<PAGE>
 
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                       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, 1998

                                       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 $54,821,883 
on, March 29, 1999 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 69,566,089 on March 29, 1999.

--------------------------------------------------------------------------------
                   Documents incorporated by reference: None
<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS.

Disclosure Regarding Forward Looking Statements

     This Report on Form 10-K contains certain statements that are "Forward
Looking Statements" within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as
amended.  Those statements include, among other things, the discussions of the
Company's business strategy and expectations contained in "Item 1  Business" and
"Item 7  Management's Discussion and Analysis of Financial Condition and Results
of Operations."  Although the Company believes that the expectations reflected
in Forward Looking Statements are reasonable, Management can give no assurance
that such expectations will prove to have been correct.  Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, or projections
involving anticipated revenues, expenses, earnings, levels of capital
expenditures, liquidity or indebtedness or other aspects of operating results or
financial position.  All phases of the operations of the Company are subject to
a number of uncertainties, risks and other influences, many of which are outside
the control of the Company and any one of which, or a combination of which,
could materially affect the results of the Company's operations and whether the
Forward Looking Statements made by the Company ultimately prove to be accurate.

General

     VIMRX is a biotechnology company that focuses on innovative technologies to
improve human health. VIMRX's principal subsidiary, Nexell Therapeutics Inc., is
developing products utilizing cell separation technology in cell therapy for
cancer and other life-threatening diseases.  Nexell currently sells such
products outside the United States, and is seeking FDA approval to market its
products in the United States.  VIMRX also has two compounds in development:
VIMRxyn(R), chemically synthesized hypericin, which is in clinical trials for
treating a type of cancer and as a topically applied therapy for certain skin
diseases, and VM301, a wound healing agent.

Nexell

Business of Nexell

     Nexell is engaged in the development, manufacture, marketing and
distribution of specialized instruments, biologicals, reagents, sterile plastics
sets and related products used in ex vivo cell research and therapies. Nexell's
cell processing instruments are used in combination with biological reagents and
other instruments to provide integrated systems for manipulation of cells
extracted from patients. Nexell provides cell-processing instruments used in the
clinical treatment of disease, principally various forms of cancer.

     Nexell currently markets Isolex(R) Cell Selection systems that consist of
automated, sterile path instruments along with companion reagents/biologicals
and sterile plastic disposable sets.  These systems are used for the positive
clinical separation of specific cell populations from blood and bone marrow
(positive cell selection).  In positive cell selection, a targeted cell
population is captured and retained for reinfusion or for further biological
manipulation.  Nexell offers three versions of the Isolex(R) Cell Selection
instrument: the smaller scale Isolex(R) 50 Cell Separator for research use; the
clinical scale semi-automated Isolex(R) 300 Cell Separator; and the fully
automated Isolex(R) 300i Cell Separator.  All three versions are currently
marketed for therapeutic and/or research purposes in Europe.  As of the
beginning of 1999, Nexell began introducing an improved version of the Isolex(R)
300i (2.0 version) which allows positive cell selection (capturing cells that
are desired) and negative selection (eliminating cells that are not wanted) in a
single procedure.  As Nexell has not yet received regulatory approval of these
instruments for therapeutic purposes in the United States and Japan, sales in
such countries are limited to research laboratories and institutions on a cost
recovery basis. Nexell has, however, received a letter from the FDA advising
that the Isolex(R) 300 and 300i devices are "approvable" for therapeutic use in
the United States; the Company anticipates final approval in the near future.

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<PAGE>
 
    In addition to the positive selection Isolex(R) Cell Separator, Nexell
markets the MaxSep(R) System. The semi-automated MaxSep(R) System is a negative
selection system in which undesired cells are removed from a diverse population
of cells. The MaxSep(R) System is currently marketed for therapeutic purposes in
Europe.

     Nexell also markets various ancillary products that are utilized in the
cell processing cycle. These products include the following: Cryocyte(TM)
containers used in the freezing of blood components; Lifecell(R) tissue culture
flasks which provide a closed system environment for culturing cells; CFU stem
cell kits used to measure stem cell colony formation in samples of bone marrow,
peripheral blood, cord blood, or selected CD3 cells; the Solution Transfer Pump,
an automated, programmable pump for filling bags and splitting cell cultures;
and Harvester(TM), a cell collection device used primarily to reduce large cell
volumes.

Proposed Acquisition of Baxter's Interest in Nexell

     The Company currently owns 80.5% of Nexell, its principal business unit,
which it acquired through acquisition of certain assets from Baxter Healthcare
corporation ("Baxter") in December 1997 in exchange for (1) 11,000,000 shares of
Common Stock, (2) 66,304 shares of Series A Convertible Preferred Stock with a
liquidation value of $1,000 per share, (3) 19.5% of Nexell's outstanding common
stock, (4) a warrant to purchase an additional 6% of Nexell's common stock for
$6,000,000, and (5) the right to receive payments from Nexell upon the
occurrence of certain milestone events, which could aggregate $21,000,000 if all
the milestones are achieved. In addition, for $30,000,000 to Nexell, Baxter
received $30,000,000 of Nexell's 6 1/2% convertible subordinated debentures
convertible into Nexell's common stock upon a public offering of common stock by
Nexell.

     The acquisition of Baxter's interests in Nexell, other than its right to
milestone payments, is to be effected through an exchange of Baxter's interests
in Nexell for an equivalent value of interests directly in the Company (the
"Acquisition"). The Company and Baxter have agreed to exchange Baxter's
interests in Nexell (common stock, warrant and convertible subordinated
debentures, but excluding its right to milestone payments) for:

     . 3,000,000 shares of Common Stock,

     . an adjustment of the conversion price of the 70,282 outstanding shares of
       Series A Preferred Stock owned by Baxter from $5.50 per share to $2.75
       per share, (the 3,978 share increase from the 66,304 shares originally
       issued are a result of dividends payable in kind),

     . a warrant to purchase 5,200,000 shares of Common Stock at a price of
       $1.15 per share, and

     . approximately $33,000,000 principal amount of 6 1/2% Convertible
       Subordinated Debentures (replacing the $30,000,000 principal amount of
       Nexell's 6 1/2% convertible subordinated debentures plus accrued interest
       through the closing date of the Acquisition) convertible, commencing
       November 30, 2002, into Common Stock at a conversion price equal to 95%
       of the average of the closing prices of the Common Stock on the Nasdaq
       Stock Market for the 30 consecutive trading days preceding the date of
       conversion.

     Following consummation of the Acquisition, Nexell will be a wholly-owned
subsidiary of the Company and Baxter will own outright slightly less than 20% of
the Company's Common Stock. Baxter's ownership will increase to approximately
42% of the Common Stock (fully diluted ) upon the automatic conversion of the
Series A Preferred Stock into Common Stock on December 17, 2004, assuming
Baxter's exercise of its warrant, plus a further indeterminate percentage in the
event Baxter converts any portion of the 6 1/2% Convertible Subordinated
Debentures.

     The Company is seeking stockholder approval of the Acquisition at the
1999 Annual Meeting of Shareholders.

                                       3
<PAGE>
 
Acquisition of  CellPro Assets

     On January 29, 1999, Nexell consummated an agreement (the "CellPro
Acquisition Agreement") with CellPro Incorporated ("CellPro"), formerly one of
Nexell's principal competitors, to purchase substantially all the intellectual
property assets of CellPro, together with certain related tangible and
intangible assets in exchange for 1,882,215 shares of VIMRX's common stock
valued by the parties at $3,000,000.

     CellPro, had developed, and the FDA approved,  CellPro's Ceprate(R) SC Stem
Cell Concentration System (the "Ceprate(R) System") for use in autologous (i.e.,
self-donated) bone marrow and stem cell transplantation, and was developing
additional potential applications for the Ceprate(R) System. The Ceprate(R)
technology utilized the CD34+ monoclonal antibody and purified stem cell
technology, which are patented technologies originally licensed to Baxter") in
the therapeutic field, directly or indirectly, by Becton, Dickenson and Company
("Becton Dickenson") and Johns Hopkins University ("Johns Hopkins").   Baxter
sublicensed these technologies  to Nexell in December, 1997.

     In the course of patent infringement litigation brought against CellPro by
Becton Dickenson, Johns Hopkins and Baxter, CellPro filed a "citizen's petition"
before the FDA seeking to require the FDA to adopt certain procedures in its
review of Nexell's premarket approval application for the Isolex cell separation
systems which could have delayed or prevented FDA approval of the application
and also filed a petition before the Department of Health and Human Services
("HHS") requesting the exercise of so-called "march-in rights," a form of
compulsory licensing, with respect to the patents underlying the CD34+
sublicense.  CellPro was found to have infringed the patents underlying the
CD34+ technology, was ordered to pay damages and was enjoined from manufacturing
and selling the Ceprate(R) System.  A limited stay of that injunction was
granted allowing CellPro to continue supplying the Ceprate System to transplant
centers in the U.S. pending approval of the Isolex(R) System (or another stem
cell selection device), provided that it paid a court-ordered royalty to Johns
Hopkins and its licensees.

     Pursuant to the CellPro Acquisition Agreement, CellPro filed a petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code on October 28,
1998. Among other things, the Acquisition Agreement required CellPro (1) to
withdraw its citizen's petition(s) before the FDA, and otherwise to refrain from
attacking Nexell's premarket approval application for the Isolex cell separation
systems, and (2) to withdraw its petition before the Department of Health and
Human Services requesting the exercise of so-called "march-in rights" with
respect to the patents underlying the CD34+ sublicense.
 
     In a related transaction, Baxter acquired the right to distribute the
disposable kits used in connection with CellPro's Ceprate(R) cell processing
equipment.  CellPro agreed to maintain its technical support and continue to
perform its regulatory reporting and compliance responsibilities for a limited
period of time after the closing.

     The intellectual property and other assets acquired by Nexell consists of
patents (granted and pending), license agreements, antibodies and related master
cell banks and working cell banks for such antibodies, clinical and research
protocols, copyrights, copyright registration applications, trademarks and
trademark applications, software, supply agreements, marketing materials and
books and records.  Some of the monoclonal antibody lines included in the
purchased assets may expand the potential range of diseases for which therapies
utilizing the Isolex(R) technology may be developed.  Similarly, the data from
clinical trials conducted by CellPro, the rights to which were acquired by
Nexell,  could  lead to additional diseases or other medical indications which
could be treated using the Isolex(R) technology. Additionally, included in the
assets are rights to two diagnostic kits related to the detection and
enumeration of certain types of cancer cells.  Nexell anticipates it will begin
marketing the first of these kits by mid-year 1999.

                                       4
<PAGE>
 
Hypericin

General

     VIMRxyn(R) is the Company's chemically synthesized hypericin product.
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.  Plant extracts containing hypericin continue to be used as lay
treatments for various disorders.  The Company is investigating using VIMRxyn(R)
as a treatment for glioblastoma multiforme, a serious form of brain cancer, and
as a treatment for various hyperproliferative disorders of the skin including
psoriasis, warts, and cutaneous T-cell lymphoma ("CTCL").  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 the Weizmann
Institute of Science in Israel (New York University and YEDA, collectively, the
"Hypericin Licensors").

Glioblastoma (Brain Tumors)

     Pre-clinical studies by Dr. William Couldwell and his colleagues suggested
that hypericin selectively inhibited the growth of human glioblastoma cells in
culture.  In October 1996, the Company initiated a Phase I/II clinical study
under the direction of Dr. Couldwell to evaluate the efficacy and tolerability
of VIMRxyn(R) for treatment of glioblastoma multiforme, an invasive and deadly
form of brain tumor.  The  trial took place at five medical centers in the
United States and Canada and was completed in October, 1998.  Initial results
from the clinical trial indicate that VIMRxyn(R) may have a beneficial effect in
some patients in the treatment of brain gliomas.  The results of the study
further indicated that VIMRxyn(R) is well-tolerated at the doses studied, and
that an antiglioma effect was observed in several of the patients in the small
study. VIMRX is now developing a protocol for a larger Phase II, multi-center
study to determine more definitively the efficacy of the compound.

Topical Phototherapy for Hyperproliferative Skin Disorders

     It has been known for some time that hypericin sensitizes many types of
cells to light exposure. Work in the laboratories of Drs. Alain Rook and Floyd
Fox of the Department of Dermatology at the University of Pennsylvania Medical
School indicated that hypericin was able to kill cancerous cells from a patient
with cutaneous T-cell lymphoma ("CTCL") selectively relative to normal cells
when the hypericin-treated cells were exposed to fluorescent light. Based on
this work, the Company has completed an initial Phase I safety study in normal
volunteers for topical administration of hypericin, followed by exposure to
controlled doses of fluorescent light. A safe dose that resulted in a consistent
biological response was established in this study. In early 1998, the Company
initiated pilot Phase I/II studies under Dr. Rook's supervision to evaluate the
efficacy of topically applied, light-activated hypericin in patients suffering
from three hyperproliferative skin disorders: psoriasis, cutaneous T-cell
lymphoma and warts. This study is being conducted at three university hospital
medical centers, two located in Philadelphia, Pennsylvania, and one in
Cleveland, Ohio.

VM301; Agent For Wound Healing

     On May 16, 1997, VIMRX acquired the exclusive, worldwide rights to develop
OAS1000, a drug candidate which was being evaluated by OsteoArthritis Sciences,
Inc. for topical anti-inflammatory and wound healing indications. The agent,
designated VM301 by VIMRX, has shown promising wound healing activity in
preclinical studies when applied topically.

     A Phase I clinical trial, designed to evaluate the safety of VM301 when
applied to broken and unbroken skin of human subjects, was conducted at a
university hospital medical center in New York.  No clinical volunteers
participating in the study experienced any adverse results.  Beginning in 1999,
the Company is planning to conduct Phase II clinical trials designed to
establish the efficacy of VM301.

