In  October  1996,  the  Company  entered  into a  restated  employment
agreement with Richard L. Dunning,  effective March 27, 1996,  pursuant to which
Mr. Dunning serves as President and Chief Executive Officer of the Company.  The
agreement provides for a base annual salary of $200,000,  which may be increased
at the discretion of the Board of Directors or the Compensation  Committee,  and
an annual cash bonus based on performance  criteria,  with an initial cash bonus
targeted to be at least 33% of Mr. Dunning's base  compensation.  Mr. Dunning is
entitled to four weeks'  vacation and to participate  in the Company's  medical,
dental,  life and long-term  disability  insurance  and other benefit  programs.
Pursuant to the agreement,  Mr. Dunning was granted stock options to purchase an
aggregate of 800,000  shares of Common  Stock at an exercise  price of $2.56 per
share,  exercisable  cumulatively at the rate of 25% per annum  commencing March
28,  1997 (one year from the date of grant).  Mr.  Dunning's  employment  may be
terminated  by the Company for cause,  or without  cause upon 60 days' notice by
either the Company or Mr.  Dunning.  In the event Mr.  Dunning's  employment  is
terminated by the Company without cause, or in the event Mr. Dunning  terminates
his employment  following  certain actions by the Company  (including a material
reduction in Mr.  Dunning's  duties or a relocation of the  Company's  principal
executive offices),  Mr. Dunning is entitled to a severance payment equal to six
months'  of his base  salary,  payable in monthly  installments.  The  agreement
contains certain  non-competition and confidentiality  provisions,  and provides
that the Company may obtain "key man" life  insurance on the life of Mr. Dunning
for the Company's  benefit.  Mr. Dunning  received a $40,000  signing bonus upon
execution of the agreement.

         In August 1996, the Company  entered into an employment  agreement with
David A. Jackson,  Ph.D., pursuant to which Dr. Jackson serves as Vice President
- Research and  Development  and Chief  Scientific  Officer of the Company.  The
agreement provides for a base annual salary of $175,000,  which may be increased
at the discretion of the Board of Directors or the Compensation  Committee,  and
an annual cash bonus based on performance  criteria,  with an initial cash bonus
targeted to be at least 33% of Dr. Jackson's base  compensation.  Dr. Jackson is
entitled to four weeks'  vacation and to participate  in the Company's  medical,
dental,  life and long-term  disability  insurance  and other benefit  programs.
Pursuant to the agreement,  Dr. Jackson was granted stock options to purchase an
aggregate of 500,000  shares of Common Stock at an exercise price of $3.3125 per
share,  exercisable  cumulatively at the rate of 25% per annum commencing August
26,  1997 (one year from the date of grant).  Dr.  Jackson's  employment  may be
terminated  by the Company for cause,  or without  cause upon 60 days' notice by
either the Company or Dr.  Jackson.  In the event Dr.  Jackson's  employment  is
terminated by the Company without cause, or in the event Dr. Jackson  terminates
his employment  following  certain actions by the Company  (including a material
reduction in Dr.  Jackson's  duties or a relocation of the  Company's  principal
executive  offices),  Dr.  Jackson is entitled to a severance  payment  equal to
twelve  months'  of his  base  salary,  payable  in  monthly  installments.  The
agreement contains certain non-competition and confidentiality  provisions,  and
provides that the Company may obtain "key man" life insurance on the life of Dr.
Jackson for the Company's benefit.  Dr. Jackson received a $40,000 signing bonus
upon execution of the agreement.


                                       20
<PAGE>


         In June 1994,  the Company  entered into an employment  agreement  with
Alfonso J. Tobia, Senior Vice President of the Company,  effective July 1, 1994,
providing for a base annual salary of $125,000, to be increased to $150,000 upon
the  redemption  by the  Company  of  its  outstanding  Class  A  Warrants,  and
eligibility for a discretionary bonus up to $25,000. The agreement provides that
Dr. Tobia is eligible to receive  options to purchase  150,000  shares of Common
Stock (which were granted on August 24, 1994), and is eligible to participate in
the Company's  benefit  programs,  which  currently  include a medical  program,
dental/vision insurance and group life insurance.

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

(1)   Item 12.   Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth as of January 31, 1997  information with
respect to the  beneficial  ownership of the Company's  Common Stock by (i) each
person known by the Company to own  beneficially  more than five percent of such
Common Stock,  (ii) each director of the Company,  (iii) each executive  officer
named in the Summary  Compensation  Table in "Item 11. Executive  Compensation,"
and (iv) all directors and  executive  officers as a group,  together with their
respective percentage ownership of such shares:
<TABLE>
<CAPTION>
                                                                 Shares                Percent
                        Name                               Beneficially Owned        Outstanding

<S>                                                        <C>                      <C>

Richard L. Dunning.................................                   203,595(1)          *
Francis M. O'Connell...............................                    50,000(2)          *
Alfonso, J. Tobia, Ph.D. ..........................                    75,000(2)          *
Donald G. Drapkin .................................                462,500(3)(4)          *
Laurence D. Fink ..................................                450,000(3)(5)          *
Jerome Groopman, M.D. .............................                    50,000(3)          *
Linda G. Robinson .................................                   183,333(3)          *
Eric A. Rose, M.D. ................................                   584,900(6)          *
Lindsay A. Rosenwald, M.D. ........................              6,014,999(3)(7)        10.7%
Michael Weiner, M.D. ..............................                    62,410(3)          *
Paramount Capital Asset
  Management, Inc..................................                 4,049,999(8)        7.4%
  787 Seventh Avenue
  New York, New York 10019
Mellon Bank Corporation............................                 2,865,000(9)
  One Mellon Bank Center
  Pittsburgh, Pennsylvania 15258
All directors and executive
  officers as a group (11) persons) ...............                8,136,737(10)        14.3%
</TABLE>

--------------------
*  ......Less than one percent.


                                       21
<PAGE>

(1)      Consists of currently  exercisable  options to purchase  200,000 shares
         owned by Mr. Dunning,  2,095 shares owned by a daughter of Mr. Dunning,
         and 500 shares owned by each of Mr. Dunning's  spouse,  son and another
         daughter,  respectively.  Mr. Dunning disclaims beneficial ownership of
         the shares held by his spouse, son and daughters.

(2)      Consists of currently exercisable options.

(3)      Includes  100,000  shares for Mr. Drapkin and 50,000 shares for each of
         Mr. Fink, Dr. Groopman,  Ms. Robinson,  Dr. Rosenwald and Dr. Weiner of
         restricted  stock  which  vests at the rate of 25% per year  commencing
         June 20, 1997, provided the respective individual continues to serve as
         a director of the Company,  and subject to a non-lapsing right of first
         refusal by the Company.

(4)      Includes currently exercisable options to purchase 262,500 shares.

(5)      Includes  66,666  shares owned by a family trust for the benefit of Mr.
         Fink's children.  Mr. Fink disclaims beneficial ownership of the shares
         held by the family trust.

(6)      Includes currently exercisable options to purchase 262,500 shares.

(7)      Includes  currently  exercisable  options to purchase  1,915,000 shares
         owned by Dr. Rosenwald,  and the 4,049,999 shares beneficially owned by
         Paramount Capital Asset Management, Inc. ("PCAM") (see note (8) below).
         Dr.  Rosenwald serves as President and is sole shareholder of PCAM. Dr.
         Rosenwald  disclaims  beneficial  ownership of the shares  beneficially
         owned by PCAM except to the extent of his pecuniary interest, if any.

(8)      Information  is from a Schedule  13D dated  December  23, 1996 filed by
         PCAM  which is the  investment  manager  of The  Aries  Fund,  a Cayman
         Islands  Trust,  (the "Aries  Trust") and the general  partner of Aries
         Domestic  Fund,  L.P. (the "Aries  Limited  Partnership"),  and reports
         shared voting and dispositive  power of 5,964,999  shares and 2,750,000
         shares,  respectively,  by  the  Aries  Trust  and  the  Aries  Limited
         Partnership.

(9)      Information  is from a Schedule 13G dated  January 24,  1997,  filed by
         Mellon Bank Corporation,  which reflects sole voting power with respect
         to  2,865,000  shares  and  sole  dispositive  power  with  respect  to
         2,750,000 shares.

(10)     See notes (1) - (7).


Item 13.   Certain Relationships and Related Transactions.

         In August 1995,  the Company  entered into a consulting  agreement with
Lindsay A.  Rosenwald,  M.D.,  who was elected a director of the Company in June
1996,  pursuant  to  which  Dr.  Rosenwald  has  agreed  to act  as a  financial
consultant to the Company  pursuant to the terms thereof and the Company granted
Dr. Rosenwald an option to purchase  2,000,000 shares of Common Stock at $.53125
per share (the  closing bid price of the Common Stock on The Nasdaq Stock Market
on the date preceding the date of grant), exercisable through August 6, 1998. In
June 1996, Dr. Rosenwald  transferred  85,000 of the underlying option shares to
other persons.


                                       22
<PAGE>

         In November 1995, the Company  entered into an arrangement  with Donald
G. Drapkin,  a director of the Company,  pursuant to which Mr. Drapkin agreed to
make available to the Company his business and financial  acumen for a five-year
period, and the Company granted Mr. Drapkin an option to purchase 650,000 shares
at $.9375 per share  (the  closing  bid price of the Common  Stock on The Nasdaq
Small Cap Market on the date  preceding the date of grant),  exercisable  at the
rate of 25% of the aggregate  number of underlying  shares per annum  commencing
one year  from the date of  grant.  Concurrently,  the  Company  entered  into a
five-year  consulting  arrangement  with Eric A. Rose,  M.D.,  a director of the
Company,  pursuant  to which Dr. Rose  agreed to provide  scientific  consulting
services to the Company,  and the Company granted Dr. Rose an option to purchase
650,000  shares  at  $.9375  per  share,  exercisable  at the rate of 25% of the
aggregate  number of underlying  shares per annum  commencing  one year from the
date of grant.

         On June 21, 1996, the Company completed a private placement pursuant to
a subscription agreement dated March 21, 1996 to a group of investors (see "Item
5. - Market for Registrant's Securities and Related Stockholder Matters - Recent
Sales of Unregistered Securities"), including the following directors or persons
or entities affiliated with such directors:  (i) Laurence D. Fink, a director of
the Company,  purchased  266,667 shares of Common Stock and 133,333 Common Stock
Purchase Warrants for $400,000,  and a family trust of Mr. Fink purchased 66,666
shares of Common Stock and 33,333 Common Stock  Purchase  Warrants for $100,000;
(ii) Linda G. Robinson,  a director of the Company,  purchased 133,333 shares of
Common Stock and 66,666 Common Stock  Subscription  Warrants for  $200,000;  and
(iii) The Aries Trust Fund, a Cayman Island trust (the "Aries  Trust"),  and The
Aries Domestic Fund,  L.P., a Delaware limited  partnership  ("The Aries Limited
Partnership"  and,  together with the Aries Trust, the "Aries Funds"),  , in the
manner described below, purchased an aggregate of 666,666 shares of Common Stock
and 333,333 Common Stock  Subscription  Warrants for an aggregate of $1,000,000.
Lindsay A. Rosenwald,  M.D., a director of the Company,  serves as President and
is the sole shareholder of the investment manager of the Aries Trust, and serves
as President  and is the sole  shareholder  of the general  partner of the Aries
Limited  Partnership.  Jerome Groopman,  M.D., a director of the Company, , is a
member of the Scientific Advisory Board of the Aries Funds.