                                       5
<PAGE>
 
VGI/Ventiv BioGroup

     VIMRX and its 90% owned subsidiary, VIMRX Genomics, Inc (d/b/a Ventiv
BioGroup, Inc., "VGI"), had been negotiating a restructuring of their
relationship with Columbia University under the Research Agreement dated March
7, 1998 ("Research Agreement") and several related agreements. The restructuring
negotiations were unsuccessful and on November 11, 1998, VIMRX, Columbia and VGI
terminated their relationship and released all claims arising from that
relationship on the following terms and conditions:

     .  VIMRX paid Columbia $900,000;
     .  Columbia transferred its interest in VGI to VIMRX; and
     .  The Research Agreement, the License Agreements relating to Blood Factor
        IXai (VM201), the BCL-6 and MUM-1 genes, and the Shareholder's Agreement
        between VIMRX and Columbia relating to VGI were terminated, with no
        further obligations by the parties thereunder. All intellectual property
        licensed to VIMRX or VGI under the agreements reverted to Columbia (or,
        in the case of the BCL-6 license, to Columbia and a co-licensor).

     Additionally, VGI vacated its premises at Columbia's Audubon Building in
New York City.

Innovir

     VIMRX has completed its funding commitments to Innovir under its December
31, 1997 agreement, and has determined not to provide any further funding to
Innovir.  Innovir's common stock was delisted from the Nasdaq Small-Cap Market
and now trades on the OTC Bulletin Board.  Innovir closed its Cambridge, England
operations on or about November 30, 1998, and closed its remaining operations,
located in Gottingen, Germany and New York, New York, on December 31, 1998.
Innovir's management is seeking strategic alliances and/or buyers for its
various assets.

Patents and Licenses

Nexell

     Nexell's intellectual property estate is arranged into four general patent
families:

            1.  Selection systems;
            2.  Bioreactor and culture systems;
            3.  Reagents for use in selection; and
            4.  Culturing cell compositions.

     The selection system encompasses the Isolex(R) Cell Separator and similar
instruments.  This patent family includes patents and patent applications
directed to the basic selection device having two magnets for capturing the
paramagnetic beads and patents and applications directed to the specific device
configuration.  The disposable set for the Isolex(R) 300i Cell Separator
incorporates a spinning membrane technology, used for cell washing, the patent
rights to which are owned by Baxter.

     At the time of the acquisition of Nexell, Baxter granted to Nexell
sublicenses of substantially all of Baxter's rights under four license
agreements, and Nexell assumed substantially all of Baxter's obligations as
licensee thereunder, including payment of all royalties, annual maintenance fees
and other required payments.  Two of the sublicenses are under licenses to
Baxter from Becton Dickenson and relate, respectively, to (i) CD34+ technology
for use in applications other than diagnostic applications and (ii) certain
antibodies which attach to CD20+ and CD10+ B cells.  A third sublicense is under
a non-exclusive license from Cetus Oncology Corporation, d/b/a Chiron
Therapeutics, and relates to the manufacture, use and sale of specific
antibodies and cell lines for the ex vivo therapeutic treatment of human cancer.
The fourth sublicense is under a non-exclusive license from Professor Bernd
Dorken and 

                                       6
<PAGE>
 
relates to certain cell lines for the production of antibodies to be used in the
extracorporeal therapeutic treatment or diagnosis of Non-Hodgkins lymphoma and
other specified malignancies.
 
     In August, 1998, the United States Patent and Trademark Office (the "Patent
Office") allowed Nexell's patent application relating to peptide release for
CD34+ antibody, which is a critical component of the Isolex(R) system. The
patent allowance relates to the method of using a peptide to compete for the
binding site of a cell-capturing antibody, thereby displacing the antibody and
releasing the target cells essentially free of contamination by any of the
reagents used in the cell selection process. These released cells can then be
used for transplantation, cell therapy, or as target cells for gene therapy.

     The Patent Office recently allowed (in June and October of 1998) two
patents relating to the infusion of neutrophil (white blood cells responsible
for fighting bacterial infections) precursor cells for the treatment of
neutropenia (a common side effect of high dose chemotherapy characterized by a
deficiency of neutrophils and an increased susceptibility to infection).  Human
neutrophil precursor cells are a type of immature blood cell which mature into
neutrophils.

Hypericin

     Pursuant to an agreement dated June 1, 1988, as amended, 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.  The agreement provides for the payment of
royalties based on net sales and certain other revenues related to hypericin,
and provides for a $100,000 minimum annual royalty.

VM301

     The patent rights to VM301 are owned by the Company.

Manufacturing

     Nexell has no manufacturing capability and has contracted with Baxter to
manufacture and package its Isolex(R) and MaxSep(R) products as well as supplies
used by those products.

     VIMRX has no manufacturing capability.  VIMRX has contracted with outside
suppliers to develop, produce, and package therapeutic formulations of a
synthesized form of hypericin for its human clinical trials.  VIMRX intends to
contract with outside suppliers to develop, produce and package any needed
quantities of VM301 and any other substances that may be needed.

Government Regulation
 
     The Company has acquired or developed technologies which are intended to
lead to drugs and medical devices. The Company's products are currently
undergoing, or will be required to undergo, the difficult and costly approval
process for testing, manufacturing and sale established by the FDA, and may be
subject as well to state and foreign regulation.

     In order for drug products to obtain pre-market approval from the FDA, the
Company must conduct pre-clinical studies, including animal studies, to generate
preliminary information on the product's efficacy and safety.  An
investigational new drug application must then be filed and approved in order to
proceed with human clinical trials.  These clinical trials, which are done in
three phases, normally take two to five years to complete.  If the clinical
trials are successful, the Company will file a new drug application to receive
approval to market the product.  This process requires substantial expense, time
and effort and there is no guarantee that approval will be granted.

     Medical devices follow a similar process for approval although the length
and difficulty of the process varies with the controls which the FDA determines
are necessary to insure their stability and effectiveness.  Based on these
controls, the devices are put into three classes, i.e., Class I, Class II, Class

                                       7
<PAGE>
 
III. Two types of approval are granted on devices.  A 501(K) clearance is given
if the device is deemed to be "substantially" equivalent to a legally marketed
Class I or Class II device, or a Class III device that was not required to
obtain a PMA application.  A PMA application requires valid scientific evidence
to demonstrate the safety and effectiveness of the device and usually requires
tests similar to a filing for a drug product including clinical trials.  A
501(K) clearance generally requires 6 months to a year to obtain, while the PMA
can take one to three years and possibly longer.

     The Company presently has two devices (Isolex(R) 300 SA and Isolex(R) 300i)
awaiting approval of a PMA, and two drug products (VIMRxyn(R) and VM301) are in
clinical trials.

     Nexell filed a supplemental application for premarket approval ("PMA") of
the Isolex(R)300i with the FDA on February 3, 1998; Baxter, as Nexell's
predecessor in interest, had filed an application for PMA of the Isolex(R)300SA
on February 24, 1997. On July 2, 1998, the FDA notified Nexell that certain data
and other information would be required before the PMA for both devices could be
approved. Nexell submitted the requested information in late August, 1998. The
FDA advised Nexell in a letter dated January 7, 1999, that the PMA application
for the Isolex(R) 300SA, and the PMA supplement for the fully automated 
Isolex(R) 300i, are approvable subject to the submission of additional
information needed primarily to finalize labeling and the inspection of
manufacturing facilities by the FDA. On February 9, 1999, Nexell submitted all
requested information and all inspections of manufacturing were completed by
March 25, 1999. Responses have been submitted to the FDA for all observations
noted in the inspections. Nexell intends to respond to any additional questions
that may arise from the pre-insepction audits.

Competition

     The biomedical industry is highly competitive.  Competition in each of the
fields 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.  Forms of hypericin extracted from plants are
being used as lay treatments for a variety of disorders.  The Company is
similarly subject to substantial competition from pharmaceutical, chemical and
biotechnology firms seeking to develop therapeutics for brain cancer (glioma),
hyperproliferative skin disorders and wound healing.

     In general, Nexell may face competition from cell processing device
companies. Like Nexell, there are several product-focused companies attempting
to develop turn-key devices for cell processing. Although the sale of CellPro's
intellectual property to Nexell effectively eliminated CellPro as a competitor
in the cell separation market, other competitors or potential competitors
remain, including Miltenyi Biotec GmbH, Novartis/SyStemix, Amgen Corp. and
Aastrom Biosciences Inc. in collaboration with Cobe BCT, Inc. Nexell's
competitive position will be determined in part by which cell selection products
are ultimately approved for sale by regulatory authorities. See "Government
Regulation" above.

Employees

     VIMRX has ten full-time employees.  In connection with the proposed
consolidation of the Company's operations at Nexell's Irvine, California
offices, the employment of eight Delaware-based VIMRX employees will be
terminated.  The Company is currently negotiating severance terms with the
affected employees.

     Nexell has approximately 104 full-time U.S. employees. VIMRX believes that
Nexell's relations with its employees are satisfactory.
 

                                       8
<PAGE>
 
Consultants

     The Company is dependent on third parties for significant aspects of its
research and development operations.  In certain cases, consultants are used to
perform or supervise such activities. Consultants have also been retained to
assist in supervising the FDA regulatory process, monitoring the human clinical
trials and establishing the toxicology tests for hypericin.
 
     The Company has retained a number of consultants as part of conducting
human clinical trials in connection with the hypericin and VM301 programs. The
Company also retains financial consultants.

     The Company's consultants generally 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 generally devote only a 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.

Directors and Executive Officers of VIMRX

     Dr. Jerome Groopman resigned as a director of VIMRX, effective August 3,
1998. Dr. Richard Kouri resigned as Vice-President, Research, and as President
and Chief Executive Officer of VIMRX Genomics, Inc. effective November 6, 1998
in connection with the termination of the Columbia University Genomics
collaboration. See "Business VGI/Ventiv BioGroup."


ITEM 2.      PROPERTIES.

     The Company occupies 5,581 square feet of office space at 2751 Centerville
Road, Suite 210, Wilmington, Delaware under a lease at a monthly rent of
$10,095. The lease expires on August 31, 1999, with an option to renew for five
years.  The Company does not intend to renew the existing lease.

     Nexell occupies a building consisting of approximately 59,600 square feet,
under a lease which provides for current monthly rental of $40,500 plus real
estate taxes and operating costs, expires November, 30, 2004 and contains two
five-year renewal options.


ITEM 3.      LEGAL PROCEEDINGS.

     The Company has brought an action against a former employee who is alleged
by the Company to have misappropriated funds in 1996.  The former employee has
counterclaimed for damages in excess of $40 million.  Management believes these
counterclaims are totally without merit and will vigorously defend against them.


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

     Not Applicable

                                       9
<PAGE>
 
                                    PART II

ITEM 5.      MARKET FOR REGISTRANT'S SECURITIES AND RELATED
             STOCKHOLDER MATTERS.
 
Market Price of Common Stock

     The Company's Common Stock is traded on The Nasdaq 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, 1996 through December 31, 1998. Prior to December 31, 1996, the
Company's Common Stock traded on The Nasdaq Small-Cap Market.

<TABLE>
<CAPTION>
                                      High                    Low
                                      ----                    --- 
 
        1996          
        ----          
        <S>                           <C>                     <C>
        First Quarter                 3.03                    1.13
        Second Quarter                6.25                    2.78
        Third Quarter                 4.94                    3.00
        Fourth Quarter                3.81                    2.28
                      
        1997          
        ----          
        First Quarter                 3.50                    2.47
        Second Quarter                3.63                    1.88
        Third Quarter                 3.63                    1.56
        Fourth Quarter                2.88                    1.75
                      
        1998          
        ----          
        First Quarter                 2.06                    1.28
        Second Quarter                1.88                    1.13
        Third Quarter                 1.44                    0.94
        Fourth Quarter                1.47                    0.97
</TABLE>


     On  March 26, 1998, there were approximately 18,000 shareholders of the
Company's Common Stock, including beneficial owners of shares registered in
nominee or street name.

     The Company 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 April 9, 1998, the Company issued certificates representing 404,120
shares of Common Stock to Lazard Freres in consideration of financial advisory
services rendered in connection with the acquisition of Nexell in December 1997.
The shares were issued as of December 17, 1997, the closing date of the Nexell
acquisition, at which time Lazard Freres had become fully entitled to the
shares.

     On August 3, 1998, Lindsay A. Rosenwald and certain other individuals
associated with Paramount Capital Inc. exercised options to purchase an
aggregate of 1,978,332 shares of the Company's common stock.  The exercise was
accomplished by the withholding of 1,050,989 shares in payment of the purchase
price of the options and the issuance of 927,343 shares to the optionholders.

     All of such shares were taken for investment by the recipients, the stock
certificates were legended to reflect their restricted status, and the issuance
of such shares was exempt from registration under the Securities Act of 1933, as
amended, under Section 4(2) thereof.

                                       10
<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 through 1998 and the Balance Sheets Data at December 31, 1997
and 1998 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>
                                                                   Year Ended December 31,
                                                                   -----------------------
                                         ---------------------------------------------------------------------------
                                             1998            1997            1996            1995           1994
                                         -------------   -------------   -------------   ------------   ------------
 
<S>                                      <C>             <C>             <C>             <C>            <C>
Revenue                                  $ 13,443,000    $  5,002,000              --             --             --
Cost of Goods Sold                          8,166,000       4,630,000              --             --             --
                                         ------------    ------------    ------------    -----------    -----------
 
Gross Profit                                5,277,000         372,000              --             --             --
   Operating expenses:
   Research and development                24,427,000      14,507,000       2,950,000      2,840,000      1,463,000
   Purchased research and development              --      39,862,000      14,484,000             --             --
   General administrative and              
     goodwill amortization                 13,823,000       7,627,000       4,300,000      2,272,000      1,646,000 
   Selling and marketing                    3,625,000          61,000              --             --             --
   Restructuring costs                      2,625,000              --              --             --             --
                                         ------------    ------------    ------------    -----------    -----------
 
Total operating expense                    44,500,000      62,057,000      21,734,000      5,112,000      3,109,000
                                         ------------    ------------    ------------    -----------    -----------
 
Operating (loss)                          (39,223,000)    (61,685,000)    (21,734,000)    (5,112,000)    (3,109,000)
 
Other (income) expense:
Royalty expense (income)                     (176,000)        150,000         100,000        100,000        100,000
Interest (income)                          (2,972,000)     (2,216,000)     (1,792,000)      (160,000)      (189,000)
Interest expense                            2,036,000         121,000         329,000          2,000             --
Contract settlement                           900,000              --              --             --             --
Minority interest in net loss of            
 consolidated subsidiaries                 (4,161,000)     (3,474,000)       (116,000)            --             -- 
Other net                                     113,000         (67,000)       (395,000)       186,000        589,000
                                         ------------    ------------    ------------    -----------    -----------
 
Total other (income) expenses              (4,260,000)     (5,486,000)     (1,874,000)       128,000        500,000
 
Net (loss)                                (34,963,000)    (56,199,000)    (19,860,000)    (5,240,000)    (3,609,000)
                                         ------------    ------------    ------------    -----------    -----------
 
Preferred stock dividend                   (3,988,000)       (166,000)             --             --             --
                                         ------------    ------------    ------------    -----------    -----------
Net loss applicable to common stock      $(38,951,000)   $(56,365,000)   $(19,860,000)   $(5,240,000)   $(3,609,000)
                                         ============    ============    ============    ===========    ===========
 
Basic and diluted (loss) per share             $(0.58)         $(1.02)         $(0.50)        $(0.27)        $(0.19)
                                         ============    ============    ============    ===========    ===========
 
Weighted average number of shares of       67,284,000      55,457,000      39,399,000     19,748,000     19,067,000
 Common Stock outstanding                ============    ============    ============    ===========    ===========
</TABLE>
                                                                                
Balance Sheets Data:

<TABLE>
<CAPTION>
                                             1998            1997            1996            1995            1994
                                        --------------   -------------   -------------   -------------   -------------
 
<S>                                     <C>              <C>             <C>             <C>             <C>
Working capital                         $  32,017,000    $ 61,354,000    $ 44,848,000    $    391,000    $  4,742,000
Total assets                               87,601,000     121,947,000      51,692,000       2,958,000       5,249,000
Total liabilities                          38,786,000      34,239,000        3,01,000       2,698,000         116,000
Minority interest in Subsidiary                    --       4,161,000       2,381,000              --              --
Retained deficit                         (133,533,000)    (98,570,000)    (42,371,000)    (13,662,000)    (22,511,000)
Shareholders' equity                       48,815,000      83,547,000      46,210,000         260,000       5,134,000
</TABLE>

                                       11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

Years Ended December 31, 1998 and 1997

         Operating loss for the year ended December 31, 1998 decreased
$22,462,000 or 36% from the year ended December 31, 1997.  The decrease in the
operating loss was principally due to purchased research and development charged
to expense in 1997 resulting from various purchases of technology in that year
(predominantly the Nexell purchase in December 1997 resulting in a $37,712,000
charge to  expense). There was no purchased research and development charged to
expense in 1998.  This was offset by increased operating loss principally due to
the first full year of operations of Nexell.  During that year, sales increased
$8,441,000 or 168%, cost of goods sold increased $3,536,000 or 76% resulting in
an increase in the gross profit of $4,905,000.  Operating expenses decreased due
to the decrease in purchased research and development discussed above offset by
research and development expenses which increased $9,920,000 or 68%, general and
administrative increased $6,196,000 or 81%, selling expense was effectively
recorded for the first time in 1998 at $3,625,000 and one-time restructuring
costs amounting to $2,625,000 were recorded.

         The increase in revenues and the related cost of goods sold resulted
from the inclusion of a full year of sales in 1998 compared to sales recorded
after the Nexell acquisition in December 1997 reflecting the initial purchase of
inventory by Nexell's sole distributor, Baxter.  The gross profit percentage was
39% in 1998 as compared to 7% in 1997.  This difference resulted principally
from adjustments made in 1997 to record the Nexell acquisition on the "purchase
method."

         The Company recorded a write-off of purchased in-process technology of
$39.9 million in 1997 principally related to the acquisition of the
Immunotherapy Division of the Biotech Business Group of Baxter Healthcare
Corporation. This amount represented an allocation of purchase price to projects
that primarily were aimed at the approval of the Nexell's Isolex products in the
United States and certain foreign countries. Such amount was charged to expense
because the projects related to research and development that had not reached
technological feasibility and for which there was no alternative future use.

         The research and development expense increase of $9,920,000 or 68%
resulted from an increase due to the inclusion of a full year of activity for
Nexell $15,658,000 offset by decreases in spending in VGI ($3,464,000),
VIMRX ($856,000) and Innovir ($1,418,000).

         General and administrative expenses and amortization of Goodwill
increased by $6,196,000 or 81% is due principally to the inclusion of Nexell
($8,512,000) offset by decreases in expenses in VIMRX and Innovir.

         Selling and marketing expenses were incurred by Nexell as it ramped up
marketing efforts in Europe and prepared for approval of its products by the FDA
in the United States.

         Restructuring costs include expenses related to the shutdown of
Innovir's facilities (see footnote 4).

         Interest income increased $756,000 or 34% due to an increase in the
average funds available for investment.  Interest expense increased $1,915,000
principally due to the interest in the long-term debt due to a related party.

         Minority interest in net loss of a consolidated subsidiary increased
$687,000 or 20% due principally to the inclusion of Nexell in 1998, offset by a
decrease in the participation of the minority interest in the losses of Innovir.

         The foregoing resulted in a $21,236,000 or 38% decrease in the net loss
for the year ended December 31, 1998.

Years Ended December 31, 1997 and 1996

         Total operating expenses increased by $40,323,000 or 186% due
principally to a $25,378,000 or 175% increase in purchased research and
development. The $39,862,000 purchased research and development charge recorded
in 1997 was principally due to the acquisition of the Immunotherapy Division of
the Biotech Business Group of Baxter Healthcare Corporation (Nexell). In
addition, research and development increased $11,557,000 or 392% and general and
administration expense increased $2,915,000 or 68%.

                                       12
<PAGE>
 
     The increase in research and development expense from $2,950,000 in 1996 to
$14,507,000 in 1997 was principally due, to costs incurred by VGI in its
collaboration with Columbia ($5,904,000) expenses incurred at Innovir, which was
purchased in December, 1996, (therefore, the first full year of expenses was
1997) ($4,137,000) and increased spending on VIMRX's research programs
($1,382,000).

     The increase in general and administrative expense from $4,300,000 in 1996
to $7,215,000 in 1997 was due principally to a full year of costs related to
Innovir which increased $2,869,000 over the $506,000 incurred in 1996.

     Minority interest in net loss of consolidated subsidiary increased
$3,358,000 due to the losses incurred by Innovir and VGI.

     Revenue and cost of goods sold resulting in a gross profit of $372,000 in
1997 are a result of the operations of Nexell which acquired the assets and
operations of Baxter's Immunotherapy Division in December 1997.

     The foregoing resulted in an increase in the net loss of $36,339,000.

Liquidity And Capital Resources

     Before fiscal 1997 the Company had not realized any operating revenues and
has financed its operations through the sale of its securities.

     The Company had $33,091,000 in cash and cash equivalents as of December 31,
1998 as compared to $57,830,000 in cash and cash equivalents as of December 31,
1997 and working capital of $32,017,000 at December 31, 1998 as compared to
$61,354,000 at December 31, 1997. Most of the decrease in cash and working
capital positions resulted from the cash used in the operations of the Company
of approximately $25,000,000.

     Cash used in operating activities increased approximately $8,100,000 or 48%
over the cash used in operating activities in the year ended December 31, 1997
due principally to the inclusion of Nexell and the step up of Nexell operations
offset by the curtailment of operations in Innovir, VGI and VIMRX development
programs.

     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 and cash
equivalents is sufficient to fund its operations for over one and one-half
years, assuming no capital infusions are received.  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.

Year 2000 Issues

     The Company is aware of and has addressed many of the "Year 2000" issues
associated with both information technology ("IT") and non-IT systems which
could cause problems and network failures should the systems fail to recognize
year designations after 1999.

     The Company has reviewed its own computer, communication, software and
operating systems and is satisfied they are Year 2000 compliant.  Furthermore,
the Company has taken proactive measures to ensure the systems are Year 2000
compliant by upgrading all server and workstation operating systems.  All system
servers and workstations' BIOS have been reprogrammed and are Year 2000
compliant (the BIOS are responsible for starting the computer by providing a
basic set of instructions.  It performs all the tasks which need to be done at
start-up time).

                                       13
<PAGE>
 
     The Company has upgraded all productivity, communication and accounting
software to meet Year 2000 compliance. The Company has tested the accounting
systems with the Year 2000 date and feels confident they are compliant.

     The Company will plan system-wide testing in the first and second quarters
of 1999.  Any system failures will be addressed at that time.  The Company feels
its Year 2000 risks are minimal.  The Company has spent approximately $750,000
to upgrade its systems which brought the Company into Year 2000 readiness.

     The Company will continue to contact critical suppliers, collaborators,
partners and vendors to determine if their operations, as they relate to the
Company, are Year 2000 compliant.

     Although the Company will take all practical measures to prevent problems
related with the Year 2000 programming issue, such problems and failures may
occur which could seriously affect the Company's progress.  Because of the
unprecedented nature of such problems, the extent of the effect on the Company's
progress cannot be certain.

New Accounting Pronouncements

     In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("Statement 98-1"). Once the
capitalization criteria of Statement 98-1 have been met, external directs costs
of materials and services consumed in developing or obtaining internal-use
computer software; payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the project); and
interest costs incurred when developing computer software for internal use
should be capitalized. Training costs and data conversion costs, should be
expensed as incurred. Statement 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. The Adoption of this standard is not expected to have a material 
impact on the Company's earning or financial position.

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (the
"Statement").The Statement requires costs of start-up activities, including
organizational costs, to be expensed as incurred. Start-up activities are
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting businesses in a new territory,
conducting business with a new process in an existing facility, or commencing a
new operation. The Statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this Standard is not expected to have a 
material impact on the Company's earning or financial position.

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, Accounting for Derivative Instruments and Hedging Activities
("Statement133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters beginning after June 15, 1999. The Company intends to adopt
this accounting standard as required. The adoption of this standard is not
expected to have a material impact on the Company's earnings or financial
position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company maintains excess cash in a mutual fund, the "BlackRock Low
Duration Bond Portfolio", (the fund) which invests in asset backed securities,
bonds and various other commercial obligations. The fund may, from time to time,
use certain derivatives in its investment strategy.

     Two of the main risk disclosed by the fund are interest rate risk and
credit risk. Typically, when interest rates rise, there is a corresponding
decline in the market value of bonds such as those held by the fund. Credit risk
refers the possibility that the issues of the bond will not be able to make
principal and interest payments.

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.

                                       14
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.

     Changes in Registrant's Certifying Accountant

     Prior to fiscal year 1997,  the independent auditors of the Company were
Richard A. Eisner & Company, LLP, who have been replaced upon recommendation of
the Audit Committee effective May 15, 1997. At no time did any report on the
financial statements of the Company by Richard A. Eisner & Company, LLP contain
an adverse opinion or a disclaimer of opinion, or a qualification or
modification as to uncertainty, audit scope or accounting principles. The
decision to change accountants was occasioned by the developments in 1996 and
early 1997, and not by any disagreement or advice given on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. In particular, in light of the Company's acquisition of a
controlling interest in Innovir Laboratories Inc., the Audit Committee concluded
in 1997 that it would be most efficient and in the best interests of both
Innovir and the Company for the same auditors to audit both companies. The
Company solicited proposals from four auditing firms, including Richard A.
Eisner & Company, LLP. KPMG LLP was chosen as a result of this process, and was
engaged by the Company as its principal auditors on May 15, 1997.

                                       15
<PAGE>
 
                                    PART III

Item 10.   Directors and Executive Officers of the Registrant.

      The directors and executive officers of VIMRX are as follows:

<TABLE>
<CAPTION>
Name                                 Age                        Position
----                                 ---                        --------
<S>                                <C>          <C>
Richard L. Dunning                    53        President and Chief Executive Officer
L. William McIntosh                   53        President and Chief Executive Officer, Nexell
                                                Therapeutics, Inc.
David A. Jackson, Ph.D.               56        Executive Vice President and Chief Scientific
                                                Officer
Francis M. O'Connell                  53        Vice President, Finance and Controller
Alfonso J. Tobia, Ph.D.               56        Vice President, Research and Development
Donald G. Drapkin                     51        Director (1)
Laurence D. Fink                      49        Director (2)
Linda G. Robinson                     46        Director (2)
Eric A. Rose, M.D.                    48        Director (1)
Lindsay A. Rosenwald, M.D.            43        Director (1)
Michael Weiner, M.D.                  52        Director (2)
Victor  W. Schmitt                    50        Director (3)
</TABLE>
___________________________

(1)  Member of Compensation Committee.
(2)  Member of Audit Committee.
(3)  Mr. Schmitt was elected to the Board of Directors pursuant to a provision
     of the Asset Purchase Agreement, dated December 17, 1997, with Baxter,
     pursuant to which the Company agreed to nominate and recommend to the
     stockholders of the Company until such time as Baxter shall cease to own at
     least 3% of the issued and outstanding capital stock of VIMRX, the election
     to the Board of a designee of Baxter in future Stockholder meetings at
     which directors are elected.

     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 (now DuPont Life Sciences) from 1991.  Mr. Dunning also
serves as a director of the following corporations which file reports pursuant
to the Exchange Act: Epoch Pharmaceuticals, Inc. and Endorex Corp.

     L. WILLIAM McINTOSH, has served since March 1, 1998 as President and Chief
Executive Officer of Nexell.  From May, 1997 through February, 1998, he served
as Senior Vice President, Business Development and Finance and Chief Financial
Officer of the Company. Prior to joining VIMRX, Mr. McIntosh  served as Senior
Vice President Business Development, Commercial Operations for Zynaxis, a
biotechnology company with both drug delivery and diagnostic technologies and
was an independent industry consultant who,  for some time, worked exclusively
for SmithKline Beecham.

     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 

                                       16
<PAGE>
 
was with DuPont Merck Pharmaceutical Company (now DuPont Life Sciences) since
1991, most recently serving as Senior Director, Cancer, Virology and Molecular
Biology Research.