         On December 23, 1996, the Company acquired an approximate 68% ownership
interest  in Innovir  pursuant to an  agreement  dated  November  21,  1996,  as
amended,  among the Company and the Aries Funds and an agreement  dated November
21, 1996 between the Company and Innovir. Pursuant to the agreements, as amended
(i) the Aries  Funds,  which owned 4 million  shares of  Innovir's  common stock
prior to the  transaction,  exercised  warrants  and unit  purchase  options  to
purchase an additional 6 million shares, thereby providing $3 million in cash to
Innovir and  resulting in the Aries Funds owning 10 million  shares of Innovir's
common stock;  (ii) the Company  acquired 9.5 million shares of Innovir's common
stock from the Aries Funds for  $3,000,000  in cash and  3,000,000  newly issued
shares of the Company's Common Stock, and (iii) the Company exchanged all of the
capital stock of its  wholly-owned  subsidiary,  VIMRx Holdings Ltd., a Delaware
corporation ("VHL") (to which, prior to closing,  the Company had made a capital
contribution  of  $4,000,000),  for 8.7 million shares of Innovir's  convertible
preferred stock (convertible into 8.7 million shares of Innovir's common stock),
plus five-year  warrants to purchase an additional 2 million shares of Innovir's
common  stock (1 million  shares at an  exercise  price of $1.00 per share and 1
million shares at an exercise price of $2.00 per share).  The Company has agreed
to  file a  registration  statement  (the  "Registration  Statement")  with  the
Securities and Exchange  Commission (the  "Commission") for the public resale of
the 3,000,000  shares of Common Stock issued to the Aries Funds, to use its best
efforts to cause the  Registration  Statement  to be declared  effective  by the



                                       23
<PAGE>

        Commission  under the Securities  Act as soon as practicable  and to use
its best efforts to keep the Registration  Statement effective until the earlier
of the date such shares shall have been  disposed of or the date on which all of
such shares are eligible for sale pursuant to Rule 144 under the Securities Act.
The  acquisition of the 9.5 million shares of Innovir stock from the Aries Funds
was negotiated at arms' length with the Aries Funds and an opinion was issued by
an  independent  investment  banking firm that the  transaction  was fair from a
financial  point  of  view to the  Company  and its  public  shareholders.  Drs.
Rosenwald  and  Groupman  did not  participate  in the  meeting  of the Board of
Directors in which the acquisition was approved.

         On March 7, 1997,  the Company  entered into a research  agreement with
Columbia  University   ("Columbia")   whereby  the  Company,   through  a  newly
established  subsidiary,  VIMRx Genomics,  Inc.  ("Genomics"),  90%-owned by the
Company  and  10%-owned  by  Columbia  University,  will  provide $30 million in
funding to the Columbia Genome Center established by Columbia, with $4.7 million
to be paid  during  the  first  year in  quarterly  installments.  In  exchange,
Genomics will receive an exclusive license to develop, manufacture, use, sell or
market products  resulting from any invention or research  product  developed by
the Columbia Genome Center and funded under the agreement.  Following an initial
five-year term, the agreement  automatically will renew for successive  two-year
terms and, in the absence of an agreement to the contrary, the amount of funding
will  be  increased  at a rate  of 9%  for  every  additional  year.  Under  the
agreement,  the Company agreed to issue  Columbia a one-time  payment of 200,000
shares of Common Stock, and granted  Columbia  "piggyback"  registration  rights
with  respect to such shares  during the period  April 1, 1997 to April 1, 1999.
See "Item 1 - Business - Research  Agreement with Columbia  University." Eric A.
Rose,  M.D.,  a director  of the  Company,  is a  Surgeon-In-Chief  at  Columbia
Presbyterian  Medical  Center in New York,  an affiliate  of  Columbia,  and has
served as Chairman of the Department of Surgery at the College of Physicians and
Surgeons  of  Columbia  since  1994  and  as  a  Director  of  the  Division  of
Cardiothoracic  Surgery of the Department  since 1990.  Michael Weiner,  M.D., a
director of the Company,  is the Hellinger  Professor of Clinical  Pediatrics at
Columbia's College of Physicians and Surgeons,  Director of Pediatric  Oncology,
and is an attending physician at Columbia Presbyterian Medical Center.

         The  Company  believes  that  the  consulting   arrangements  with  Dr.
Rosenwald,  Mr.  Drapkin and Dr. Rose are on terms no less  favorable than could
have been negotiated with unrelated third parties of similar expertise,  and the
research agreement with Columbia was negotiated on an arm's length basis.








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

(a)      Lists.

         1.  See Index to Financial Statements on page F-1.

         2.  See Item 8 regarding financial statement schedules.

         3.  Exhibits.


                                       24
<PAGE>


        Exhibit
        Number       Description

        2.2a         Copy of Agreement  dated November 21, 1996 (the "Aries
                     Agreement") by and among the Company and The Aries Domestic
                     Fund, L.P. (1)
        2.2b         Copy of Amendment to the Aries Agreement dated December 23,
                     1996 by and among the Company and the Aries Fund and The
                     Aries Domestic Fund, L.P. (1)
        2.3          Copy of Agreement dated November 21, 1996 by and between
                     the Registrant and Innovir Laboratories, Inc. (1)
        4.4          Copy of Warrant Agreement dated June 17, 1996 between the
                     Company and American Stock Transfer & Trust Company.
        10.3         Copy of the Company's Amended and Restated 1990 Incentive
                     and Non-Incentive Stock Option Plan, as amended through
                     February 22, 1997.*
        10.9         Copy of Employment letter agreement dated June 21, 1994
                     between the Company and Alfonso J. Tobia.* (2)
        10.11        Copy of the Company's 1995 Outside  Directors  Stock Option
                     Plan.*(3)
        10.12        Copy of letter  agreement  dated  August 7, 1995  between
                     the Company and Lindsay A. Rosenwald, M.D. (3)
        10.13        Copy of Stock Option Agreement dated August 7, 1995 between
                     Registrant and Lindsay A. Rosenwald, M.D. (3)
        10.14        Copy of Consulting and Stock Option Agreement dated
                     November 17, 1995 between the Company and Eric A. Rose,M.D.
                     (3)
        10.15        Copy of Stock Option Agreement dated November 17, 1995
                     between the Company and Donald G. Drapkin. (3)
        10.16        Copy of the Company's 1996 Non-Employee Director Restricted
                     Stock Award Plan.* (3)
        10.17        Copy of Registration Rights Agreement dated December 23,
                     1996, between Registrant and The Aries Fund and The Aries
                     Domestic Fund, L.P. (1)
        10.18        Copy of Research Agreement dated as of March 7, 1997 among
                     the Company, The Trustees of Columbia University in the
                     City of New York and VIMRx Genomics, Inc. (4)
        10.19        Copy of the Company's 1997 Incentive and Non-Incentive
                     Stock Option Plan, together with forms of stock option
                     agreements.*
        10.20        Copy of Employment Agreement date October 30, 1996 between
                     the Company and Richard L. Dunning.*
        10.21        Copy of Employment Agreement dated  August 26, 1996 between
                     the Company and David A. Jackson, Ph.D.*



                                       25
<PAGE>

        21           List of Subsidiaries.
        23           Consent of Richard A. Eisner & Company, LLP.

----------
*        Denotes  management   contract  or  compensatory  plan  or  arrangement
         required to be filed as an exhibit to this Annual Report on Form 10-K.




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

(1)      Filed as the same numbered  Exhibit to the Company's  Current Report on
         Form 8-K  (Commission  File No.  0-19153)  filed  January  3,  1997 and
         incorporated herein by reference thereto.

(2)      Filed as the same numbered  Exhibit to the  Company's  Annual Report on
         Form 10-K for the year ended  December  31, 1994  (Commission  File No.
         0-19153) and incorporated herein by reference.

(3)      Filed as the same numbered  Exhibit to the  Company's  Annual Report on
         Form 10-K for the year ended  December  31, 1995  (Commission  File No.
         0-19153) and incorporated herein by reference thereto.

(4)      Filed as the same numbered  Exhibit to the Company's  Current Report on
         Form 8-K  (Commission  File  No.  0-19153)  filed  March  21,  1997 and
         incorporated herein by reference thereto.

(b)      Reports on Form 8-K.

         None.




                                       26
<PAGE>

>




                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                        (a development stage enterprise)

                          INDEX TO FINANCIAL STATEMENTS


                                                                   PAGE
                                                                  NUMBER


REPORT OF INDEPENDENT AUDITORS                                     F-2


CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31,
1996 AND DECEMBER 31, 1995                                         F-3


CONSOLIDATED STATEMENTS OF OPERATIONS FOR
EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
DECEMBER 31, 1996 AND FOR THE PERIOD
FROM DECEMBER 30, 1986 (INCEPTION) TO
DECEMBER 31, 1996                                                  F-4


CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR EACH OF THE YEARS
IN THE TEN-YEAR PERIOD FROM DECEMBER 30, 1986
(INCEPTION) TO DECEMBER 31, 1996                                   F-5


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
DECEMBER 31, 1996 AND FOR THE PERIOD
FROM DECEMBER 30, 1986 (INCEPTION)
TO DECEMBER 31, 1996                                               F-8


NOTES TO FINANCIAL STATEMENTS                                      F-9


                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS




Board of Directors and Stockholders
VIMRx Pharmaceuticals Inc.
Wilmington, Delaware


     We have  audited  the  accompanying  consolidated  balance  sheets of VIMRx
Pharmaceuticals  Inc. and  subsidiaries (a development  stage  enterprise) as at
December 31, 1996 and December 31, 1995, and the related consolidated statements
of operations,  changes in  shareholders'  equity and cash flows for each of the
years in the three-year  period ended December 31, 1996 and the amounts for such
years included in the period December 30, 1986 (inception) to December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

     In our opinion, the financial  statements  enumerated above present fairly,
in  all  material  respects,   the  consolidated  financial  position  of  VIMRx
Pharmaceuticals  Inc.  and  subsidiaries  at December  31, 1996 and December 31,
1995, and the consolidated  results of their  operations and their  consolidated
cash flows for each of the years in the  three-year  period  ended  December 31,
1996 in conformity with generally accepted accounting principles.