     FRANCIS M. O'CONNELL, CPA, has served as Chief Financial Officer of the
Company from February 1995, to May, 1997; he has served as Vice President-
Finance of the Company since May, 1997 and as the Chief Financial Officer of
Innovir since February, 1997.  Prior to joining the Company, Mr. O'Connell was
Director of Litigation Support in the New York office of J.H. Cohn & Company, a
CPA 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).

     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 Chairman of the Board of Directors in March
1996 and has served as a director of the Company since November 17, 1995. Mr.
Drapkin has been a director and Vice Chairman of MacAndrews & Forbes Holdings
Inc. and various of its affiliates since 1997 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:
Algos Pharmaceutical Corporation, Anthracite Capital, Inc., BlackRock Asset
Investors, Cardio Technologies, Inc., The Molson Companies Limited, Playboy
Enterprises, Inc., Revlon, Inc., Revlon Consumer Products Corporation and Weider
Nutrition International, 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
Innovir Laboratories, Inc. and of the closed end funds for which BlackRock
serves as investment advisor.

     LINDA G. ROBINSON was elected a director of the Company in June 1996.  Ms.
Robinson has been Chairman, and Chief Executive Officer of Robinson Lerer &
Montgomery, LLC, a strategic communications consulting firm that serves major
corporations in the United States and abroad, since May 1996.  For more than
five years prior to that she was Chairman and Chief Executive Officer of
Robinson Lerer Sawyer Miller Group, or its predecessors.  Ms. Robinson is a
director of the following corporation which files reports pursuant to the
Exchange Act:  Revlon, Inc.

     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.  Dr. Rose is a past president of
the International Society for Heart and Lung Transplantation.

     LINDSAY A. ROSENWALD, M.D. is an investment banker, venture capitalist and 
investment manager. Dr. Rosenwald is the co-founder of and has served as the 
Chairman of the board of directors of Paramount Capital, Inc., an NASD member 
broker dealer, since 1992, Paramount Capital Investments, LLC a merchant and 
investment bank, since 1995, and Paramount Capital Asset Management, Inc., since
June 1994, Paramount Capital Asset Management, Inc. serves as the general 
partner of the Aries Domestic Fund, L.P. and the investment manager of The Aries
Master Fund, a Cayman Island exempted company, each of which is a fund that
specializes in the biotechnology sector. Dr. Rosenwald serves as a member of the
Board of Directors of Interneuron Pharmaceuticals, Inc. BioCryst
Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc. and Neose Technologies, Inc,
each a publicly traded company. Dr. Rosenwald is also the President of the
Rosenwald Foundation, a charitable foundation based in New York which assists
outstanding scientists in their continued research and development in order to
further the advancement of biotechnology. Dr. Rosenwald received his medical
doctorate from Temple University School of Medicine and his bachelor of science
degree in finance from Pennsylvania State University.

     VICTOR W. SCHMITT was elected a director of the Company in January 1998.
Mr. Schmitt has  been President, Venture Management, Baxter Healthcare
Corporation since 1994. Prior to this position, 

                                       17
<PAGE>
 
he held the operating position of President, Baxter Biotech Europe. Mr. Schmitt
joined Baxter from a 16- year career with the American Red Cross Blood Services
where he held positions in marketing and operations. Mr. Schmitt holds a B.S.
from the University of Virginia and an M.B.A. from the University of Maryland.
He serves on the Board of Directors of a number of development-stage biotech
companies.

     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(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers, directors and holders of more than 10% of the
Common Stock (collectively, "Reporting Persons") file reports of their holdings
and transactions in the Common Stock with the Securities and Exchange
Commission.  Based on a review of Section 16 forms filed by the Reporting
Persons during the last fiscal year, the Company believes that the Reporting
Persons timely complied with all applicable Section 16 filing requirements,
except that Dr. Lindsay A. Rosenwald was delinquent in reporting the exercise,
on August 3, 1998, of certain options to purchase Common Stock.

                                       18
<PAGE>
 
ITEM 11.   EXECUTIVE COMPENSATION

Compensation Summary

Summary Compensation Table

     The following table sets forth a summary of the compensation for each of
the three years ended December 31, 1998 earned by the Company's principal
executive officer and by each  executive officer whose compensation exceeded
$100,000 during 1998:

<TABLE>
<CAPTION>
                                                                                    
                                                                                   
                                                                                        Long-Term 
                                                                                       Compensation
                                           Annual Compensation                           Awards              
        Name and              ----------------------------------------------             ------                Other 
   Principal Position           Year          Salary                Bonus (1)             Options (2)        Compensation
   ------------------           ----          ------                -----                 -------            ------------   
<S>                             <C>          <C>                    <C>                     <C>             <C>
Richard L. Dunning              1998         $250,000                     --              200,000           $ 8,950 (3)(4)
  President and Chief           1997         $200,000               $120,000                   --           $ 9,090 (3)(4)
  Executive Officer             1996         $134,000               $135,000              800,000           $ 4,500
                                                                                                             
David A. Jackson,  Ph.D.        1998         $200,000                     --              135,000           $ 5,000
  Vice President,               1997         $175,000               $100,000                   --           $ 3,938
  Research &                    1996         $ 48,000               $110,000              500,000                --
  Development, Chief                                                                                         
   Scientific Officer                                                                                        
                                                                                                             
L. William McIntosh             1998         $216,000               $ 11,000              525,000           $10,614 (3)(5)
  President and Chief           1997         $ 99,000               $115,000              400,000 (6)            --
  Executive Officer,                                                                                         
  Nexell Therapeutics,                                                                                       
  Inc.                                                                                                       
                                                                                                             
Francis M. O'Connell            1998         $146,000                     --               25,000           $ 4,363 (3)
  Vice President-Finance        1997         $139,000               $ 35,000                   --           $ 3,128 (3)
   and Controller               1996         $124,000               $ 45,000                   --                --
                                                                                                             
Alfonso J. Tobia, Ph.D.         1998         $156,000                     --                   --           $ 4,665 (3)
  Executive Vice                1997         $150,000               $ 35,000                   --           $ 3,375 (3)
  President                     1996         $147,000               $ 55,000                   --                --
</TABLE>
________________
  (1) Bonus amounts are shown for the year in which earned and, except for
      signing bonuses ($40,000 to each of Mr. Dunning and Dr. Jackson in 1996
      and to Mr. McIntosh for 1997) were paid in the following year.

  (2) Number of shares of Common Stock purchasable.  See Option Grant Table
      below for exercise prices and expiration dates.

  (3) Includes Company's matching contribution to the named executive's account
      in the Company's 401(k) retirement plan.

  (4) Amounts shown for 1998 and 1997, respectively, include reimbursement of
      personal medical and health care insurance in the amount of $6,000.

  (5) Amount shown includes reimbursement of relocation expenses.

  (6) Options to purchase 190,000 of such shares were cancelled in connection
      with the executive's appointment as President and Chief Executive Officer
      of Nexell. See "Executive Compensation, Compensation Summary, Option
      Repricing."

                                       19
<PAGE>
 
Option Grant Table

     The following table sets forth certain information concerning options
granted in 1998 to the individuals named in the Summary Compensation Table:
 
<TABLE>
<CAPTION>
                               Number of                                                             Potential Realizable
                                 Shares            % of Total                                           Value at Assumed
                               Underlying           Options       Exercise                        Annual Rates of Stock Price
                                 Options           Granted to       Price        Expiration               Appreciation
        Name                     Granted           Employees      Per Share         Date                For Option Term
        ----                     -------           ---------      ---------         ----                ---------------
<S>                          <C>                 <C>              <C>             <C>             <C>               <C>
                                                                                                      @5%                @10%
                                                                                                   --------            --------
Richard L.   Dunning              200,000             5.3%          $1.630         1/15/08         $205,019            $519,560
 
David A.   Jackson, Ph.D.         135,000             3.6%          $1.630         1/15/08         $138,388            $350,703
 
L. William  McIntosh               90,000             2.4%          $1.630         1/15/08         $ 92,259            $230,802
                                  375,000 (1)         9.9%          $1.670          1/1/08         $393,845            $998,081
                                   60,000 (1)         1.6%          $0.001          1/1/08         $163,155            $259,832
 
Francis M. O'Connell               25,000             0.7%          $1.630         1/15/08         $ 25,627            $ 64,945
</TABLE>
____________________
(1)     Granted in connection with the executive's appointment as President and
        Chief Executive Officer of Nexell; concurrently, options to purchase
        190,000 shares granted in 1997 were cancelled.  See "Executive
        Compensation, Compensation Summary, Option Repricing."


Option Exercises and Value Table

    The following table sets forth certain information concerning options
exercised during 1998, and the number of unexercised options as at December 31,
1998 held by the individuals named in the Summary Compensation Table:

<TABLE>
<CAPTION>
                                                                        Number of Unexercised
                                Shares                                  Options at December 31,       Value of Unexercised
                              Acquired on          Value                1998 Exercisable (E) /       In-the-Money Options at
Name                           Exercise          Realized(1)              Unexercisable (U)           December  31, 1998(1)
----                           --------          -----------              -----------------           ---------------------
<S>                               <C>                 <C>                      <C>                           <C> 
Richard L. Dunning                  --                --                      492,677 (U)                       --
                                    --                --                      507,323 (E)                       --
 
David A. Jackson                    --                --                      422,925 (U)                       --
                                    --                --                      212,075 (E)                       --
 
L. William McIntosh                 --                --                      622,500 (U)                       --
                                    --                --                       52,500 (E)                       --
                                    --                --                       60,000 (U)                    $65,580
 
Francis M. O'Connell                --                --                       50,000 (U)                    $16,500
                                    --                --                       75,000 (E)                    $49,500
 
Alfonso J. Tobia, Ph.D.             --                --                      150,000 (E)                    $60,563
</TABLE>
_______________
(1)  Based upon the $1.094 closing sale price of the Common Stock on The Nasdaq
     Stock Market on December 31, 1998.

                                       20
<PAGE>
 
Option Repricing

     In connection with his employment as Senior Vice President, Business
Development and Finance, and Chief Financial Officer in 1997, Mr. McIntosh was
granted non-incentive options to purchase 238,000 shares of Common Stock at
$1.906 per share, the per share market value on May 1, 1997, the date he
accepted the Company's offer of employment, and incentive options to purchase
162,000 shares at $2.469 per share, the per share market value on May 19, 1997,
the date he commenced employment. In January 1998 Mr. McIntosh was granted
additional non-incentive options to purchase 90,000 shares at $1.625 per share,
the per share market value on the date of grant. As a result of such grants, Mr.
McIntosh held options to purchase an aggregate of 490,000 shares of Common Stock
at a weighted average exercise price of $ 2.04 per share.

     In May 1998, upon Mr. McIntosh's appointment as President and Chief
Executive Officer of Nexell (see "Employment Arrangements," below), his option
package was restructured. Mr. McIntosh was awarded non-incentive options to
purchase (i) 125,000 shares of  Nexell's common stock at $5.00 per share (which
will automatically convert into non-incentive options to purchase 375,000 shares
of the Company's Common Stock at $1.67 per share upon consummation of the
Company's acquisition of Baxter's minority interest in Nexell), and (ii) 60,000
shares of the Company's Common Stock at $.001 per share. Concurrently, Mr.
McIntosh was required to cancel outstanding options to purchase an aggregate of
190,000 shares of the Company's Common Stock. As a result of the restructuring
and after giving effect to the automatic conversion of his options to purchase
Nexell's common stock (assuming consummation of the Company's acquisition of
Baxter's minority interest in Nexell), Mr. McIntosh would hold options to
purchase an aggregate of 735,000 shares of the Company's Common Stock at an
average exercise price of $1.59 per share. At the time of the restructuring, the
price of the Company's Common Stock was $1.34 per share.

     The following table sets forth certain information concerning the repricing
of Mr. McIntosh's options:

<TABLE>
<CAPTION>                                    Number of
                                             Shares             Market            Exercise                      Length of Original
                                            Underlying         Price at           Price at           New             Option
                           Date              Options           Time of             Time of        Exercise       Term Remaining
      Name               Repriced            Repriced          Repricing          Repricing         Price     at Date of Repricing
      ----               --------            --------          ---------          ---------         -----     --------------------
<S>                        <C>                 <C>                <C>                <C>             <C>             <C>
L. William  McIntosh      5/28/98              60,000            $1.344            $2.469         $0.001            9 years
                          5/28/98             102,000            $1.344            $2.469         $1.667            9 years
                          5/28/98              28,000            $1.344            $1.906         $1.667            9 years
</TABLE>

Employment Arrangements
-----------------------

     Mr. Dunning serves as President and Chief Executive Officer of the Company
under a restated employment agreement which provides for a base annual salary of
$200,000 and an annual cash bonus based on performance criteria.  Mr. Dunning is
entitled to four weeks' vacation and to participate in the Company's employee
benefit programs. Mr. Dunning's employment may be terminated for cause, or
without cause upon 60 days' notice. In the event Mr. Dunning's employment is
terminated by the Company without cause, or he terminates his employment
following certain actions by the Company (such as a material reduction in Mr.
Dunning's duties or a relocation of the Company's principal executive offices),
Mr. Dunning would be entitled to a severance payment equal to six months of his
base salary, payable in monthly installments.  The agreement contains 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.
 
     On March 1, 1998 Mr. L. William McIntosh, then Senior Vice President,
Business Development and Finance and Chief Financial Officer of the Company, was
named the President and CEO of the Company's majority-owned subsidiary, Nexell.
In light of his new position, Mr. McIntosh, the Company and Nexell renegotiated
Mr. McIntosh's employment arrangement effective as of March 1,

                                       21
<PAGE>
 
1998. The renegotiated agreement provides for a base annual salary of $225,000,
an annual cash bonus based on performance criteria, targeted to be at least 25%
of Mr. McIntosh's base compensation, a $25,000 signing bonus and reimbursement
of relocation expenses. Mr. McIntosh is entitled to four weeks' vacation and to
participate in Nexell's employee benefit programs. Mr. McIntosh's renegotiated
employment contract may be terminated by Nexell for cause, or without cause upon
60 days' notice. In the event Mr. McIntosh's employment is terminated by Nexell
without cause, or in the event Mr. McIntosh terminates his employment following
certain actions by Nexell (such as a material reduction in his duties), Mr.
McIntosh would be entitled to a severance payment equal to twelve months of his
base salary, payable in monthly installments. The agreement contains non-
competition and confidentiality provisions, and provides that Nexell may obtain
"key man" life insurance on the life of Mr. McIntosh for Nexell's benefit. See
"Summary Compensation Option Repricing," above.

     Dr. Jackson serves as Vice President - Research and Development and Chief
Scientific Officer of the Company under an employment agreement which provides
for a base annual salary of $175,000 and an annual cash bonus based on
performance criteria. Dr. Jackson is entitled to four weeks' vacation and to
participate in the Company's employee benefit programs.  Dr. Jackson's
employment may be terminated for cause, or without cause upon 60 days' notice.
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 (such as a material reduction in his duties or a
relocation of the Company's principal executive offices), Dr. Jackson would be
entitled to a severance payment equal to twelve months of his base salary,
payable in monthly installments.  The agreement contains 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. Tobia serves as Senior Vice President of the Company under an
employment agreement which provides for a base annual salary of $150,000 and
eligibility for a discretionary bonus up to $25,000. Dr. Tobia is eligible to
participate in the Company's benefit programs, which currently include a medical
program, dental insurance and group life insurance.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth, as of  March 17, 1999, information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to own beneficially five percent or more of the outstanding
Common Stock, together with their respective addresses, (ii) each director and
nominee for election as a director, (iii) each executive officer named in the
Summary Compensation Table in "Item 11.  Executive Compensation," and (iv) all
executive officers and directors as a group:

<TABLE>
<CAPTION>
                                                                     Shares                Percent
Name                                                            Beneficially Owned      of  Outstanding
----                                                            ------------------      ---------------   
<S>                                                             <C>                    <C>         
       Richard L. Dunning                                        834,404  (1)(2)              1.2%
                             
       Francis M. O'Connell                                      120,753  (1)(3)                *
                             
       Alfonso J. Tobia, Ph.D.                                   154,828  (1)(4)                *
                             
       David A. Jackson, Ph.D.                                   251,460  (1)(4)                *
                             
       L. William McIntosh                                       247,590  (1)(5)                *
                             
       Donald G. Drapkin                                         887,500  (6)(7)              1.3%
                             
       Laurence D. Fink                                          550,000  (6)(8)                *
                             
       Linda G. Robinson                                         250,000  (6)(9)                *
</TABLE> 

                                       22
<PAGE>
 
<TABLE> 
<CAPTION>  
                                                                     Shares                Percent
Name                                                            Beneficially Owned      of  Outstanding
----                                                            ------------------      ---------------   
<S>                                                                    <C>                    <C>         
Eric A. Rose, M.D.                                               959,900  (6)(10)             1.4%

Lindsay A. Rosenwald, M.D.                                     5,152,655  (6)(11)             7.3%

Victor W. Schmitt                                                      0                        0

Michael Weiner, M.D.                                              62,410  (6)                   *

Paramount Capital Asset Management, Inc.                       4,204,999  (12)                6.0%
787 Seventh Avenue, New York, NY 10019

Baxter Healthcare Corporation                                 11,000,000                     15.7%
One Baxter Parkway, Deerfield, IL  60015

All directors and executive officers as a group (12            9,471,500  (13)               12.8%
persons)
</TABLE>
____________________
*  Less than one percent.

    (1)  Includes shares held by the Company's 401(k) retirement plan for the
         benefit of the officer.

    (2)  Includes currently exercisable options to purchase 827,650 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.

    (3)  Includes currently exercisable options to purchase 106,250 shares.

    (4)  Consists of currently exercisable options.

    (5)  Consists of currently exercisable options, assuming consummation of the
         acquisition of Baxter's minority interest in Nexell. See "Executive
         Compensation, Compensation Summary, Option Repricing".

    (6)  Includes 100,000 vested restricted shares held by Mr. Drapkin and
         50,000 vested restricted shares held by each of Mr. Fink, Ms. Robinson,
         Dr. Rose, Dr. Rosenwald and Dr. Weiner.

    (7)  Includes currently exercisable options to purchase 687,500 shares.

    (8)  Includes warrants to purchase 133,333 shares owned directly by Mr. Fink
         and 66,666 shares and warrants to purchase 33,333 shares owned by a
         family trust for the benefit of Mr. Fink's children. Mr. Fink disclaims
         beneficial ownership of the shares and warrants held by the family
         trust.

    (9)  Includes warrants to purchase 66,666 shares.

    (10) Includes currently exercisable options to purchase 587,500 shares.

    (11) Includes 4,204,999 shares beneficially owned by Paramount Capital Asset
         Management, Inc. ("PCAM", see note (12) below), of which Dr. Rosenwald
         is Chairman and the sole shareholder. Dr. Rosenwald disclaims
         beneficial ownership of such shares except to the extent of his
         pecuniary interest, if any.

    (12) Information is from a Form 4 dated November 6, 1998 filed by Dr.
         Rosenwald reporting the open market purchase of 155,000 shares of
         Common Stock by The Aries Master Fund, a Cayman Islands exempted
         company, (the "Fund") and the general partner of Aries Domestic Fund,
         L.P. (the "Partnership"), and confirming (i) the ownership of 2,614,700
         shares and warrants to purchase 225,000 shares by the Fund and of
         1,206,966 shares and warrants to purchase 158,333 shares by the
         Partnership, and (ii) the status of PCAM as the general partner of the
         Partnership and the investment manager of the Fund, with shared power
         to vote and dispose of the securities owned by the partnership and the
         Fund. PCAM and Dr. 

                                       23
<PAGE>
 
         Rosenwald disclaim beneficial ownership of the
         securities owned by the Fund and the Partnership, except to the extent
         of their respective pecuniary interest, if any.

    (13) See notes (1) - (12).

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     In March 1997 the Company entered into a research agreement relating to the
discovery, mapping, sequencing and validation of disease-related genes with
Columbia University.  The agreement provided for VIMRX Genomics, Inc. ("VGI")
d/b/a Ventiv BioGroup, a majority-owned subsidiary of the Company, to provide
$30 million in funding to the Columbia Genome Center over a 5-year period and
for VGI to receive an exclusive license to develop, manufacture, use, sell or
market products resulting from any invention, research information and
biological materials developed by the Center and funded under the agreement.
VGI sought technology collaborations with pharmaceutical and/or diagnostic
companies and solicited equity investments in VGI from potential technology
partners and other investors, but was unable to consummate any such transactions
on reasonable terms.  As a result, VGI attempted to restructure its relationship
with Columbia but was unable to agree on the terms of a restructuring.  On
November 11, 1998 the Company and Columbia entered into a Termination Agreement
pursuant to which all further obligations of the Company and VGI to Columbia
under the March 1997 research agreement and under the Blood Factor IXai Research
Agreement dated March 28, 1997 between Columbia and the Company were terminated,
and all claims related thereto released, in consideration of the payment of
$900,000 by the Company to Columbia. The Termination Agreement also provided for
termination of the licenses granted to VGI and the Company pursuant to the
research agreement and the Factor IX agreement and the return to Columbia of all
intellectual property delivered to, or developed by, the Company or VGI pursuant
to those licenses.  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 Hettinger 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.

     On December 24, 1998, the Company purchased an aggregate of 2,500,000
shares of Innovir Laboratories, Inc. Common Stock from the Aries Funds for one
cent per share, or a total purchase price of $25,000. 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.

     In March 1999 the Company terminated its 1996 Non-Employee Director Stock
Award Plan under which, in June 1996, it had issued restricted shares of Common
Stock to all non-employee directors, other than Mr. Victor W. Schmitt. The
restricted shares vested cumulatively at the rate of 25% per year and were
subject to a non-lapsing right of first refusal to the Company to repurchase the
shares at market value, minus $4.25, in the event the director desired to
transfer the shares. In April 1999 the Company will change the terms of the
restricted shares by vesting the 50,000 unvested restricted shares held by Mr.
Drapkin and the 25,000 unvested restricted shares held by each of Messrs. Fink,
Rose, Rosenwald and Weiner and Ms. Robinson and eliminating the Company's right
of first refusal.

                                       24
<PAGE>
 
                                    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.

<TABLE>
<CAPTION>

Exhibit
Number       Description
------       -----------
<S>          <C>
2.4          Copy of Asset Purchase Agreement dated October 10, 1997 by and
             among Baxter Healthcare Corporation ("Baxter"), the Company and
             Nexell (1)

2.5          Copy of Acquisition Agreement dated February 18, 1999, by and among
             Baxter, the Company and Nexell.

3.1(a)       Copy of the Company's Amended and Restated Certificate of
             Incorporation dated July 10, 1990. (2)

3.1(b)       Copy of the Certificate of Amendment of Amended and Restated
             Certificate of Incorporation of the Company dated June 12, 1993.
             (2)

3.1(c)       Copy of the Certificate of Amendment of Amended and Restated
             Certificate of Incorporation of the Company dated June 20, 1996.
             (2)

3.1(d)       Copy of the Certificate of Change of Registered Agent and
             Registered office of the Company dated March 10, 1997. (2)

3.1(e)       Copy of the Certificate of Amendment of the Certificate of
             Incorporation of the Company dated December 16, 1997. (3)

3.2          Copy of the Company's By-Laws, dated March 27, 1995. (2)

4.4          Copy of Warrant Agreement dated June 17, 1996 between the Company
             and American Stock Transfer & Trust Company. (4)

4.5          Copy of the Certificate of Amendment of the Certificate of
             Incorporation of the Company dated December 16, 1997 creating the
             Class A Preferred Stock (described in Exhibit 3.1(e) above).

10.3         Copy of the Company's Amended and Restated 1990 Incentive and Non-
             Incentive Stock Option Plan, as amended through February 27, 1997.
             (4)

10.9         Copy of Employment letter agreement dated June 21, 1994 between the
             Company and Alfonso J. Tobia.* (5)

10.11        Copy of the Company's 1995 Outside Directors Stock Option Plan.*
             (6)

10.12        Copy of letter agreement dated August 7, 1995 between the Company
             and Lindsay A. Rosenwald, M.D. (6)

10.13        Copy of Stock Option Agreement dated August 7, 1995 between
             Registrant and Lindsay A. Rosenwald, M.D. (6)

10.14        Copy of Consulting and Stock Option Agreement dated November 17,
             1995 between the Company and Eric A. Rose, M.D. (6)

</TABLE> 

                                       25
<PAGE>
 
<TABLE>
<CAPTION>

Exhibit
Number       Description
------       -----------
<S>          <C>
10.15        Copy of Stock Option Agreement dated November 17, 1995 between the
             Company and Donald G. Drapkin. (6)

10.16        Copy of the Company's 1996 Non-Employee Director Restricted Stock
             Award Plan.* (6)

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. (7)

10.19        Copy of the Company's 1997 Incentive and Non-Incentive Stock Option
             Plan, together with forms of stock option agreements.*(4)

10.19(a)     Resolutions of the Board of Directors and Stockholders authorizing
             an increase in the number of shares issuable under the Company's
             1997 Incentive and Non-Incentive Stock Option Plan.

10.20        Copy of Employment Agreement dated October 30, 1996 between the
             Registrant and Richard L. Dunning. (4)*

10.21        Copy of Employment Agreement dated August 26, 1996 between the
             Registrant and David A. Jackson, Ph.D. (4) *

10.22        Copy of Factor IX Research Agreement dated March 28, 1997 between
             Registrant and the Trustees of Columbia University in the City of
             New York. (8)

10.24        Copy of Employment Agreement dated May 19, 1997 between the Company
             and L. William McIntosh (9) *

10.24(a)     Copy of Letter Agreement dated May 28, 1998 between Nexell and L.
             William McIntosh. *

10.24(b)     Copy of Letter Agreement dated May 28, 1998 between the Company and
             L. William McIntosh.*

10.25        Hardware and Disposables Manufacturing Agreement between Nexell
             Baxter, dated as of December 17, 1997. (10)

10.26        Antibody Manufacturing and Storage Agreement between Nexell and
             Baxter, dated as of December 17, 1997. (11)

10.27        Hardware and Disposables Supply Agreement between Nexell and
             Baxter, dated as of December 17, 1997. (12)

10.28        Marketing, Sale and Distribution Agreement between Nexell and
             Baxter, dated as of December 17, 1997. (13)

10.29        Non-Competition and Confidentiality Agreement between the Company
             and Baxter, dated as of December 17, 1997. (14)

10.30        Sublicense (Chiron) between Nexell and Baxter, dated as of December
             17, 1997. (15)

10.31        Sublicense (Dorken) between Nexell and Baxter, dated as of December
             17, 1997. (16)

10.32        Sublicense (First Becton-Dickinson) between Nexell and Baxter,
             dated as of December 17, 1997. (17)

10.33        Sublicense (Second Becton-Dickinson) between Nexell and Baxter,
             dated as of December 17, 1997. (18)
</TABLE> 

                                       26
<PAGE>
 
<TABLE>
<CAPTION>

Exhibit
Number     Description
------     -----------
<S>        <C>
10.34      Warrant, dated December 31, 1997, issued by Innovir to VIMRX. (2)

10.35      Agreement, dated December 31, 1997, between VIMRX and Innovir
           relating to future equity purchases. (2)

10.36      Employment Agreement, effective as of October 1, 1997, by and between
           Innovir, Thomas R. Sharpe and the Company. (19)

10.37      Termination Agreement dated November 11, 1998 between the Company,
           VGI and Columbia. (20)

10.38      Asset Purchase Agreement, dated October 28, 1998, between CellPro, Incorporated
           and Nexell.

16         Letter of Richard A. Eisner & Co., LLP (21)

21         List of Subsidiaries. (2)

23(a)      Consent of KPMG, LLP

23(b)      Consent of Richard A. Eisner & Co., LLP
</TABLE>

__________

  *  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 2, 1998 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, 1997 (Commission File No. 0-19153) and
     incorporated herein by reference thereto.

(3)  Filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(4)  Filed as the same numbered Exhibit to the Company's Annual Report on Form
     10-K for the year ended December 31, 1996 (Commission File No. 0-19153) and
     incorporated herein by reference thereto.