Richard A. Eisner & Company, LLP

New York, New York
March 14, 1997
                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                        (a development stage enterprise)

                           CONSOLIDATED BALANCE SHEETS

                                                         December 31,
                                                     1996                1995
                ASSETS

Current assets:
 <S>                                           <C>                 <C>

     Cash and cash equivalents                 $   8,611,000        $  2,219,000
     Short-term investments                       38,300,000
     Deferred finance costs                                              310,000
     Other current assets                            348,000              96,000
                                                 -----------          ----------
              Total current assets                47,259,000           2,625,000
Equipment - net                                    2,650,000             108,000
Notes receivable                                                         225,000
Marketable equity securities                         286,000
Other assets                                         261,000
Goodwill                                           1,236,000
                                                ------------        ------------
              T O T A L                         $ 51,692,000        $  2,958,000
                                                ============        ============
<CAPTION>
                                       LIABILITIES

Current liabilities:
<S>                                             <C>                 <C>

     Accounts payable and accrued expenses      $  1,903,000       $     432,000
     Innovir note payable - warrantholder;
        current portion includes accrued
        interest of $5,000                            36,000
     Notes payable                                                     1,802,000
     Capital lease - current portion                 472,000
                                                   ---------           ---------
              Total current liabilities            2,411,000           2,234,000



Innovir note payable - warrantholder,
includes accrued interest
     of $39,000                                      227,000
Capital leases                                       463,000
Other liabilities                                                        464,000
                                                   ---------          ----------
              Total liabilities                    3,101,000           2,698,000
                                                   ---------           ---------

Minority interest in subsidiary                    2,381,000
                                                   ---------

Contingencies, commitments and other matters
     (Notes 4, 10, 11, 13, 14 and 16)
<CAPTION>
                                   SHAREHOLDERS' EQUITY
<S>                                             <C>                 <C>
Common stock; $0.001 par value, 120,000,000 shares
     authorized, 54,429, 887 and 19,894,576 shares
     issued and outstanding at December 31, 1996
     and December 31, 1995, respectively              54,000             20,000
Additional paid-in capital                        89,478,000         23,244,000
Unearned compensation                               (800,000)          (493,000)
Unrealized (loss) on investment                     (143,000)
Cumulative translation adjustment                     (8,000)
Deficit accumulated during the development stage (42,371,000)       (22,511,000)
                                                 -----------        -----------
              Total shareholders' equity          46,210,000            260,000
                                                  ----------            -------

              T O T A L                         $ 51,692,000       $  2,958,000
                                                ============       ============
</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                     F-3
<PAGE>



                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                        (a development stage enterprise)

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                                                   December 30,1986
                                                                                                                    (Inception) to
                                                                       Year Ended December 31,                        December 31,
                                                                  1996              1995              1994               1996
                                                                  ----              ----              ----               ----
Operating expenses:
    <S>                                                     <C>                <C>               <C>                 <C>
    Research and development                                 $ 2,950,000       $ 2,840,000       $ 1,463,000         $15,939,000
    Purchased research and development (net
       of gain on sale of subsidiary of $2,889,000)           14,484,000                                              14,484,000
    General and administrative                                 4,300,000         2,272,000         1,646,000          13,782,000
                                                               ---------         ---------         ---------          ----------
                                                              21,734,000         5,112,000         3,109,000          44,205,000
                                                              ----------         ---------         ---------          ----------

Other (income) expenses:
    Royalty payments                                             100,000           100,000           100,000             300,000
    Interest (income)                                         (1,792,000)         (160,000)         (189,000)         (2,951,000)
    Interest expense                                             329,000             2,000                               413,000
    Provision for losses on notes receivable                                                                             135,000
    Investment in and advances to research and
       development entities charged to expense                                     185,000           515,000             700,000
    Minority interest in net loss of consolidated
       subsidiary                                               (116,000)                                               (116,000)

    Other - net                                                 (395,000)            1,000            74,000            (315,000)
                                                                --------             -----            ------            --------

                                                              (1,874,000)          128,000           500,000          (1,834,000)
                                                              ----------           -------           -------          ----------

NET LOSS                                                     $19,860,000       $ 5,240,000       $ 3,609,000         $42,371,000
                                                             ===========       ===========       ===========         ===========

NET LOSS PER SHARE                                               $0.50              $0.27             $0.19
                                                                 =====              =====             =====

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
    OUTSTANDING                                               39,398,644         19,747,595       19,066,754
                                                              ==========         ==========       ==========

</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                      F-4
<PAGE>



<TABLE>
<CAPTION>

                                                                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                                                                        (a development stage enterprise)

                                                               CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                                       FOR THE PERIOD FROM DECEMBER 30, 1986 (INCEPTION) TO DECEMBER 31, 1996



                                                         Preferred  Stock                    Treasury Stock
                                             ----------------------------------------     ---------------------
                                                 Series A               Series B                                    Common Stock
                                             ----------------     -------------------      Common                -------------------
                                             Shares    Amount     Shares       Amount      Shares     Amount     Shares       Amount
                                             ------    ------     ------       ------      ------     ------     ------       ------

<S>                                          <C>      <C>         <C>          <C>         <C>        <C>       <C>        <C>

 Balance - December 30, 1986
 Issuance of common stock ($.02 a                                                                                1,066,158  $ 1,000
  share)                                                                                                         ---------  -------
 Net (loss) for year

 Balance - December 31, 1987                                                                                     1,066,158    1,000
 Reverse stock split of one for ten                                                                              (959,543)   (1,000)
 shares
 Return of capital to adjust purchase
 price for effect
     of reverse stock split
 Issuance of common stock ($.03 a                                                                                  876,295    1,000
 share)
 Purchase of treasury stock ($.03 a                                                        (1,797)
 share)
 Sale of treasury stock ($.03 a share)                                                       1,797
 Issuance of Series A preferred stock       600,000   $ 6,000
 ($1.07 a share)
 Issuance of Series B preferred stock
 ($2.58495 a share)
     and related warrants                                           773,709   $  8,000
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1988                600,000     6,000       773,709      8,000       - 0 -   $  - 0 -      982,910    1,000

 Purchase of treasury stock ($.03 a                                                      (242,611)    (8,000)
 share)
 Issuance of common stock ($.50 a                                                                                   6,888     3,000
 share)
 Issuance of common stock (.03 share)                                                                              55,928
 Issuance of Series B preferred stock
 ($2.58495 a share)
     and related warrants                                           604,461      6,000
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1989                600,000     6,000     1,378,170     14,000   (242,611)    (8,000)    1,045,726    1,000
 Purchase of treasury stock ($.03 a                                                        (7,188)
 share)
 Conversion of bridge loan plus
 accrued interest in
     common stock                                                                                                2,117,782    2,000
 Issuance of common stock (average
 price of $.05
     a share)                                                                                                      161,063
 Recapitalization                         (600,000)   (6,000)   (1,378,170)   (14,000)     249,799      8,000    1,435,858    2,000
 Initial public offering - net ($5.00
 a unit)
     ($1.00 per share)                                                                                            5,750,000   6,000
 Issuance of  common stock ($.50 a                                                                                  18,010
 share)
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ----------  -------
 Balance - December 31, 1990 (carried         - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -    10,528,439  11,000
 forward)

 (continued)



<PAGE>

<CAPTION>

                                                                                                        Deficit
                                                                                                      Accumulated
                                          Additional                    Unrealized     Cumulative        During
                                            Paid-in       Unearned       (Loss) on     Translation    Development
                                            Capital     Compensation    Investments       Stage        Adjustment
                                            -------     ------------    -----------    -----------     ----------
<S>                                     <C>              <C>            <C>             <C>           <C>
 Balance - December 30, 1986
 Issuance of common stock ($.02 a        $  17,000
 share)
 Net (loss) for year                                                                                 $   (106,000)
                                        ------------      -----------    -----------     ----------   -------------

 Balance - December 31, 1987                 17,000                                                      (106,000)
 Reverse stock split of one for ten           1,000
 shares
 Return of capital to adjust purchase
 price for effect
     of reverse stock split                 (14,000)
 Issuance of common stock ($.03 a            28,000
 share)
 Purchase of treasury stock ($.03 a
 share)
 Sale of treasury stock ($.03 a share)
 Issuance of Series A preferred stock       637,000
 ($1.07 a share)
 Issuance of Series B preferred stock
 ($2.58495 a share)
     and related warrants                 1,992,000
 Net (loss) for year                                                                                    (1,046,000)
                                        ------------      -----------    -----------     ----------   -------------
 Balance - December 31, 1988              2,661,000                                                     (1,152,000)
 Purchase of treasury stock ($.03 a
 share)
 Issuance of common  stock ($.50 a share)    3,000
 Issuance of common  stock ($.03 share)      2,000
 Issuance of Series B preferred stock
 ($2.58495 a share) and related warrants 1,557,000
 Net (loss) for year                                                                                   (2,531,000)
                                        ------------      -----------    -----------     ----------    -----------
 Balance - December 31, 1989              4,223,000                                                    (3,683,000)
 Purchase of treasury stock ($.03 a
 share)
 Conversion of bridge loan plus
 accrued interest in
     common stock                           928,000
 Issuance of common stock (average
 price of $.05 a share)                       7,000
 Recapitalization                            10,000
 Initial public offering - net ($5.00
 a unit)($1.00 per share)                 4,540,000
 Issuance of  common stock ($.50 a            9,000
 share)
 Net (loss) for year                                                                                    (2,988,000)
                                          ------------      -----------    -----------     ----------   ----------
 Balance - December 31, 1990 (carried      9,717,000                                                    (6,671,000)
 forward)
                                      F-5
<CAPTION>
<PAGE>

 (continued)

                                                                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                                                                        (a development stage enterprise)

                                                               CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                                       FOR THE PERIOD FROM DECEMBER 30, 1986 (INCEPTION) TO DECEMBER 31, 1996
                                                                                  (continued)

                                                        Preferred  Stock                    Treasury Stock
                                             ----------------------------------------     ---------------------
                                                 Series A               Series B                                    Common Stock
                                             ----------------     -------------------      Common                -------------------
                                             Shares    Amount     Shares       Amount      Shares     Amount     Shares       Amount
                                             ------    ------     ------       ------      ------     ------     ------       ------
<S>                                          <C>      <C>         <C>          <C>         <C>        <C>       <C>        <C>
 Balance - December 31, 1990 (brought         - 0 -  $ - 0 -          - 0 -  $  - 0 -        - 0 -    $ - 0 -  10,528,43     $11,000
 forward)
 Exercise of options ($.30 a share)                                                                                   500
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1991                  - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -   10,528,939    11,000
 Issuance of common stock in public
 offering - net
     ($5,000 a unit) ($2.20 per share)                                                                           3,139,500     4,000
 Exercise of options and warrants -                                                                                412,754
 net ($.30 - $.50 per share)
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1992                  - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -   14,081,193    15,000
 Exercise of options and warrants -                                                                                 27,683
 net ($.30 - $.50 per share)
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1993                  - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -   14,108,876    15,000
 Issuance of common stock in public
 offering - net
     ($5,000 a unit) ($2.20 per share)                                                                           5,393,200     5,000
 Exercise of warrants - net ($1.50 per                                                                                 500
 share)
 Issuance of common stock for services                                                                             240,000
 ($0.3125 per share)
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1994                  - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -   19,742,576    20,000
 Exercise of warrants - net ($1.50 per                                                                               2,000
 share)
 Exercise of options ($0.4375 per                                                                                  150,000
 share)
 Value of options issued to consultants
 Value assigned to warrants issued in
 private
     placement of debt securities
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------    -----
 Balance - December 31, 1995 (carried         - 0 -     - 0 -         - 0 -      - 0 -       - 0 -      - 0 -   19,894,576    20,000
 forward)

 (continued)