(5)  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.

(6)  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.

(7)  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.

(8)  Filed as the same numbered Exhibit to the Company's Quarterly Report on
     Form 10-Q for the quarter ended March 31, 1997 (Commission File No. 0-
     19153) and incorporated herein by reference.

(9)  Filed as the same numbered Exhibit to the Company's Quarterly Report on
     Form 10-Q (Commission File No. 0-19153) filed November 14, 1997 and
     incorporated herein by reference thereto.

                                       27
<PAGE>
 
(10) Filed as Exhibit number 10.1 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(11) Filed as Exhibit number 10.2 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(12) Filed as Exhibit number 10.3 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(13) Filed as Exhibit number 10.4 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(14) Filed as Exhibit number 10.5 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(15) Filed as Exhibit number 10.6 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(16) Filed as Exhibit number 10.7 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(17) Filed as Exhibit number 10.8 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(18) Filed as Exhibit number 10.9 to the Company's Current Report on Form 8-K
     (Commission File No. 0-19153) filed January 2, 1998 and incorporated herein
     by reference thereto.

(19) Filed as the same number Exhibit to the Company's Quarterly Report on Form
     10-Q  for the quarter ended June 30, 1998 (Commission File No. 0-19153)
     filed August 14, 1998 and incorporated herein by reference thereto.

(20) Filed as the same number Exhibit to the Company's Quarterly Report on Form
     10-Q  for the quarter ended September 30, 1998 (Commission File No. 0-
     19153) filed November 13, 1998 and incorporated herein by reference
     thereto.

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

(b)  Reports on Form 8-K.

     On January 3, 1998, the Company filed a current report on Form 8-K
announcing the acquisition of the assets of the Immunology Division of the
Biotech Business Group of Baxter Healthcare Corporation.

                                       28
<PAGE>
 
                  VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES
                              Index to Financials

Consolidated Financial Statements                                     

Independent Auditor's Report                                           F-2

Independent Auditor's Report                                           F-3

Consolidated Balance Sheets at December 31, 1998 and 1997              F-4

Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996                                       F-5

Consolidated Statements of Changes in Shareholders' Equity 
for the years ended December 31, 1998, 1997 and 1996                   F-6

Consolidated Statements of Cash Flows for the years ended 
December 31, 1998, 1997 and 1996.                                      F-7  

Notes to Consolidated Financial Statements                     F-8 to F-26

                                      F-1
<PAGE>
 
                          Independent Auditors Report

The Board of Directors and Shareholders
VIMRX Pharmaceuticals Inc:

We have audited the accompanying consolidated balance sheets of VIMRX
Pharmaceuticals Inc. and subsidiaries ("VIMRX"), as of December 31, 1998 and
1997, and the related statements of operations changes in shareholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The accompanying financial statements of VIMRX as of and for the year
ended December 31, 1996 were audited by other auditors whose report thereon
dated March 14, 1997, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 1998 and 1997 consolidated financial statements referred to 
above present fairly, in all material respects, the financial position of VIMRX 
as of December 31, 1998 and 1997, and the results of their operations and their 
cash flows for the years then ended in conformity with generally accepted 
accounting principles.

KPMG LLP

Philadelphia, Pennsylvania 
March 26, 1999

                                      F-2
<PAGE>
 
INDEPENDENT AUDITORS' REPORT 

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


We have audited the accompanying consolidated statements of operations, changes 
in shareholders' equity and cash flows for the year ended December 31, 1996 of 
VIMRx Pharmaceuticals Inc. and subsidiaries. These consolidated financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audit.

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

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

Richard A. Eisner & Company, LLP
New York, New York
March 14, 1997

                                      F-3
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1998 and 1997

<TABLE> 
<CAPTION> 

---------------------------------------------------------------------------------------------------------------------------
                                                                                                  December 31,
                                                                                  -----------------------------------------
Assets                                                                                  1998                       1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                          <C> 
Current assets:
    Cash and cash equivalents                                                     $  33,091,000                $ 57,830,000
    Receivables from related party                                                    2,450,000                   4,235,000
    Inventory                                                                         2,389,000                   2,227,000
    Other current assets                                                                842,000                     922,000
---------------------------------------------------------------------------------------------------------------------------
 
Total current assets                                                                 38,772,000                  65,214,000
---------------------------------------------------------------------------------------------------------------------------
 
Fixed assets, net                                                                    10,942,000                  15,464,000
Intangible assets, net                                                               37,635,000                  40,773,000
Other assets                                                                            252,000                     496,000
---------------------------------------------------------------------------------------------------------------------------
 
Total assets                                                                      $  87,601,000                $121,947,000
---------------------------------------------------------------------------------------------------------------------------
 
Liabilities
---------------------------------------------------------------------------------------------------------------------------
 
Current liabilities:
    Accounts payable                                                              $   3,943,000                $    853,000
    Accrued expenses                                                                  2,544,000                   2,527,000
    Long-term debt current portion                                                       96,000                     130,000
    Capital leases current portion                                                      172,000                     350,000
---------------------------------------------------------------------------------------------------------------------------
 
Total current liabilities                                                             6,755,000                   3,860,000
 
Long-term debt                                                                       32,031,000                  30,171,000
Capital leases                                                                               --                     208,000
---------------------------------------------------------------------------------------------------------------------------
 
Total liabilities                                                                    38,786,000                  34,239,000
---------------------------------------------------------------------------------------------------------------------------
 
Minority interest in subsidiaries                                                            --                   4,161,000
 
Commitments and contingencies and other  matters (note 12)
 
Shareholders' equity:
    Class A convertible preferred stock; $.001,  par value
        150,000 shares authorized;  70,282 and 66,304 issued and
        Outstanding at December 31, 1998 and December 31, 1997                              100                         100
        (liquidation value $70,458,000 and $66,304,000)
Common stock; $.001 par value, 120,000,000 shares authorized,
        67,830,000 and 66,898,000 shares issued and outstanding at
        December 31, 1998 and December 31, 1997, respectively                            68,000                      67,000
Additional paid-in capital                                                          182,537,900                 182,538,900
Unearned compensation                                                                  (278,000)                   (449,000)
Accumulated other comprehensive income (loss)                                            20,000                     (40,000)
Accumulated deficit                                                                (133,533,000)                (98,570,000)
---------------------------------------------------------------------------------------------------------------------------
 
Total shareholders' equity                                                           48,815,000                  83,547,000
---------------------------------------------------------------------------------------------------------------------------
 
Total liabilities and shareholders' equity                                        $  87,601,000                $121,947,000
---------------------------------------------------------------------------------------------------------------------------
 
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES


Consolidated Statement of Operations

Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                               ------------------------------------------------------------------
                                                                      1998                      1997                    1996
---------------------------------------------------------------------------------------------------------------------------------
                                                               
<S>                                                             <C>                       <C>                      <C>
Revenue                                                             $ 13,443,000             $  5,002,000            $         --
                                                               
Cost of goods sold                                                     8,166,000                4,630,000                      --
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Gross profit                                                           5,277,000                  372,000                      --
                                                               
Operating expenses:                                            
    Research and development                                          24,427,000               14,507,000               2,950,000
    Purchased research and development (net of gain on sale    
    of subsidiary of $2,889,000 in 1996)                                                       39,862,000              14,484,000
    General and administrative                                        10,221,000                7,215,000               4,300,000
    Goodwill and intangible amortization                               3,602,000                  412,000                      --
    Selling and marketing                                              3,625,000                   61,000                      --
    Restructuring Costs                                                2,625,000                       --                      -- 
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Total operating expenses                                              44,500,000               62,057,000              21,734,000
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Operating loss                                                       (39,223,000)             (61,685,000)            (21,734,000)
                                                               
Other (income) expenses:                                       
    Royalty                                                             (176,000)                 150,000                 100,000
    Minority interest in net loss of consolidated subsidiaries        (4,161,000)              (3,474,000)               (116,000)
    Interest income                                                   (2,972,000)              (2,216,000)             (1,792,000)
    Interest expense                                                   2,036,000                  121,000                 329,000
    Contract settlement                                                  900,000                       --                      --
    Other, net                                                           113,000                  (67,000)               (395,000)
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Total other (income) expenses                                         (4,260,000)              (5,486,000)             (1,874,000)
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Net loss                                                             (34,963,000)             (56,199,000)            (19,860,000)
                                                               
Preferred stock dividends                                             (3,988,000)                (166,000)                     --
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Net (loss) applicable to common stock                               $(38,951,000)            $(56,365,000)           $(19,860,000)
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Basic loss per share                                                      $(0.58)                  $(1.02)                 $(0.50)
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Weighted average number of shares of common stock outstanding         67,284,000               55,457,000              39,399,000
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Diluted loss per share                                                    $(0.58)                  $(1.02)                 $(0.50)
---------------------------------------------------------------------------------------------------------------------------------
                                                               
Weighted average number of shares of common stock and          
    dilutive equivalent shares outstanding                            67,284,000               55,457,000              39,399,000
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of the consolidated financial
statements.

                                      F-5
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES


Consolidated Statement of Changes in Shareholders' Equity

Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                        Preferred Stock           Common Stock               Additional
                                                     -----------------------------------------------
                                                        Shares   Amount         Shares       Amount       paid-in capital
-------------------------------------------------------------------------------------------------------------------------
 
<S>                                                  <C>         <C>           <C>           <C>          <C>
Balance - January 1, 1996                                   --         --       19,894,576   $20,000         $ 23,243,000

Exercise of warrants ($1.50 per share
    net of $712,000 expense)                                --         --       13,907,015    14,000           20,135,000
Exercise of warrants ($2.25 per share
    net of $1,275,000 expense)                              --         --       14,210,315    14,000           30,684,000
Issuance of common stock in private placement
    ($1.50 per unit net of $142,000 expense)                --         --        2,799,991     3,000            4,055,000
Issuance of warrants in connection with
    Acquisition of Ribonetics                               --         --               --        --            1,562,000
Exercise of options ($.50 - $1.16 per share)                --         --          217,990        --              195,000
Issuance of restricted stock to nonemployee
    Directors                                               --         --          400,000        --              400,000
Issuance of shares in connection with acquisition
    of Innovir ($3 per share)                               --         --        3,000,000     3,000            8,997,000
Compensatory stock options                                  --         --                         --              207,000
Total comprehensive loss                                    --         --               --        --                   --
-------------------------------------------------------------------------------------------------------------------------
 
Balance - December 31, 1996                                  --         --       54,429,887    54,000           89,478,000
 
Exercise of directors' options
    ($.75 - $.94 per share)                                 --         --          520,000     1,000              417,000
Issuance of common stock to
    Columbia University                                     --         --          200,000        --              700,000
Exercise of warrants ($1.50 per share)                      --         --          200,000        --              299,000
Exercise of directors' options                              --         --           12,500        --               17,000
Issuance of shares in connection with
    Acquisition of Ribonetics                               --         --          121,339        --                   -- 
Exercise of consultant options                              --         --           15,000        --                8,000
Issuance of shares in connection with
    Acquisition of Immunotherapy                        66,304        100       11,400,000    12,000           91,619,900
Amortization of options                                     --         --               --        --                   --
Total comprehensive loss                                    --         --               --        --                   --
-------------------------------------------------------------------------------------------------------------------------
 
Balance - December 31, 1997                             66,304        100       66,898,726    67,000          182,538,900
                                                                         
Issuance of shares in connection with                                    
    Acquisition of Immunotherapy                            --         --            4,120        --                   --
Exercise of special options                                 --         --          927,343     1,000               (1,000)
Amortization of options                                     --         --               --        --                   --
Preferred dividends                                      3,978         --               --        --                   --
Total comprehensive loss                                    --         --               --        --                   --
-------------------------------------------------------------------------------------------------------------------------
 
Balance - December 31, 1998                             70,282        100       67,830,189    68,000         $182,537,900
-------------------------------------------------------------------------------------------------------------------------
 
 
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>





























VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES


Consolidated Statement of Changes Shareholders' Equity, Continued

Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                                                         Unearned                       Other
                                                                     Compensation        Comprehensive Income      Retained Deficit
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                          <C>              <C> 
Balance - January 1, 1996                                              $(493,000)                        --          $(22,511,000)
                                                                                                              
Exercise of warrants ($1.50 per share                                                                         
   net of $712,000 expense)                                                   --                         --                    -- 
Exercise of warrants ($2.25 per share                                                                         
   net of $1,275,000 expense)                                                 --                         --                    -- 
Issuance of common stock in private placement                                 
   ($1.50 per unit net of $142,000 expense)                                   --                         --                    
Issuance of warrants in connection with                                                                       
   acquisition of Ribonetics                                                  --                         --                    -- 
Exercise of options ($.50 - $1.16 per share)                                  --                         --                    -- 
Issuance of restricted stock to non-employee directors                  (347,000)                        --                    --
Issuance of shares in connection with acquisition                                                             
   of Innovir ($3 per share)                                                  --                         --                    -- 
Compensatory stock options                                                40,000                              
Total comprehensive loss                                                      --                   (151,000)          (19,860,000)
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
Balance - December 31, 1996                                             (800,000)                  (151,000)          (42,371,000)
                                                                                                              
Exercise of directors' options                                                                                
   ($.75 - $.94 per share)                                                    --                         --                    -- 
Issuance of common stock to                                                                                   
   Columbia University                                                        --                         --                    -- 
Exercise of warrants ($1.50 per share)                                        --                         --                    -- 
Exercise of directors' options                                                --                         --                    -- 
Issuance of shares in connection with                                                                         
   acquisition of Ribonetics                                                  --                         --                    -- 
Exercise of consultant options                                                --                         --                    -- 
Issuance of shares in connection with                                                                         
   acquisition of Immunotherapy                                               --                         --                    -- 
Amortization of options                                                  351,000                              
Total comprehensive loss                                                      --                    111,000           (56,199,000)
---------------------------------------------------------------------------------------------------------------------------------

Balance - December 31, 1997                                             (449,000)                   (40,000)          (98,570,000)
                                                                                                              
Issuance of shares in connection with                                                                         
   acquisition of Immunotherapy                                               --                         --                    -- 
Exercise of special options                                                   --                         --                    -- 
Amortization of options                                                  171,000                         --                    --
Preferred dividends                                                           --                         --                    --
Total comprehensive loss                                                      --                     60,000           (34,963,000)
---------------------------------------------------------------------------------------------------------------------------------

Balance - December 31, 1998                                            $(278,000)                 $  20,000         $(133,533,000)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-6
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES


Consolidated Statement of Cash Flows

Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                                         December 31,   
                                                                  ---------------------------------------------------------
                                                                      1998                 1997                  1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                   <C>
Cash flows from operating activities:                                                                   
Net (loss)                                                         $(34,963,000)         $(56,199,000)         $(19,860,000)
Adjustments to reconcile net (loss) to net cash (used in)                                               
     operating activities:                                                                              
        Depreciation and amortization                                 6,611,000             1,232,000               155,000
        Amortization of debt discount                                                              --               198,000
        Research and development expenses to be settled                                                 
            through issuance of stock                                        --                    --              (464,000)
        (Gain) on sale of subsidiaries                                       --                    --            (2,889,000)
        Noncash compensation                                            170,000               430,000               481,000
        Purchased in process research and development                        --            39,862,000            17,374,000
        Loss from disposal of equipment                                      --                    --                12,000
        Closure of facilities and related costs                       2,265,000                    --                    --
        Deferred financing cost                                              --                    --               310,000
        Minority interest in net loss                                (4,161,000)           (3,474,000)             (116,000)
        Changes in operating assets and liabilities:                                                    
            (Increase) decrease in other current assets and other     2,114,000              (100,000)             (103,000)
             assets                                                                                     
            Increase (decrease) in accounts payable and                                                 
            accrued expenses                                          2,745,000             1,190,000              (265,000)
---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities                             (25,219,000)          (17,059,000)           (5,167,000)
---------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Cash flows from investing activities:                                                                   
    Net (purchases) sales of short-term investment                           --            38,300,000           (38,279,000)
    Payment for acquisition, net of cash acquired                            --                    --            (2,011,000)
    Purchase of marketable securities                                        --               214,000              (450,000)
    Purchases of equipment                                           (1,128,000)             (683,000)             (802,000)
    Proceeds from sale of equipment                                          --                    --                12,000
    Cash acquired in acquisition                                             --            28,138,000                    --
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                  (1,128,000)           65,969,000           (41,530,000)
---------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Cash flows from financing activities:                                                                   
    Proceeds from sales of preferred and common stock, net                   --                    --             4,058,000
    Proceeds from issuance of common stock in connection with                                           
        the exercise of warrants/options                                     --               742,000            51,042,000
    Accrued interest on long-term debt                                1,956,000                    --                    --
    Repayment of capital leases                                        (386,000)             (503,000)                   --
    Repayment of bridge loans                                                --                    --            (2,000,000)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                             1,570,000               239,000            53,100,000
---------------------------------------------------------------------------------------------------------------------------
                                                                                                        
Effect of exchange rate changes on cash                                  38,000                70,000               (11,000)
                                                                                                        
Net increase in cash and cash equivalents                           (24,739,000)           49,219,000             6,392,000
                                                                                                        
Cash and cash equivalents at beginning of period                     57,830,000             8,611,000             2,219,000
---------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of period                         $ 33,091,000          $ 57,830,000          $  8,611,000
---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:                                                                               
    Cash paid for interest                                         $     79,000          $    121,000          $    124,000
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                      F-7
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------
(1)  The Business
 
     Operations

     VIMRX Pharmaceuticals Inc. and subsidiaries ("The Company") is a
     biopharmaceutical company focused on identifying, evaluating, acquiring,
     and commercializing scientific technologies to be developed by the Company
     in partnership with others.  The Company has an 80.5% interest in Nexell
     Therapeutics, Inc. ("Nexell"), the former Immunotherapy Division of the
     Biotech Business Group of Baxter Healthcare Corporation ("Baxter").  Nexell
     is developing and selling products to support cell therapy for cancer and
     other serious diseases.  The Company also owns approximately 85% of the
     capital stock of Innovir Laboratories, Inc.,    ("Innovir"). Innovir was
     engaged in the research and development of oligozymes, a new class of
     biopharmaceutical agents for use in identifying, characterizing, and
     validating pharmaceutical drug discovery targets (target validation). The
     company is also engaged in developing therapeutic products from synthetic
     hypericin, principally for the treatment of brain cancer and certain
     hyperproliferative skin diseases and to enhance wound healing.  Prior to
     1997 the Company was considered to be a development stage enterprise.

     Risks

     The Company is subject to those risks associated with any biopharmaceutical
     company which has substantial expenditures for research and development.
     There can be no assurance that the Company's research and development
     projects will be successful, that products developed will obtain necessary
     regulatory approval, or that any approved product will be commercially
     viable.  In addition, the Company operates in an environment of rapid
     technological change, and is largely dependent on the services of its
     employees and consultants.


(2)  Summary of Significant Accounting Policies

     Basis of Presentation

     The financial statements have been prepared on a going concern basis, which
     contemplates the realization of assets and the satisfaction of liabilities
     in the normal course of business.  The Company has sustained operating
     losses and negative cash flows from operations since inception, however,
     management believes that existing liquid assets will enable the Company to
     continue to operate for the foreseeable future.  Prior to 1997 the Company
     was a development stage enterprise.  As a result of the acquisition of
     Nexell, described in note 3, the Company has products which have
     appropriate regulatory approval, are manufactured and sold, and therefore
     the Company is no longer considered a development stage enterprise.

     Consolidation

     The accompanying consolidated financial statements include the accounts of
     VIMRX, Innovir, Nexell and all subsidiaries which are wholly owned.  All
     significant intercompany balances and transactions have been eliminated.

                                      F-8
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------
 
(2)  Continued

     Foreign Currency Translation

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

     Cash and Cash Equivalents

     Cash and cash equivalents of $33.1 million and $57.8 million at December
     31, 1998 and 1997, respectively, consist of money market deposits, bank
     deposits, commercial paper with maturity of less than three months, and a
     mutual fund which invests in short duration bonds.  For purposes of the
     statements of cash flows, the Company considers all highly liquid debt
     instruments which have maturities of three months or less when acquired to
     be cash equivalents.  The Company holds no collateral for these financial
     instruments.  Cash and cash equivalents subject the Company to
     concentrations of credit risk.
 
     Investments

     At December 31, 1996 the Company had certain investments which were
     classified as "available-for-sale". These investments were reported at fair
     market value in the balance sheet, and related unrealized holding gains and
     losses were reported as separate component of shareholders' equity until
     realized.

     Inventories

     Inventories, which consist only of finished goods, are stated at the lower
     of cost or market.

     Fixed Assets

     Fixed assets consist of office and laboratory equipment and leasehold
     improvements stated at cost, unless such assets are under a capital lease
     in which case they are stated at the present value of the minimum lease
     payments. Equipment held for sale is valued at its net tangible value.

     Equipment is depreciated on a straight-line basis over its estimated useful
     lives which range from 3 to 15 years.  Leasehold improvements are amortized
     on a straight-line basis over the shorter of the lease term or estimated
     useful life of the asset.  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.

     Expenditures for maintenance and repairs which do not materially extend the
     useful lives of the assets are charged to operations as incurred.

     Intangible Assets

     Goodwill and other intangibles arising from the 1997 acquisition of the
     assets of Nexell represents the excess of purchase price paid by the
     Company over 80.5% of the fair value of net assets tangible assets acquired
     (see note 3).  Such amounts are being amortized over 12.5 to 15 years, 
     with the exception of purchased research and development, which was
     immediately charged to the statement of operations. 1997 amortization
     expense related to the Nexell goodwill was not material.

                                      F-9
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------

(2)  Continued

     Goodwill arising from the 1996 acquisition of Innovir, represents the
     excess of the purchase price paid by the Company over 68% of the fair value
     of the net tangible assets acquired.  Such amount has been amortized on a
     straight-line basis over the period of expected benefit of three years,
     with the exception of purchased research and development which was charged
     to the statement of operations in 1996. Amortization of the Innovir
     goodwill for the year ended December 31, 1998 was $307,000 and $412,000 for
     the year ended December 31, 1997.

     In 1998, when management determined that Innovir's operations would be shut
     down and the employment of the workforce would be discontinued (see
     Footnote 4), the remaining value of the Goodwill, $517,000, was charged to
     expense.

     Other Assets

     Other assets consist principally of security deposits and will be recovered
     upon termination of the related leases.

     Revenue Recognition

     Revenue and related cost of goods sold are recognized upon shipment of
     products.

     Research and Development

     Research and development costs are charged to expense as incurred.  In the
     event of a business combination, purchased research and development is
     valued and included in the allocation of the purchase price.  If
     technological feasibility of the acquired technology can not be established
     at the date of acquisition and the technology has no future alternative
     uses, the amount is immediately charged to expense.

     Income Taxes

     Income taxes are accounted for under the asset and liability method.
     Deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases and operating loss and tax credit carryforwards.  Deferred tax
     assets and liabilities are measured using enacted tax rates expected to
     apply to taxable income in the years in which those temporary differences
     are expected to be recovered or settled.  Deferred tax assets may be
     reduced, if necessary, by a valuation allowance for any tax benefits which
     are not expected to be realized.  The effect on deferred tax assets and
     liabilities of a change in tax rates is recognized in income in the period
     that includes the enactment date.

     Stock-based Compensation

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

                                      F-10
<PAGE>
 
(2)  Continued

     pro forma earnings per share disclosures for employee stock option grants
     made in 1995 and future years as if the fair value based method defined in
     SFAS 123 had been applied.  The Company has elected to continue to apply
     the provisions of APB 25 and provide the pro forma disclosure required by
     SFAS 123.

     Net Loss Per Share

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

     Commitments and Contingencies

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

     Impairment of Long-Lived Assets

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

     Fair Value of Financial Instruments

     Financial instruments include receivables, accounts  and notes payable and
     investments.  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.

     Comprehensive Loss

     On January 1, 1998, the Company adopted SFAS No. 130, Reporting
     Comprehensive Income. SFAS No. 130 establishes standards for reporting and
     presentation of the Company's comprehensive loss and its components in a
     full set of financial statements. Comprehensive loss consists of net loss
     and net unrealized gains (losses) on securities and is presented in the
     consolidated statements of changes in stockholder's equity. The Statement
     requires only additional disclosures in the

                                      F-11
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(2)  Continued

     consolidated financial statements; it does not affect the Company's
     financial position or results of operations. Prior year financial
     statements have been reclassified to conform to the requirements of SFAS
     No. 130.

     Comprehensive loss is summarized below:

<TABLE>
<CAPTION>
                                                    1998                 1997                  1996
                                                 ------------         ------------          ------------
     <S>                                       <C>                <C>                  <C>
                                                                                    
     Net loss                                   $(34,963,000)        $(56,199,000)         $(19,860,000)
     Net unrealized gain                                                            
     (loss) in investment securities                      --              143,000              (143,000)
     Translation adjustment                           60,000              (32,000)               (8,000)
                                                ------------         ------------          ------------
     Total comprehensive loss                   $(34,903,000)        $(56,088,000)         $(20,011,000)
                                                ============         ============          ============
</TABLE>


     Use of Estimates

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

     Reclassifications

     Certain prior year amounts have been reclassified to conform with current
     year presentation.
 
 
(3)  Acquisitions

     Acquisition of 80.5% of the Immunology Division of the Biotech Business
     Group of Baxter Healthcare Corporation

     On December 17, 1997, the Company completed its acquisition of the
     intellectual property and intangible assets, other than trademarks, of the
     Immunotherapy Division (the "Division") of the Biotech Business Group of
     Baxter Healthcare Corporation ("Baxter"), for 11,000,000 shares of the
     Company's Common Stock and 66,304 shares of the Company's Class A Preferred
     Stock; and the transfer of such intangible assets to a newly organized
     subsidiary, Nexell Therapeutics, Inc. ("Nexell"), in exchange for 80.5% of
     Nexell's common stock. Concurrently, Nexell acquired the tangible assets,
     business, trademarks and certain obligations of the Division in exchange
     for the payment to Baxter of 19.5% of Nexell's common stock and a warrant
     entitling Baxter to purchase an additional 6% of Nexell's common stock for
     $6,000,000.  In addition, the Company purchased $10,000,000 principal
     amount of the Subsidiary's 6.5% convertible subordinated debentures for
     $10,000,000 and Baxter purchased $30,000,000 principal amount of such
     debentures for $30,000,000.  The Company's debentures eliminate on
     consolidation.

     VIMRX's acquisition of 80.5% of Nexell has been accounted for as a purchase
     and the operating results of the Company include those of Nexell for the
     period from December 23, 1997 (date of acquisition) to December 31, 1997.
     The purchase price of $93,000,000 was allocated as follows:

                                      F-12
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(3) Continued
 


<TABLE>          

                
                <S>                                       <C>   
 
                Tangible assets                          $13,952,000
                Liabilities                               (1,389,000)
                In-process research and development       37,712,000
                Goodwill                                  28,861,000
                Other intangible assets                   11,086,000
                                                         -----------

                                                         $93,000,000
                                                         ===========

</TABLE> 

     The technological feasibility of the purchased in-process research and
     development has not yet been established, therefore, the entire amount has
     been expensed in the period ended December 31, 1997.

     The in-process technology acquired in the Division acquisition consisted of
     several significant research and development projects associated with
     Isolex product line. At the time of acquisition, the Division was
     continuing research and development to obtain marketing approval in the
     United States and several foreign countries. At the time of the
     acquisition, the Company assigned a value of $37.7 million to the in-
     process technology with the assistance of an independent valuation prepared
     at such time.

     The value was determined by estimating the costs to develop the Isolex
     products into commercially viable products, obtaining FDA approval in the
     United States and other regulatory agencies in foreign countries and
     discounting the net cash flows back to their present value. The resulting
     cash flows are based upon management's estimates of revenues, costs of
     sales, research and development costs, selling, general and administrative
     costs and income taxes from such products.