<CAPTION>



                                                                                                        Deficit
                                                                                                      Accumulated
                                          Additional                    Unrealized     Cumulative        During
                                            Paid-in       Unearned       (Loss) on     Translation    Development
                                            Capital     Compensation    Investments       Stage        Adjustment
                                            -------     ------------    -----------    -----------     ----------
 <S>                                     <C>              <C>            <C>             <C>           <C>
 Balance - December 31, 1990 (brought      $ 9,717,000                                               $  (6,671,000)
 forward)
 Exercise of options ($.30 a share)
 Net (loss) for year                                                                                    (2,016,000)
                                          ------------   -----------    -----------     ----------    -----------
 Balance - December 31, 1991                 9,717,000                                                  (8,687,000)
 Issuance of common stock in public
 offering - net
     ($5,000 a unit) ($2.20 per share)       5,706,000
 Exercise of options and warrants -            489,000
 net ($.30 - $.50 per share)
 Net (loss) for year                                                                                    (2,451,000)
                                          ------------   -----------    -----------     ----------    -----------
 Balance - December 31, 1992                15,912,000                                                 (11,138,000)
 Exercise of options and warrants -             17,000
 net ($.30 - $.50 per share)
 Net (loss) for year                                                                                    (2,524,000)
                                          ------------   -----------    -----------     ----------    -----------
 Balance - December 31, 1993                15,929,000                                                 (13,662,000)
 Issuance of common stock in public
 offering - net
     ($5,000 a unit) ($2.20 per share)       6,380,000
 Exercise of warrants - net ($1.50 per
 share)
 Issuance of common stock for services          75,000
 ($0.3125 per share)
 Net (loss) for year                                                                                    (3,609,000)
                                          ------------   -----------    -----------     ----------    -----------
 Balance - December 31, 1994                22,384,000                                                 (17,271,000)
 Exercise of warrants - net ($1.50 per           3,000
 share)
 Exercise of options ($0.4375 per               65,000
 share)
 Value of options issued to consultants        591,000     $(493,000)
 Value assigned to warrants issued in
 private
     placement of debt securities              200,000
 Net (loss) for year                                                                                    (5,240,000)
                                          ------------   -----------    -----------     ----------    -----------
 Balance - December 31, 1995 (carried       23,243,000      (493,000)                                  (22,511,000)
 forward)

 (continued)

                                      F-6
<PAGE>
<CAPTION>


                                                                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                                                                        (a development stage enterprise)

                                                               CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                                       FOR THE PERIOD FROM DECEMBER 30, 1986 (INCEPTION) TO DECEMBER 31, 1996
                                                                                  (continued)

                                                        Preferred  Stock                    Treasury Stock
                                             ----------------------------------------     ---------------------
                                                 Series A               Series B                                    Common Stock
                                             ----------------     -------------------      Common                -------------------
                                             Shares    Amount     Shares       Amount      Shares     Amount     Shares       Amount
                                             ------    ------     ------       ------      ------     ------     ------       ------
<S>                                          <C>      <C>         <C>          <C>         <C>        <C>       <C>        <C>
 Balance - December 31, 1995 (brought         - 0 -  $ - 0 -        - 0 -  $  - 0 -        - 0 -    $ - 0 -   19,894,576    $20,000
 forward)
 Exercise of warrants ($1.50 per
 share) (net of $712,000
     expense)                                                                                                 13,907,015     14,000
 Exercise of warrants ($2.25 per
 share) (net of
     $1,275,000 expense)                                                                                      14,210,315     14,000
 Issuance of common stock in private
 placement
     ($1.50 per unit) (net of $142,000                                                                         2,799,991      3,000
     expense)
 Issuance of warrants in connection
 with acquisition  of Ribonetics
 Exercise of options ($.50 - $1.16 per                                                                          217,990
 share)
 Issuance of restricted stock to                                                                                400,000
 nonemployee directors
 Issuance of shares in connection with
 acquisition of Innovir ($3 per share)                                                                         3,000,000      3,000
 Compensatory stock options
 Translation adjustment
 Unrealized (loss) on investments
 Net (loss) for year
                                            -------     -----       -------      -----     -------    -------    ---------  -------
 Balance - December 31, 1996                 - 0 -    $ - 0 -        - 0 -    $  - 0 -       - 0 -    $ - 0 -   54,429,887  $54,000
                                            =======     =====       =======      =====     =======    =======   ==========  =======


<CAPTION>



                                                                                                        Deficit
                                                                                                      Accumulated
                                          Additional                    Unrealized     Cumulative        During
                                            Paid-in       Unearned       (Loss) on     Translation    Development
                                            Capital     Compensation    Investments       Stage        Adjustment
                                            -------     ------------    -----------    -----------     ----------
 <S>                                     <C>              <C>            <C>             <C>           <C>
 Balance - December 31, 1995 (brought      $23,243,000     $(493,000)                                 $(22,511,000)
 forward)
 Exercise of warrants ($1.50 per
 share) (net of $712,000 expense)          20,135,000
 Exercise of warrants ($2.25 per
 share) (net of
     $1,275,000 expense)                    30,684,000
 Issuance of common stock in private
 placement
     ($1.50 per unit) (net of $142,000       4,055,000
     expense)
 Issuance of warrants in connection
 with acquisition
     of Ribonetics                           1,562,000
 Exercise of options ($.50 - $1.16 per         195,000
 share)
 Issuance of restricted stock to               400,000      (347,000)
 nonemployee directors
 Issuance of shares in connection with
 acquisition
     of Innovir ($3 per share)               8,997,000
 Compensatory stock options                    207,000       40,000
 Translation adjustment                                                                    $(8,000)
 Unrealized (loss) on investments                                        $(143,000)
 Net (loss) for year                                                                                   (19,860,000)
                                          ------------    -----------    -----------       --------   -------------

 Balance - December 31, 1996               $89,478,000     $(800,000)     $(143,000)        $(8,000)   $(42,371,000)
                                           ===========     =========      =========         =======    ============

                                      F-7
</TABLE>
the accompanying notes to financial statements are an integral part hereof.


<PAGE>


<TABLE>
<CAPTION>
                                                                                                                F-8

                                              VIMRx PHARMACEUTICALS INC. and Subsidiaries
                                                   (a development stage enterprise)

                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                                   December 30, 1986
                                                                              Year Ended December 31,                  Inception) to
                                                                    ------------------------------------------         December 31,
                                                                       1996             1995             1994              1996
                                                                       ----             ----             ----              ----
<S>                                                                <C>              <C>              <C>              <C>

Cash flows from operating activities:
    Net (loss)                                                     $(19,860,000)     $(5,240,000)     $(3,609,000)     $(42,371,000)
    Adjustments to reconcile net (loss) to net cash
      (used in) operating activities:
        Depreciation and amortization                                   155,000           24,000           10,000           254,000
        Amortization of debt discount                                   198,000            2,000                            200,000
        Interest expense settled through issuance of stock                                                                   72,000
        Consulting fees settled through issuance of stock                                                  75,000            75,000
        Research and development expenses to be
          settled through the issuance of stock                        (464,000)         464,000
        Provision for losses on notes receivable                                                                            135,000
        Investment in and advances to research and
          development entities charged to expense                                        185,000          515,000           700,000
        (Gain) on sale of subsidiaries                               (2,889,000)                                         (2,889,000)
        Noncash compensation                                            481,000           98,000                            579,000
        Purchased in process research and development                17,374,000                                          17,374,000
        Loss from disposal of equipment                                  12,000                                              20,000
        Deferred financing cost                                         310,000                                             310,000
        Minority interest in net loss                                  (116,000)                                           (116,000)
        Changes in operating assets and liabilities:
          Decrease in prepayments under research
            contracts                                                                     47,000            8,000
          (Increase) in organization costs                                                                                   (3,000)
          (Increase) decrease in other current assets
            and other assets                                           (103,000)           69,000        (110,000)         (199,000)
          Increase (decrease) in accounts payable and
            accrued expenses                                           (265,000)         266,000            1,000           116,000
                                                                      ----------       ----------       ----------       -----------
            Net cash (used in) operating activities                  (5,167,000)      (4,085,000)      (3,110,000)      (25,743,000)
                                                                      ----------       ----------       ----------       -----------

Cash flows from investing activities:
    Net (purchases) sales of short-term investments                 (38,279,000)        2,590,000        (588,000)      (38,279,000)
    Payment for acquisition, net of cash acquired                    (2,011,000)                                         (2,011,000)
    Purchase of marketable securities                                  (450,000)                                           (450,000)
    Purchases of equipment                                             (802,000)         (50,000)         (71,000)       (1,040,000)
    Proceeds from sale of equipment                                      12,000                                              39,000
    Loans to DNA Pharmaceuticals, Inc.                                                                                     (296,000)
    Repayment of DNA Pharmaceuticals, Inc. loans                                                                            161,000
    Loans to Ribonetics GmbH                                                                            (600,000)          (600,000)
    Investment in and loan to CambES, Ltd.                                             (100,000)        (225,000)          (325,000)
                                                                    -----------        ---------       ----------       -----------
            Net cash provided by (used in) investing
              activities                                            (41,530,000)       2,440,000       (1,484,000)      (42,801,000)

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

Cash flows from financing activities:
    Proceeds from sales of preferred and
      common stock, net                                               4,058,000                         6,450,000        24,836,000
    Proceeds from issuance of common stock in
      connection with the exercise of warrants/options               51,042,000           69,000            1,000        51,111,000
    Purchase of treasury stock                                                                                               (8,000)
    Proceeds from bridge loans                                                         1,740,000                          3,141,000
    Repayment of bridge loans                                        (2,000,000)                                         (2,500,000)
    Issuance of convertible demand notes payable                                                                            600,000
    Return of capital                                                                                                       (14,000)
                                                                     ----------        ---------        ---------        ----------
            Net cash provided by financing activities                53,100,000        1,809,000        6,451,000        77,166,000
                                                                     ----------        ---------        ---------        ----------

Effect of exchange rate changes on cash                                 (11,000)                                            (11,000)
                                                                        -------                                             -------

NET INCREASE IN CASH AND CASH
    EQUIVALENTS                                                       6,392,000          164,000        1,857,000         8,611,000

Cash and cash equivalents at beginning of period                      2,219,000        2,055,000          198,000
                                                                      ---------        ---------         ---------        ----------
CASH AND CASH EQUIVALENTS AT END OF
    PERIOD                                                         $  8,611,000      $ 2,219,000      $ 2,055,000     $   8,611,000
                                                                   ============      ===========      ===========     =============

Supplemental disclosure of cash flow information:
    Cash paid for interest                                         $    124,000                                       $     124,000
    For noncash transactions see Notes 2, 7 and 11.
</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                   F-8
<PAGE>


                   VIMRx PHARMACEUTICALS INC. and Subsidiaries
                        (a development stage enterprise)

                          NOTES TO FINANCIAL STATEMENTS




(continued)



Note 1 - The Business:

     VIMRx Pharmaceuticals Inc. ("VIMRx") is a development stage company focused
on   identifying,   evaluating,   acquiring   and   commercializing   scientific
technologies  to be developed  by the Company in  partnership  with others.  The
Company is engaged in developing therapeutic and related products form synthetic
hypericin  principally for the treatment of viral and retroviral  diseases.  The
Company  also  owns   approximately   68%  of  the  capital   stock  of  Innovir
Laboratories,   Inc.   ("Innovir")   (see  below)   which,   together  with  its
subsidiaries,  is engaged in the research and  development of oligozymes,  a new
class of  biopharmaceutical  agents for the  treatment  of a wide array of human
diseases.

     In January 1995, to complement and diversify its potential  hypericin-based
product line,  VIMRx,  through its  subsidiary,  VIMRx Holdings,  Ltd.  ("VHL"),
acquired a worldwide  exclusive license from Ribonetics GmbH  ("Ribonetics"),  a
German  company.  The  worldwide  exclusive  license  gives  VHL  the  right  to
commercialize and exploit oligozymes for pharmaceutical and diagnostic products.
On May  23,  1996,  VHL  acquired  100%  of the  outstanding  capital  stock  of
Ribonetics (see Note 2[b]).

     On December 23, 1996, VIMRx and Innovir and certain shareholders of Innovir
entered  into  a  series  of  agreements  (the   "Transaction")   whereby  VIMRx
effectively  acquired 68% of Innovir and Innovir  acquired all of the issued and
outstanding  shares of VHL, a wholly  owned  subsidiary  of VIMRx.  As discussed
further in Note 2, for financial  reporting  purposes,  the Transaction has been
accounted for as a partial sale of VHL to Innovir and a partial  acquisition  of
Innovir. In connection  therewith,  the purchase price has been allocated to net
tangible assets, purchased in-process research and development and goodwill. The
purchased  in-process  research and development  was charged to operations.  The
accompanying  consolidated  financial  statements include the accounts of VIMRx,
Innovir  and  all  subsidiaries  which  are  wholly  owned  (collectively,   the
"Company").

     The Company is subject to those risks  associated  with  development  stage
companies.  All of the Company's  efforts to date have been devoted to acquiring
technology,  research  and  development,  setting up  laboratories  and  raising
capital.  The Company does not yet generate any revenues from product sales. The
Company has research  laboratories in the United States,  the United Kingdom and
Germany.  In  addition,   research  and  development  and  clinical  trials  are
contracted to independent institutions in the United States and elsewhere.

                                      F-9
<PAGE>


Note 2 - Acquisitions:


[a]  Transactions to acquire 68% of Innovir Laboratories, Inc.:

     As discussed in Note 1, VIMRx,  Innovir and certain stockholders of Innovir
(the "Aries Funds") entered into the  Transaction  whereby VIMRx acquired 68% of
Innovir and Innovir  acquired 100% of the  outstanding  capital stock of VHL. In
consideration of the acquisition of VHL,  Innovir,  on December 23, 1996, 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
Innovir's common stock. The warrants expire after five years. The exercise price
for one million  warrants is $1.00 per share; the remaining one million warrants
have an exercise price of $2.00 per share.

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

     VIMRx's  partial  acquisition of Innovir and Innovir's  acquisition of VHL,
have been  accounted  for as a purchase in  accordance  with APB Opinion No. 16,
"Business  Combinations" ("APB No. 16") 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  for as a  partial  sale of VHL to the  minority  shareholders  of
Innovir and a partial acquisition of Innovir.  VIMRx's purchase price of its 68%
of Innovir  totaled  approximately  $17 million.  Of the total  purchase  price,
approximately  $3.7 million was  allocated to tangible  assets,  $1.8 million to
liabilities,  $13.8 million to purchased in-process research and development and
the balance to goodwill.  Technological  feasibility of the purchased in-process
research and development has not yet been  established and the technology has no
alternative  future use. In connection with the partial sale of VHL, the Company
recorded a gain on $2.8 million which has been included with purchased  research
and development  expense.  The accompanying  statement of operations include the
operations of Innovir from December 23, 1996 to December 31, 1996.

[b]  Acquisition of Ribonetics:

     During  1996,  VHL  acquired  100%  of the  outstanding  capital  stock  of
Ribonetics in consideration for approximately $1.6 million of 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 Company valued the warrants at approximately
$1,562,000.  The  Acquisition  has  been  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
approximately   $3.7  million  and  has  been  allocated  to  tangible   assets,
liabilities  and  purchased  in-process  research and  development  of $475,000,
$289,000 and $3,528,000,

                                      F-10
<PAGE>


Note 2 - Acquisitions:  (continued)

[b]  Acquisition of Ribonetics:  (continued)

     respectively.  It was  determined  at the  date  of  acquisition  that  the
purchased  in-process  research and  development  had not reached  technological
feasibility and that the technology had 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 ended December 31.
<TABLE>
<CAPTION>

                                               Year Ended December 31,
                                              1996               1995
                                                     (Unaudited)
          <S>                           <C>                <C>

          Revenues                        $ 2,089,000       $    470,000

          Expenses                         17,367,000         12,021,000
                                           ----------         ----------

          Net loss                        $15,278,000        $11,551,000
                                          ===========        ===========

          Net loss per share                 $0.36              $0.51
                                             =====              =====
</TABLE>

     The pro forma  results of  operations  above  include  adjustments  for the
amortization  of  intangibles  and  exclude   nonrecurring  charges  related  to
purchased  in-process  research and development arising from the Transaction and
the Acquisition.

     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 periods, nor are
they necessarily indicative of future operating results.

                                      F-11
<PAGE>

Note 3 - Summary of Significant Accounting Policies:

[a]  Consolidation:

        The accompanying  consolidated financial statements include the accounts
of VIMRx,  Innovir and all subsidiaries  which are wholly owned. All significant
inter-company balances and transactions have been eliminated.

[b]  Research and development:

        Research and development costs are charged to expense as incurred.

[c]  Foreign currency translation:

        Financial  statements of foreign  subsidiaries  are translated into U.S.
dollars  at the  exchange  rate  at each  balance  sheet  date  for  assets  and
liabilities and a weighted  average  exchange rate for each period for revenues,
expenses  and gains and  losses.  Where the  local  currency  is the  functional
currency,  translation  adjustments  are  recorded  as a separate  component  of
shareholders'  equity  (deficit).  Where  the  U.S.  dollar  is  the  functional
currency,  translation  adjustments are included in operating  results.  Foreign
exchange  gains and losses  included  in  operations  were not  material.  As of
December 31, 1996,  approximately 2% and approximately 3% of the Company's total
assets are located in the United Kingdom and Germany, respectively.

[d]  Amortization of goodwill:

        Goodwill represents the excess of the purchase price paid by the Company
over 68% of the fair value of the net assets and purchased  in-process  research
and  development of Innovir.  Such amount is being  amortized on a straight-line
basis over the period of expected benefit of three years.  Total amortization of
goodwill  for the year ended  December 31, 1996 was not  material.  The carrying
value of goodwill  will be reviewed  periodically  based on the  advancement  of
Innovir's  technology  and the continued  employment of Innovir's  workforce and
consultants. Should this review indicate that goodwill will not be realized, the
Company's carrying value of the goodwill will be reduced.

                                      F-12
<PAGE>

Note 3 - Summary of Significant Accounting Policies:  (continued)

[e]  Fixed assets:

        Fixed assets  consist of office and  laboratory  equipment and leasehold
improvements  stated at cost.  Equipment is depreciated on a straight-line basis
over  its  estimated  useful  life of five  years.  Leasehold  improvements  are
amortized  over  the  life of the  lease  or of the  improvement,  whichever  is
shorter. 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
operations.

[f]  Deferred financing costs:

        Direct  costs   associated  with  obtaining  debt  financing  have  been
capitalized and are being amortized on a basis which  approximates  the interest
method, over the terms of the respective loans.

[g]  Cash and cash equivalents:

        The Company  considers  all highly  liquid debt  instruments  which have
maturities  of three months or less when  acquired to be cash  equivalents.  The
carrying  amount  reported  in the balance  sheet for cash and cash  equivalents
approximates its fair value.  Cash and cash  equivalents  subject the Company to
concentrations  of credit risk.  At December 31, 1996,  the Company had invested
approximately  $6.6 million in money market funds with two investment  companies
and held approximately $1.7 million of commercial paper issued by four entities,
with  maturities not in excess of three months.  The Company holds no collateral
for these financial instruments.

[h]  Investments:

        The Company  classifies  certain  investments  as  "available-for-sale".
Investments  in securities  that are classified as  available-for-sale  and have
readily  determinable  fair  values are  measured  at fair  market  value in the
balance sheet, and unrealized holding gains and losses for these investments are
reported as a separate component of shareholders' equity until realized.

[i]  Net loss per share:

        Net loss  per  share is  computed  on the  basis of the net loss for the
period  divided  by the  weighted  average  number of  shares  of  common  stock
outstanding  during the period.  The net loss per share for all periods excludes
the number of shares  issuable  upon  exercise  of the  outstanding  options and
warrants since such inclusion would be anti-dilutive.

                                      F-13
<PAGE>

Note 3 - Summary of Significant Accounting Policies:  (continued)

[j]  Government grants:

        Proceeds from government  grants are recognized as income as the related
research is  performed.  For the year ended  December  31,  1996,  approximately
$90,000 was recognized as income and is included in other income.

[k]  Use of estimates:

        The  preparation  of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

[l]  Income taxes:

        The Company  accounts for income taxes in accordance  with  Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income Taxes" ("SFAS
109"). SFAS 109 requires  recognition of deferred tax liabilities and assets for
the expected  future tax  consequences  of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are  determined on the basis of the  difference  between tax bases of
assets  and  liabilities  and  their  respective   financial-reporting   amounts
("temporary  differences")  at enacted tax rates in effect for the year in which
the temporary differences are expected to reverse (see Note 12).

[m]  Stock based employee compensation:

        The  accompanying  financial  position and results of  operations of the
Company have been  prepared in accordance  with APB Opinion No. 25,  "Accounting
for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25,  generally,  no
compensation  expense is recognized in the accompanying  financial statements in
connection with the awarding of stock option grants to employees  provided that,
as of the  grant  date,  all terms  associated  with the award are fixed and the
quoted market price of the Company's stock, as of the grant date, is not greater
than the amount an employee  must pay to acquire the stock as defined;  however,
to the extent  that stock  options  are  granted  to  nonemployees  for goods or
services,  the fair value of these options are included in operating  results as
an expense.

        Disclosures  required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based  Compensation" ("SFAS No. 123"),  including pro
forma  operating  results had the Company  prepared its financial  statements in
accordance  with the fair  value  based  method of  accounting  for  stock-based
compensation, have been included in Note 11[b].

                                      F-14
<PAGE>

Note 3 - Summary of Significant Accounting Policies:  (continued)

[n]  Fair value of financial instruments:

        Financial instruments include notes receivable and accounts payable. The
carrying amount of these instruments  approximate fair value due either to their
short-term  nature or because  the  Company  believes  the  instrument  could be
exchanged in a current transaction for that carrying amount (also see Note 10).

[o]  Reclassifications:

        Certain reclassifications have been made to the financial statements for
1995 in order to conform with current year's presentation.


Note 4 - Research Contracts:

        [a] Pursuant to an agreement with New York  University  ("NYU") and Yeda
Research and Development Co., Ltd. ("Yeda"),  located in Israel,  (NYU and Yeda,
collectively,   the  "Licensors"),  the  Licensors  granted  VIMRx  a  worldwide
exclusive  license to commercialize  and exploit natural hypericin and synthetic
hypericin  compounds to inactivate viruses and retro-viruses as a therapeutic or
preventive  treatment  for viral or  retroviral  diseases,  and for  anti-glioma
(brain tumor)  indications.  Between 1988 and May 1995, VIMRx paid the Licensors
an aggregate of  approximately  $4,928,000  for  research and  development  with
respect to hypericin,  and  approximately  $434,000 for  reimbursement of patent
expenses and  approximately  $300,000 in minimum royalty  payments since June 1,
1993.  The agreement  requires  VIMRx to protect the Licensors and their related
parties  (consultants and scientists) from damages arising out of the conduct of
the  research  project  and  the use or  practice  of the  research  technology,
products or processes by VIMRx or its related parties.  VIMRx must also maintain
employer's  liability  insurance for all its employees engaged in work involving
the research project.

        In  addition,  the  Company is  required  to make  royalty  and  related
payments to licensors under the agreement  consisting of: (1) royalties of 7% on
net sales of products  licensed;  (2) royalties of 4.4% on net sales of products
sublicensed;  (3) 40% of  payments  from  third  parties  to Fund  research  and
development  and (4)  12% of  consideration  received  from  an  entity  selling
licensed products.

        Commencing June 1, 1993, minimum annual royalty payments of $100,000 are
due until the later of the expiration of the Licensors' patents or 15 years from
the first commercial sale of products under the agreement. During 1996, 1995 and
1994, such payments were made.

                                      F-15
<PAGE>

Note 4 - Research Contracts:  (continued)

        [b] On  March  7,  1995,  VHL  entered  into  a one  year  research  and
development  agreement  with  Ribonetics  with respect to rights and the related
technology acquired from Ribonetics.  During 1995,  approximately  $1,050,000 of
such funding was made. The agreement provides for the issuance by the Company of
500,000 shares of its common stock at the  anniversary  date of the research and
development agreement.  However, should the agreement be terminated prior to any
anniversary date the unissued shares shall not be payable.  At December 31, 1995
a liability of $464,000 reflecting this agreement has been recorded based on the
pro rata shares earned at the current market price, and research and development
expense had been charged.

        In 1996,  VHL  terminated  its research and  development  agreement with
Ribonetics  resulting  in a reversal of the accrual for payments of common stock
under that agreement.

        [c]  Innovir  (as  licensee)  has entered  into an  exclusive  worldwide
licensing agreement with a university whereby Innovir has the exclusive right to
use certain  technology  owned by the university.  According to the terms of the
agreement,  as amended,  Innovir 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 underlying patents
expire in such country. In addition,  the license may be terminated in the event
that  Innovir   fails  to  implement  a  plan   directed  at   development   and
commercialization  of products  based on the licensed  technology  or if Innovir
fails  to  satisfy  certain  other  contractual  obligations.  In the  event  of
termination,  all  licensing  rights  under the  agreement  would  revert to the
university.  The termination of the license would have a material adverse effect
on the business of Innovir.  Although Innovir 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.  Innovir  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 Innovir.

        In April 1994, Innovir (as licensee) entered into another  non-exclusive
licensing  agreement with a university  whereby  Innovir has the  non-exclusive,
non-transferable  right  to use  certain  technology  owned  by the  university.
According to the terms of this agreement, Innovir is required to remit royalties
on a quarterly  basis, at various rates,  as defined,  beginning after the first
commercial sale of a licensed

                                      F-16
<PAGE>

Note 4 - Research Contracts:  (continued)

         [c]  (continued)

product,  as defined.  In addition,  Innovir is required to pay a minimum annual
advance on earned royalties ("Advance") of $10,000, which is nonrefundable,  but
may be  credited,  as defined,  against  future  royalties  due 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,  VHL  entered  into a research  collaboration  and  licensing
agreement with a pharmaceutical company  ("Pharmaceutical  Company").  Under the
terms of the agreement,  the Pharmaceutical Company and VHL will jointly develop
certain technology and the Pharmaceutical Company obtained certain rights to the
technology  or  received  a  defined  royalty  in the  event  VHL  licenses  the
technology to a third party. The agreement also provides for the  Pharmaceutical
Company to make defined  payments to VHL 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 the parties. During
the year ended December 31, 1996, VHL received  $40,000 from the  Pharmaceutical
Company in accordance with the agreement. Such amount has been included in other
income.


Note 5 - Investments:

     Securities  available  for sale at  December  31,  1996 are  summarized  as
follows:
<TABLE>
<CAPTION>

                                                            Estimated          Unrealized
                                         Cost              Fair Value          Gain (Loss)
                                         ----             -------------        -----------
    <S>                               <C>                <C>                  <C>
    U.S. Treasury and agencies           4,867,000         $ 4,845,000           $(22,000)
    Mortgage-backed securities          17,548,000          17,583,000             35,000
    Asset-backed securities             11,181,000          11,182,000              1,000
    Corporate debt securities            4,683,000           4,690,000              7,000
                                         ---------           ---------              -----
                                       $38,279,000         $38,300,000           $ 21,000
                                       ===========         ===========           ========
</TABLE>

     During the year ended  December 31, 1996 and December 31, 1994, the Company
realized a gain (loss) of approximately $272,000 and ($74,000), respectively, on
the sale of available-for-sale investments, included in other income.

                                      F-17
<PAGE>

Note 5- Investments:  (continued)

     The cost and  estimated  fair value of  available  for sale  securities  by
contractual maturity at December 31, 1996 is as follows:

                                                                     Estimated
                                                      Cost           Fair Value
                                                      ----           -----------
    Due after one year through five years         $14,098,000        $14,083,000
    Due after five years through ten years          5,721,000          5,719,000
    Due after ten years                               912,000            915,000
    Mortgage-backed securities                     17,548,000         17,583,000
                                                   ----------         ----------
                                                  $38,279,000        $38,300,000
                                                  ===========        ===========

     Expected  maturities  may differ from  contractual  maturities  because the
issuers  of the  securities  may have the  right  to repay  obligations  without
repayment penalties.

     During  1996,  the Company  purchased  for $800,000 an aggregate of 457,143
shares of the common stock of Epoch Pharmaceuticals, Inc. ("Epoch"), warrants to
purchase  450,000 shares of Epoch's common stock at $2.00 per share and warrants
to  purchase  an  additional  450,000  common  shares at $3.00 per share,  which
warrants  expire on  October  1, 1997 and  October  1,  1998,  respectively.  In
connection  therewith,  Epoch released the Company and its  affiliates  from any
claims Epoch might have with respect to the  Innovir's  subsidiary,  Ribonetics.
During  1996,   the  Company   recorded  a  charge  to  operations  of  $350,000
representing  the  excess  over the  fair  value  of  securities  at the date of
purchase.  On December  31, 1996,  the Company  recorded an  unrealized  loss of
$164,000  on  this  investment  which  has  been  included  as  a  reduction  of
shareholders' equity.


Note 6 - Equipment:

     Equipment consists of the following:
                                                              December 31,
                                                          --------------------
                                                           1996           1995
                                                           ----           ----
        Office and laboratory equipment                $2,042,000       $ 91,000
        Computers                                         114,000         57,000
        Leasehold improvements                            689,000
                                                          -------      ---------
                                                        2,845,000        148,000
        Less accumulated depreciation and amortization    195,000         40,000
                                                          -------         ------
        Net equipment                                  $2,650,000       $108,000
                                                       ==========       ========

                                      F-18
<PAGE>

Note 7 - Notes Receivable:

     Notes receivable,  at December 31, 1995,  consist of two notes of $250,000,
each  bearing  interest at 12.5%,  due on December 7, 1994 and January 21, 1995,
respectively,  and a $250,000 unsecured demand note bearing interest at 10% from
Ribonetics.  The notes were collateralized by laboratory equipment and a license
for certain patent rights.  At December 31, 1995 and December 31, 1994,  $85,000
and $290,000, respectively, of the notes were charged to expense. On January 16,
1995,  the Company  assigned its rights to the notes and related  agreements  to
VHL.  On January  18,  1995,  VHL took  possession  of the license in return for
$150,000 of the notes  which have been  included  in  research  and  development
expense as of December 31, 1994.  No interest  income was  recognized  for these
notes for 1996, 1995 and 1994. The carrying value of these notes was included in
the purchase price when the Company acquired Ribonetics as discussed in Note 2.


Note 8 - Accounts Payable and Accrued Expenses:

     Accounts payable and accrued expenses consist of the following:

                                                            December 31,
                                                         1996           1995
                                                         ----           ----
         Accounts payable                           $  859,000      $136,000
         Accrued expenses                              435,000
         Accrued payroll and related costs              42,000
                 Professional fees                     567,000       296,000
                                                       -------       -------
                                                    $1,903,000      $432,000
                                                    ==========      ========


Note 9 - Notes Payable:

     In December  1995, the Company  issued  $2,000,000 of unsecured  promissory
notes due at the  earlier  of one year or five days  following  a sale of equity
securities of the Company,  grossing proceeds of at least $2,000,000.  The notes
were  issued  in  connection  with a  private  placement  of  units,  each  unit
consisting of a $50,000 unsecured  promissory note bearing interest at a rate of
12% per  annum  (effective  interest  rate  24%) and  25,000  warrants  ("bridge
warrants") of the Company.  The Company  valued the warrants  issued at $200,000
which has been accounted for as debt discount. The warrants contained

                                      F-19
<PAGE>

Note 9 - Notes Payable:  (continued)

provisions  that in the  event  the  Company  consummates  a public  or  private
placement of its equity  securities  prior to December  26, 1998 which  includes
warrants  ("new  warrants"),  then the bridge  warrants  would  convert into new
warrants. Effective with the private placement in 1996 (see Note 11), the bridge
warrants were converted into new warrants.  On June 28, 1996, the Company repaid
the notes and  accrued  interest.  The debt  discount  was  recorded as interest
expense.


Note 10 - Innovir Note Payable - Warrantholder:

     The term note provides for interest,  payable quarterly at a rate of 8% per
annum. The noteholder  holds a lein on all the assets of Innovir.  In connection
with the issuance of the term note,  Innovir issued a warrant which provides the
holder  with the right to acquire an  aggregate  of 40,000  shares of  Innovir's
common stock at $6.25 per share. Any accrued and unpaid interest  ($44,000 as of
December  31,  1996)  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
expires on February 10, 1998 and  contains  anti-dilution  provisions  and other
defined  adjustments in the event of a merger or reorganization,  as defined. As
of December 31, 1996, the warrant was exercisable and outstanding. The estimated
fair value of the term note at December 31, 1996 was approximately $200,000. The
fair value was  estimated  on the basis of the current rate of debt with similar
characteristics.

     In addition,  during November 1996, the payment terms of the term note were
amended. (the "Amended Note") and related accrued and unpaid interest as of that
date was deferred. In consideration for such amendment,  Innovir issued a second
warrant,  which  expires on November 21,  2001,  to the  noteholder  to purchase
20,000 shares of the Company's  common stock at $1.50 per share.  The fair value
of the warrant totaled approximately $16,000. Such amount is being accounted for
as deferred  financing cost and amortized over the remaining life of the Amended
Note.  Pursuant to the Amended Note,  future  payments of principal and deferred
interest are as follows:
<TABLE>
<CAPTION>

                      Year Ending                          Future
                      December 31,                        Payments
                         <S>                             <C>

                         1997                             $ 36,000
                         1998                              130,000
                         1999                               97,000
                         ----                               ------
                                                          $263,000
                                                          ========
</TABLE>

     Interest  expense  with regard to the Amended Note was not material for all
periods presented.

                                      F-20
<PAGE>

Note 11 - Shareholders' Equity:

[a]  Public offerings:

     On July 25, 1990, the Company  effected an initial  public  offering of its
securities.  A total of 1,150,000 units, each comprised of five shares of common
stock and five redeemable Class A warrants, were sold for $5.00 a unit, yielding
net proceeds of  approximately  $4,546,000  after  underwriting  commissions and
expenses.

     Prior to the  initial  public  offering,  the  Company  was  recapitalized,
whereby all  outstanding  preferred  stock was converted into common stock,  the
treasury  stock was retired,  the par value of the common stock was changed from
$0.01 to $0.001 a share,  and the Company  effected a .599-for-1  reverse  stock
split.

     On January 23, 1992, the Company  effected a second public  offering of its
securities.  A total of 1,380  units,  each  comprised of 2,275 shares of common
stock and 2,275 redeemable Class A warrants,  were sold for $5,000 a unit during
January  and  February  of  1992.   This   offering   yielded  net  proceeds  of
approximately $5,710,000 after underwriting commissions and expenses.

     On January 27, 1994,  the Company  effected a third public  offering of its
securities.  A total of 1,552  units,  each  comprised of 3,475 shares of common
stock and  3,475  redeemable  Class A  warrants,  were  sold for  $5,000 a unit,
yielding net proceeds of approximately $6,385,000 after underwriting commissions
and expenses.

     On April 9, 1996, the Company exercised its right to redeem all outstanding
redeemable  Class A  warrants  (the  "Class A  warrants")  on May 10,  1996 (the
"Redemption   Date").   Between  January  1,  1996  and  the  Redemption   Date,
approximately  13,900,000 Class A warrants were exercised resulting in the issue
of one share of common  stock and one  redeemable  Class B warrant (the "Class B
warrant")  for $1.50.  On April 25,  1996,  the Company  exercised  its right to
redeem all outstanding Class B warrants on June 13,1996 (the "B Class Redemption
Date").  Between January 1, 1996 and the B Class Redemption Date,  approximately
14,200,000  Class B warrants  were  exercised,  resulting in the issuance of one
share of common stock for $2.25.  The exercise of Class A and B warrants yielded
net proceeds of approximately  $50,847,000 after commissions of $1,949,000 to an
investment firm.

     On March 21, 1996,  VIMRx  entered  into a  Subscription  and  Registration
Rights Agreement (the "Agreement") with a group of individuals,  under which the
Company  agreed  to  issue  2,799,991  units,  at a price  of  $1.50  per  unit,
consisting of one share of common stock and one-half of a warrant.  Each warrant
entitles the holder to purchase  one share of common stock at an exercise  price
of $1.50 per share subject to adjustment, and exercisable through June 20, 2006.
The net proceeds to the Company were approximately $4,058,000.

                                      F-21
<PAGE>

Note 11 - Shareholders' Equity:  (continued)

[a]  Public offerings:  (continued)

     On June 21, 1996, the authorized capital stock of the Company was increased
from 60,000,000 to 120,000,000 shares of common stock.

[b]  Stock option plans:

     The Company has  established  two  employee  stock  option plans (the "1989
Plan" and the "1990  Plan").  No further  options may be granted  under the 1989
Plan.  On June 20,  1996,  the 1990 Plan was  amended  increasing  the number of
shares of common stock issuable upon exercise of options  granted under the Plan
from 1,200,000 to 2,400,000 shares.  The shares of common stock are reserved for
issuance upon exercise of either incentive or nonincentive options, which may be
granted  from time to time by a committee of the Board of Directors to employees
and others.  The terms of each incentive option and nonincentive  option are for
five years and ten years,  respectively,  from date of grant.  The grant  prices
must be no less than 50% and 100% of the fair market value for  nonincentive and
incentive  options,  respectively.  At December  31,  1996,  options for 411,900
shares were available for future grant. Generally, options vest 25% per annum on
the anniversary date of grant.
<TABLE>
<CAPTION>

         Stock options outstanding under these plans are as follows:

                                                                1989 Plan                       1990 Plan
                                                         -------------------------     ---------------------------
                                                                         Weighted-                      Weighted-
                                                                          Average                        Average
                                                                         Exercise                       Exercise
                                                           Shares         Price          Shares          Price
                                                         ---------     ----------      ------------    ------------
<S>                                                      <C>           <C>           <C>                 <C>
Outstanding at December 31, 1993                            15,594                        520,808
   Granted                                                                              1,545,146        $0.87
   Expired                                                                             (1,755,954)        0.80
                                                          --------                     ----------         ----
Outstanding at December 31, 1994                            15,594                        310,000
   Granted                                                                                250,000         0.44
   Expired                                                 (15,594)       $0.50          (135,500)        1.59
   Exercised                                                                             (150,000)        0.44
                                                          --------                       --------         ----
Outstanding at December 31, 1995                             - 0 -                        274,500
   Granted                                                                              1,475,000         2.71
   Exercised                                                                              (12,000)        1.16
                                                          --------                        -------         ----
Outstanding at December 31, 1996                           - 0 -                        1,737,500        $2.34
                                                          ========                      =========        =====
</TABLE>

                                      F-22
<PAGE>

Note 11 - Shareholders' Equity:  (continued)

[b]  Stock option plans:  (continued)

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1996 under the 1990 Plan:

<TABLE>
<CAPTION>

                                                         Options Outstanding            Options Exercisable
                                                 -------------------------------   -------------------------
                                                     Weighted-
                                                      Average
                                                     Remaining       Weighted-                      Weighted-
                                                    Contractual       Average                        Average
                                      Number            Life         Exercise         Number        Exercise
 Range of Exercise Price            Outstanding      (in Years)        Price       Exercisable        Price
 ---------------------------     ---------------   -------------   -----------   ---------------   -----------
<S>                               <C>               <C>            <C>            <C>              <C>
           .44 - .69                     250,000        2.88          $ .59             100,000       $0.63
          1.38 - 1.66                    187,500        3.95           1.64              12,500        1.38
          2.56 - 3.31                  1,300,000        4.41           2.85
                                       ---------        ----           ----            --------        -----
                                       1,737,500        4.14          $2.34             112,500        $1.46
                                       =========        ====          =====             =======        =====
</TABLE>

     In August  1995,  the Company  adopted a Directors  Stock  Option Plan (the
"Directors  Plan")  authorizing the issuance of five year options to purchase an
aggregate of 920,000  shares at an exercise price equal to the fair market value
of the common stock at date of grant.  All the options  were  granted  under the
Directors Plan and no further options are available for grant.

     Additional  information  with respect to the Directors Plan option activity
is summarized as follows:

                                                                      Weighted-
                                                                       Average
                                                                       Exercise
                                                        Shares          Price
                                                        ------          -----

        Granted                                         920,000           $0.86
                                                        -------           -----

        Outstanding at December 31, 1995                920,000            0.86

        Exercised                                      (200,000)           0.89
                                                       --------            ----

        Outstanding at December 31, 1996                720,000           $0.85
                                                        =======           =====

                                      F-23
<PAGE>

Note 11 - Shareholders' Equity:  (continued)

[b]  Stock option plans:  (continued)

     At  December  31,  1996,  all the  options  under  the  Directors  Plan are
exercisable.

     The following table summarizes  information about stock options outstanding
at December 31, 1996 under the Directors Plan:

<TABLE>
<CAPTION>

                                                  Options Outstanding
                                                ---------------------------
                                                                Weighted-
                                                                 Average
                                                                Remaining
                                                               Contractual
         Exercise                                 Number          Life
         Price                                Outstanding      (in Years)
         ----------                        --------------   ----------------
        <S>                                <C>              <C>
          $.75                                  350,000           3.67
           .9375                                370,000           3.88
                                                -------           ----
                                                720,000           3.80
                                                =======           ====
</TABLE>

     The Company  applies APB 25 in  accounting  for its stock option  incentive
plan  and,  accordingly,  recognizes  compensation  expense  for the  difference
between the fair value of the underlying common stock and the grant price of the
option at the date of grant.  The  effect of  applying  SFAS No. 123 on 1995 and
1996 pro forma net loss as stated above is not necessarily representative of the
effects on reported net loss for future years due to,  among other  things,  (1)
the vesting  period of the stock  options  and the (2) fair value of  additional
stock options in future years.  Had  compensation  cost for the Company's  stock
option  plans  been  determined  based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123,  the  Company's  net loss in 1996 and 1995  would  have been  approximately
$20.948  million  and  $5.28  million,  or $.53 per  share  and $.27 per  share,
respectively.  The fair value of the  options  granted  during 1996 and 1995 are
estimated  at $2.20 per share and $.61 per share,  respectively,  on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
assumptions:  dividend yield of 0%, volatility of 1.10%, risk-free interest rate
of 6.10% - 6.73% for 1996 and 5.77% - 7.08% for  1995,  and  expected  life of 5
years.

                                      F-24
<PAGE>


Note 11 - Shareholders' Equity:  (continued)

[c]  Nonemployee director restricted stock award plan:

     On June  21,  1996,  the  Company  adopted  the 1996  Nonemployee  Director
Restricted  Stock Award Plan (the "Award  Plan")  under  which an  aggregate  of
900,000 shares of common stock are reserved for issuance as restricted shares of
common stock to nonemployer  directors.  Restricted shares shall be forfeited by
the  nonemployee  director in the event the director ceases to serve as director
of the Company,  except that such  forfeiture  provision will lapse at a rate of
25% of the number of restricted  shares per annum  commencing  one year from the
date of issuance.

     The  Company  has the  right  of  first  refusal  to  purchase  any  vested
restricted  shares  proposed to be transferred  by a nonemployee  director for a
period of 30 days after receipt of written  notice at a per share price equal to
the  difference  between the fair market value at the date of proposed  transfer
minus the  difference  between the fair  market  value at the date of grant less
$1.00.  During the year ended  December 31, 1996,  the Company  granted  400,000
restricted  shares under the Award Plan, none of which have vested.  The Company
valued  these  shares at  $400,000,  which is being  amortized  over the vesting
period.

[d]  Warrants to acquire common stock:

     As of December  31, 1996,  the Company had  warrants to purchase  2,400,000
shares of common  stock at an  exercise  price of $1.50 per  share,  exercisable
through June 20, 2006 (see Notes 9 and 11).

     In  addition,  at December  31,  1996 the Company has  warrants to purchase
365,000  shares  of  common  stock  at an  exercise  price  of $.01  per  share,
exercisable through May 21, 2006 (see Note 2[b]).

     As of December  31, 1996 there were  2,765,000  warrants  exercisable  at a
weighted-average exercise price of $1.30.

[e]  Other options:

     In  connection  with  its  public  offerings,   the  Company  sold  to  the
underwriter,  at a nominal  amount,  the  following  options for the purchase of
units:


                                     Exercise       Number of
                         Number        Price          Shares
                        of Units      Per Unit        Reserved  Expiration Date
   1992 offering            120        $8,000          819,000  July 24, 1997
   1994 offering            135         7,000        1,407,374  January 20, 1999

                                      F-25
<PAGE>

Note 11 - Shareholders' Equity:  (continued)

[e]  Other options:  (continued)

     The  units are  identical  to the units  sold in the  respective  offerings
except that the warrants  included  therein,  which expire on July 24, 1997, are
not subject to  redemption  by the Company.  The units are subject to adjustment
for dilution (as defined).  Each Class A warrant entitles the holder to purchase
a unit  consisting  of one share of  common  stock  and one  redeemable  Class B
detachable  warrant.  Each Class B warrant  entitles  the holder to purchase one
share of common stock.

     The Company has granted stock options to certain consultants,  who are also
directors, of the Company as follows:


         Number of          Exercise
          Shares              Price          Term   Expiration Date

         1,300,000            $0.94        5 years  November 17, 2000        (1)
         2,000,000             0.53        3 years  August 6, 1998           (1)
           100,000             1.47       10 years  March 11, 2006           (2)
           100,000             1.47       10 years  March 11, 2006           (2)

(1)    During 1995 the Company  valued these options at an aggregate of $591,000
       which are being amortized over the vesting period.

(2)    Options  granted in connection with the March 1996 agreement (see Note 11
       [a])  whereby  certain  directors  agreed to provide  operating  funds if
       needed through September 1996.


Note 12 - 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.

                                      F-26
<PAGE>

Note 12 - Income Taxes:  (continued)

        The federal tax effect of net operating  loss  carryforwards,  temporary
differences and research and development tax credit carryforwards is as follows:

                                                              December 31,
                                                          -------------------
                                                         1996            1995
                                                         ----            ----

  Deferred tax assets and valuation allowance:
    Net operating loss carryforwards              $ 15,947,000      $ 6,698,000
    Deferred liabilities                                40,000
    Deferred costs                                     285,000
    Research and experimental tax credit
    carryforwards                                      570,000
    Valuation allowance                            (16,842,000)      (6,698,000)
                                                   -----------       ----------
                                                 $     - 0 -        $    - 0 -
                                                 =============       ==========

        As of December 31, 1996,  the Company has available for tax purposes the
following net operating loss carryforwards:


        United States (expires through 2011) (including
        approximately $25,000,000 relating to Innovir)               $47,000,000

        United Kingdom (no expiration date)                              970,000

        Germany (no expiration date)                                   1,700,000

     The  Company's   research  and  development  tax  credit   carryforward  of
approximately  $570,000  expires in various  years from 2005 through 2012 and is
subject to  limitation  due to a change in ownership  pursuant to Section 382 of
the Internal Revenue Code.

     At  December  31,  1996  the  Company  had  available  net  operating  loss
carryforwards to reduce future taxable income of approximately $47,000,000.  The
net operating loss  carryforwards  expire in various  amounts  through 2011. The
Company's  ability to utilize  $25,000,000 of its $47,000,000 net operating loss
carryforwards  is subject to a cumulating,  annual  limitation of  approximately
$1,200,000 pursuant to Section 382 of the Internal Revenue Code. The $22,000,000
balance would become  subject to limitation  (the amount of which would be based
on the then value of the Company's outstanding shares) if and when an "ownership
change" (as defined in Section 382 of the Internal Revenue Code) were to occur.

                                      F-27
<PAGE>

Note 13 - Related Party Transactions:

[a]  Employment agreements:

     On April 1, 1996  Innovir  entered  into an  employment  agreement  with an
officer/stockholder  ("officer") of Innovir expiring March 31, 1998, whereby the
officer  has  agreed to devote  his full  business  time to  Innovir  to further
develop certain  Company  technology.  The terms of the agreement  provide for a
base salary of $200,000 per annum,  adjusted  annually,  plus a key  performance
bonus, as determined by Innovir's Board of Directors (the "Board"). In addition,
the agreement provides for the officer to supply certain equipment to Innovir to
be used during his term of  employment.  At the  conclusion of  employment,  the
equipment will be returned to the officer.

[b]  Consulting agreements:

     Innovir  has  several   agreements  with  consultants,   two  of  whom  are
stockholders  ("stockholders/consultants")  of Innovir.  The consultants perform
services for Innovir in  consideration  for certain fees. The  consultants  have
also agreed to assign to Innovir any inventions,  ideas,  patents and copyrights
conceived if related to Innovir's business and provide other services as defined
in agreements. To date, fees paid to the stockholders/consultants  have not been
material. Future minimum quarterly payments to the  stockholders/consultants are
approximately  $46,000  through  March 31, 1998 and $24,000  thereafter  through
March 31, 2000.  Under certain  conditions,  Innovir may have to pay  additional
amounts ("patent award"), as defined, in the event the research performed by one
of the consultants leads to the issuance of a patent. Patent awards paid to date
have not been material.

     In April 1994, the Company retained MKS Enterprises Inc. ("MKS"), an entity
50% owned by one of the then  Company's  directors,  to  perform  financial  and
consulting services. In consideration,  therefore,  the Company paid $62,500 and
$112,500,  respectively,  in 1995 and 1994 and issued  240,000  shares of common
stock in December 1994 valued at $75,000. MKS was dissolved in 1995.

[c]  CambES, Ltd:

        In 1994,  the  Company  completed  its  purchase  of  60,060  shares  of
preferred stock of CambES,  Ltd.  ("CambES),  a U.S.  company,  for $200,000 and
provided $50,000 of additional funding.

                                      F-28

<PAGE>

Note 13 - Related Party Transactions:  (continued)

[c]  CambES, Ltd:  (continued)

        In April 1995,  VIMRx  acquired  the debt and equity  interest in CambES
held by Venkol  Ventures,  Ltd. and Venkol  Ventures,  L.P.  (collectively,  the
"Venkol  Entities") for $100,000.  The then Chairman of the Company is a general
partner of Venkol Ventures General Partners,  L.P., which is the general partner
of Venkol Ventures, L.P. and a shareholder and advisor to Venkol Ventures, Ltd.

        CambES has no  material  assets or  liabilities  at December  31,  1996,
December 31, 1995 and December 31, 1994 and no material operations in 1996, 1995
and 1994.


Note 14 - Commitments and Other Matters:

[a]  Research agreements:

        The Company has entered into research  fellowships and other  agreements
with  universities  and  institutions  (the  "Institutions").   Future  payments
aggregate  approximately  $600,000  payable at various  dates through June 1998.
Under  certain  conditions,  the Company or the  Institutions  may terminate the
respective agreements with 30 or 60 days notice.

[b]  Lease commitments:

Operating leases:

        The  Company  leases   various   office  and  laboratory   spaces  under
noncancelable  operating leases and subleases (the "Leases") expiring at periods
between May 31, 1999 and June 30, 2001. In addition,  the Company leases certain
laboratory space on a  month-to-month  basis. The Leases provide for escalations
of the minimum rent during the lease terms.

        The  Company  also  leases   automobiles  and  office   equipment  under
noncancelable  operating leases. The Leases expire at various times through June
2001.

                                      F-29
<PAGE>

Note 14 - Commitments and Other Matters:  (continued)

[b] Lease commitments:  (continued)

Operating leases:  (continued)

         Future  minimum  rental  payments  under all  operating  leases  are as
follows:

                         Year Ending                 Minimum
                        December 31,              Annual Rental
                        ------------              -------------
                           1997                    $  534,000
                           1998                       553,000
                           1999                       312,000
                           2000                        80,000
                           2001                        39,000
                                                   ----------
                                                   $1,518,000
                                                   ==========

        Rent expense approximated  $250,000,  $107,000 and $31,000 for the years
ended December 31, 1996, December 31, 1995 and December 31, 1994, respectively.

        Innovir  was  required  by the terms of one of the  leases to obtain the
required  approval for the lessor prior to the  consummation  of the Transaction
discussed in Note 2 to the financial statements. Accordingly, the Company may be
considered to be in violation of the terms of the amended sublease,  which would
also trigger  certain  cross  default  provisions  contained  in capital  leases
obligations.  The  present  value of  long-term  portion  of the  capital  lease
obligations,  which may be  considered  to be in default,  totals  approximately
$40,000. The accompanying  financial statements reflect such amount as a current
liability.

Capital leases:

        Innovir leases certain  equipment  under various  noncancelable  capital
lease  agreements.  Lease  terms  range from three to five  years,  after  which
Innovir  has the option to  purchase  the  equipment  at amounts  defined by the
respective lease agreements. In lieu of purchasing the equipment, certain leases
may be  extended  for  specified  periods,  at defined  monthly  payments.  Upon
expiration of the extended  lease terms,  Innovir may purchase the equipment for
one dollar or must return the equipment to the lessor.

                                      F-30
<PAGE>

Note 14 - Commitments and Other Matters:  (continued)

[b] Lease commitments:  (continued)

Capital leases:  (continued)

        Certain  capital  leases,  as amended  (the  "Amended  Leases")  contain
various covenants which include maintaining a minimum cash level, as defined, of
$250,000  during the term of the  leases.  This  covenant  indirectly  restricts
Innovir's ability to pay dividends.

        At December 31, 1996,  minimum rental payments under all capital leases,
including payments to acquire leased equipment, are as follows:

               Year Ending                             Minimum
               December 31,                         Annual Rental

                  1997                              $   536,000
                  1998                                  357,000
                  1999                                  165,000
                  2000                                   46,000
                  2001                                   36,000
                  ----                                ---------
                                                      1,140,000
               Less amount representing interest        205,000
                                                      ---------
               Present value of net minimum
                 capital lease payments             $   935,000
                                                    ===========

        Leased   equipment   included  as  a  component   of  fixed  assets  was
approximately  $1,387,000 at December 31, 1996; related accumulated depreciation
was approximately $405,000 for the same period. There was no leased equipment at
December 31, 1995.


Note 15 - Retirement Plans:

        Innovir  adopted the provisions of 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.  Innovir  has agreed to  contribute  defined  amounts
("Contributions") to the plans. In addition, based upon Innovir's profitability,
Innovir may also make discretionary contributions to the Plans. Contributions to
date have not been material.

                                      F-31
<PAGE>



Note 16 - Contingencies:

        During  February  1996,  Innovir was named as a  defendant  in an action
filed by an  investor  alleging  that  Innovir  refused to honor the  investor's
request to convert  certain shares of Innovir's  common stock.  During  February
1997, the investor and Innovir settled the action at no material cost to Innovir
or to the Company.

        The Company is aware of patents in the United  States and Europe held by
an  unaffiliated  third  party  relating  to  certain  technology  which  may be
infringed  by certain of VHL's  oligozymes,  in which event a license  from such
third party would be required.


Note 17 - Foreign Operations:

        A summary of  financial  data of foreign  subsidiaries  included  in the
consolidated financial statements as follows:

                                              December 31,
                                       -------------------------
                                          1996            1995
                                       ---------        --------

       Assets                         $  853,000      $  117,000

       Liabilities                       336,000          19,000

       Net Loss                        1,535,000       1,311,000


Note 18 - Subsequent Event:

        On March 7, 1997 the Company entered into a research  agreement with the
trustees of Columbia University in the City of New York ("Columbia") to fund the
Columbia Genome Center ("CGC"). In connection therewith VIMRx Genomics, Inc. was
formed  (owned 90% by the Company and 10% by  Columbia)  to provide  $30,000,000
($4.7  million to be paid during the first year in  quarterly  installments)  of
funding  for CGC related  projects  over five years.  In  addition,  the Company
granted Columbia 200,000 shares of common stock.

                                      F-32









                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the  undersigned,  thereunto duly authorized,
in the City of Wilmington, State of Delaware, on the 31th day of March, 1997.

                                                  VIMRx PHARMACEUTICALS INC.


                                                  By: /s/ Richard L. Dunning
                                                  --------------------------
                                                          Richard L. Dunning
                                                          President and Chief
                                                          Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the  following  persons
on behalf of the Registrant in the capacities and on the dates indicated.


    Signature                            Title                       Date

/s/ Richard L. Dunning      President and Chief Executive         March 31, 1997
----------------------      Officer and Director (Principal
Richard L. Dunning          Executive Officer)


/s/ Donald G. Drapkin       Chairman of the Board and Director    March 31, 1997
---------------------
Donald G. Drapkin

/s/ Francis M. O'Connell    Chief Financial Officer (Principal    March 31, 1997
------------------------    Financial and Accounting Officer)
Francis M. O'Connell

/s/ Laurence D. Fink        Director                              March 31, 1997
--------------------
Laurence D. Fink

/s/ Jerome Groopman, M.D.   Director                              March 31, 1997
-------------------------
Jerome Groopman, M.D.

/s/ Linda G. Robinson       Director                              March 31, 1997
---------------------
Linda G. Robinson

/s/ Lindsay A. Rosenwald, M.D.  Director                         March    , 1997
------------------------------
Lindsay A. Rosenwald, M.D.

/s/ Eric Rose, M.D.         Director                              March 31, 1997
-------------------
Eric A. Rose, M.D.

/s/ Michael Weiner, M.D.    Director                              March 31, 1997
------------------------
Michael Weiner, M.D.

<PAGE>