     The Company has since received an "approvable" letter in the United States
     for certain of the Isolex products and expects to market the products by
     the end of the fiscal 1999. The Company continues to perform research and
     development in the United States to expand the indications for such
     products and to obtain regulatory approval in foreign countries.

     In addition, the Company entered into a series of agreements pursuant to
     which Baxter will (i) perform manufacturing services; (ii) supply certain
     products and components; (iii) have the exclusive rights to distribute
     certain of the products and instruments which it sold to Nexell; (iv)
     provide engineering and product development services and certain
     transitional services for Nexell; (v) sublicense certain technology to
     Nexell; and (vi) comply with a non-competition and confidentiality
     agreement.  In connection with the product development agreement, the
     Company may pay up to $21,000,000 to Baxter as and when certain product
     development and regulatory milestones are achieved. Baxter provides
     manufacturing services to the Company on an ongoing basis with respect to
     Nexell's products at cost, and marketing services are provided at a
     certain margin.

     Transactions to Acquire Majority Interest in Innovir Laboratories, Inc.

     The Company, Innovir and certain stockholders of Innovir (the "Aries
     Funds") entered into a transaction (the "Transaction") whereby the Company
     acquired 68% of Innovir and Innovir acquired 100% of the outstanding
     capital stock of VIMRX Holdings Limited ("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, the Company, in exchange
     for $3 million and three million shares of its common stock, acquired 9.5
     million shares of Innovir's common stock from the Aries Funds.  In
     addition, the Company and the Aries Funds entered into an agreement whereby
     the Company obtained the right to vote 500,000 shares of Innovir's common
     stock held by the Aries Funds, thereby, effectively giving the Company
     voting control of an aggregate of 18,666,666 shares of Innovir's stock.

     The Company'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 16") and Emerging Issues Task Force
     Issue No. 90-13, Accounting for Simultaneous Common Control Mergers ("EITF
     90-13"). The application of APB 16 and EITF 90-13 requires that the
     Transaction be accounted for as a partial sale of VHL to the minority
     shareholders of Innovir and a partial acquisition of Innovir. The Company'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. The
     purchased in-process research and development was immediately expensed. In
     connection with the partial sale of VHL, the Company recorded a gain of
     $2.8 million which has been included with

                                      F-13
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------

(3)  Continued

     purchased research and development expense for the year ended December 31,
     1996.  The accompanying statement of operations include the operations of
     Innovir for the year ended December 31, 1997 and the period from December
     23, 1996 to December 31, 1996.

     During the year ended December 31, 1998, the Company purchased additional
     shares (at market price) which increased its ownership interest to
     approximately 85%.

     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 the Company'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 years ended December 31, 1998 and 1997
     and 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, respectively. The purchased research and
     development was immediately expensed.

     Unaudited Pro Forma Results of Operations

     The unaudited pro forma results of operations for the year ended December
     31, 1997 have been prepared as if the acquisition of 80.5% of the
     Immunology Division discussed in (a) above, occurred on January 1, 1997.
     The unaudited pro forma results of operations for the year ended December
     31, 1996 have been prepared as if the acquisitions of Innovir and
     Ribonetics above had occurred on January 1, 1996.

<TABLE>
<CAPTION>
                                                                                  Unaudited
                                                                            Year Ended December 31,
                                                                    -------------------------------------
                                                                          1997                  1996
                                                     
<S>                                                                  <C>                    <C>
            Revenue                                                  $20,829,000           $ 6,420,000
            Other income                                               7,361,000             9,267,000
                                                           
            Expenses                                                 $62,501,000           $61,199,000
            Cost of sales                                             17,079,000             8,948,000
                                                                     -----------           -----------
                                                           
            Net loss                                                 $51,390,000           $54,460,000
                                                                     ===========           ===========
                                                           
            Basic loss per share                                      $     0.93           $      1.07
            Diluted loss per share                                    $     0.93           $      1.07
</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
     acquisitions.

     The pro forma financial information is not necessarily indicative of the
     operating results that would have occurred had the acquisitions above been
     consummated at the beginning of the respective periods, nor are they
     necessarily indicative of future operating results.

                                      F-14
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------

(4)  Restructuring Costs

     The Company has discontinued funding its 85% owned subsidiary, Innovir, and
     in order to reduce operating expenses, Innovir has closed all operations
     and has discontinued research and development activities. Innovir continues
     to seek partners, licensees or purchasers of its technology.

     The three operating locations, Cambridge, England, Gottingen, Germany, and
     New York, were closed in 1998. The total number of employees terminated as
     a result of the restructuring was 44, all of which were terminated by
     December 31, 1998. Termination payments, however, will continue into 1999.

     Fixed  assets of  the  closed  facilities consisting  mainly  of laboratory
     equipment, were  sold or  are  held  for sale. Costs of  $2,625,000 related
     to the restructuring were expensed in 1998. Related expenses in connection
     with the closing of the Innovir research operations consists of the
     following:

<TABLE>
<CAPTION>
                                                    
                                                  Restructuring                        Balance
                                                     Provision       Applied       December 31, 1998
                                                  -------------    ------------    -----------------
<S>                                            <C>                 <C>             <C>
        Severance related                           $  711,000      $  330,000        $  381,000
        Lease termination                               80,000          80,000               ---
        Fixed asset impairment                       1,215,000       1,215,000               ---
        Goodwill                                       517,000         517,000               ---
        Other                                          102,000         102,000               ---
                                                    ----------      ----------        ----------
        Total                                        2,625,000      $2,244,000        $  381,000
                                                    ==========      ==========        ==========
</TABLE>



 (5) Research Contracts and other Agreements

     In the normal course of business, the Company is party to various research
     contracts, collaborative agreements, employment agreements, and other
     commitments.  Significant contracts and agreements are described below.

     Research Agreements with Columbia University

     In March 1997 the Company entered into an agreement (the "Agreement") with
     Columbia University ("Columbia") whereby the Company, through its then
     newly established subsidiary, VGI, would provide $30 million in funding to
     Columbia over the next five years in exchange for the right to exclusively
     license technology developed under the Agreement at Columbia. Columbia
     received a 10% interest in VGI (valued at $500,000), and received 200,000
     shares of the Company (valued at $700,000) which collectively were
     allocated to purchased research and development which was immediately
     expensed. Through December 31, 1998, VGI paid Columbia $6.0 million in
     funding under the terms of the Agreement.

     In March 1997 the Company also entered into a research agreement with
     Columbia whereby the Company was to provide $2.7 million in funding over
     three years to research and develop Blood Factor IXai ("VM201").  In
     connection with this agreement, the Company acquired the exclusive,
     worldwide license to VM201 for $100,000.

                                      F-15
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(5)  Continued

     Termination Agreement with Columbia University

     In November 1998, the Company entered into a termination agreement with
     Columbia University whereby the above agreements and other agreements were
     terminated, the Company paid Columbia $900,000.

     Agreements with Baxter

     As described in note 3, the Company is party to numerous contracts with
     Baxter.

     Hypericin Agreement

     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 the Company 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.  The agreement requires the
     Company 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 the Company or its related parties.  The Company 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 licensers 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.


(6)  Investments

     At December 31, 1997 and 1998, substantially all of the Company's
     investments were  in a mutual fund which, for financial statement purposes,
     is considered to be a cash equivalent.

     During the year ended December 31, 1996, the Company realized a gain of
     approximately $272,000 on the sale of available-for-sale investments, which
     is included in other income.

     Expected maturities may differ from contractual maturities because the
     issuers of the securities may have the right to repay obligations without
     repayment penalties.  In 1997 all investments which were held at December
     31, 1996 were liquidated, and the proceeds were reinvested in a mutual fund
     which is considered to be a cash equivalent.

     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

                                      F-16
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------

(6)  Continued

     share, which warrants expired 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.  During 1997 the investment was written
     down to its market value of $214,000, and is included in other assets.
     Such write-down resulted in a charge of $236,000 to the 1997 statement of
     operations.


(7)  Supplemental Balance Sheet Information

     Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                                         December 31,                                   
                                                        ----------------------------------------------                  
                                                              1998                          1997                        
                                                        ----------------              ----------------                  
<S>                                                          <C>                          <C>                           
Office and laboratory equipment                              $13,013,000                  $14,199,000                   
Computers                                                        717,000                      358,000                   
Leasehold improvements                                         1,328,000                    1,858,000                   
                                                        ----------------              ----------------                  
                                                              15,058,000                   16,415,000                   
                                                        ----------------              ----------------                  
                                                                                                                        
Less:  accumulated depreciation                                4,116,000                      951,000                   
                                                        ----------------              ----------------                  
Fixed assets, net                                            $10,942,000                  $15,464,000                   
                                                        ================              ================                  
</TABLE>

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                         December 31,                                    
                                                        ----------------------------------------------                  
                                                              1998                          1997                        
                                                        ----------------              ----------------                  
<S>                                                          <C>                          <C>                           
Miscellaneous accrued expenses                                  $347,000                   $1,459,000                   
Professional fees                                                388,000                      382,000                   
Accrued payroll and related costs                                848,000                      686,000                   
Closure of facilities and related costs                          381,000                           --                   
Relocation                                                       441,000                           --                   
Royalties                                                        139,000                           --
                                                        ----------------              ----------------                  
                                                              $2,544,000                   $2,527,000                   
                                                        ================              ================                   
</TABLE>

                                      F-17
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(7)      Continued

         Intangible assets are comprised of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,                        
                                                                  --------------------------------------------          
                                                                       1998                          1997              
                                                                  --------------               --------------                 
<S>                                                              <C>                          <C>                      
        Goodwill                                                     $31,030,000                  $30,099,000          
        Patents                                                        7,230,000                    7,230,000          
        Workforce                                                      3,490,000                    3,490,000          
        Other                                                            416,000                      366,000          
                                                                  --------------               --------------                 
                                                                      42,166,000                   41,185,000          
                                                                                                                       
        Less:  accumulated amortization                                4,531,000                      412,000          
                                                                  --------------               --------------                 
        Intangible assets, net                                       $37,635,000                  $30,171,000          
                                                                  ==============               ==============           
</TABLE>

         Receivables from related party are due from Baxter, 
         and arise upon sale of inventory to Baxter.
 
(8)      Long-Term Debt

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,                        
                                                                   -----------------------------------------           
                                                                       1998                         1997               
                                                                   --------------              --------------                
<S>                                                                  <C>                          <C>                  
        Convertible debt payable to related party                    $32,031,000                  $30,075,000          
        Note payable to warrantholder                                     96,000                      226,000          
                                                                  --------------               --------------                 
                                                                                                                       
        Total long-term debt                                          32,127,000                   30,301,000          
        Less current installments                                         96,000                      130,000          
                                                                  --------------               --------------                 
                                                                                                                       
        Long-term debt, excluding current installments               $32,031,000                  $30,171,000          
                                                                  ==============               ==============           
</TABLE>

         Convertible Debt Payable to Related Party

         In connection with the Company's purchase of 80.5% of Nexell, Baxter
         purchased $30,000,000 of Nexell's subordinated debentures which are due
         in November 2004. The debentures bear interest at a rate of 6.5% which
         is initially payable in November 2002. At December 31, 1998, accrued
         interest amounted to $2,031,000 and has been included in longterm debt.
         In the event of a public offering by, or the merger or sale of Nexell,
         the debentures are convertible into Nexell common stock at a per share
         price equal to 95% of the public offering, merger, or sale price.

         This debt will be assumed by VIMRX under the definitive agreement
         described in Footnote 15.

                                      F-18
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(8)  Continued

     Term Note Payable to Warrantholder

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

     In November 1996 the note was amended ("Amended Note"), and related accrued
     and unpaid interest as of that date was deferred.  In consideration for the
     amendment, Innovir issued a second warrant, which entitles the holder to
     purchase 20,000 shares of the Innovir's common stock at a price of $1.50
     per share.  This warrant expires in November 2001.  The fair value of the
     warrant is not material.

     The aggregate maturities of longterm debt for each of the five years
     subsequent to December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                  Year Ending December 31,
 
                <S>                       <C> 
                1999                       $    96,000
                2000                                --
                2001                                --
                2002                        12,031,000     
                2003                        10,000,000
                Thereafter                 $10,000,000
</TABLE>

     For the years ended December 31, 1998, 1997, and 1996, interest expense was
     $2,036,000, $121,000, and $329,000 respectively.


(9)  Shareholders' Equity

     The Company is authorized to issue up to 120,000,000 shares of common stock
     with a par value of $.001.  Additionally, the Company's Board, at its sole
     discretion, can issue series of preferred stock with each series having its
     own rights, privileges, and qualifications determined by the Board.  As of
     December 31, 1998, the Company is authorized to issue up to 150,000 shares
     of $0.001 par Class A Preferred Shares, of which 70,282 are outstanding.
     Class A Preferred Shares ("A Shares") rights are as follows:

     Holders of A Shares have no voting rights and are entitled to receive
     dividends at the rate of 6% of the Liquidation Preference ($1,000 per
     share) per share per annum, as and when declared by the Board of Directors,
     before any dividend or distribution is declared, set apart or paid upon the
     Common Stock.  The A Shares conversion feature provides for each share to
     be converted into that number of common shares as is determined by dividing
     the "Conversion Price" in effect at the time of conversion.  The Conversion
     Price is  initially the highest average closing price for any sixty day
     trading period during the first 18 months of issue, but in no event shall
     be greater than $7.50 per share, or less than $5.50 per share.  After seven
     years from the original issue date, or immediately prior to merger or sale
     of the Company, the A Shares automatically convert into shares of Common
     Stock at the then effective Conversion Price. The A Shares are not subject
     to any mandatory redemption or sinking fund provisions.

                                      F-19
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(9)  Continued

      At December 31, 1998 and 1997, A Share dividends amounting to $3,988,000
      and $166,000 respectively, are payable. As of December 17, 1998,
      $3,978,000 In-kind dividends were declared by the Board of Directors.


(10)  Stock Option Plans

      Employees Stock Option Plans

      The Company has two employee stock option plans (the "1990 Plan" and the
      "1997 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 and on June 24, 1997,
      the 1990 Plan was amended to conform the 1990 Plan to certain statutory
      and regulatory development and to provide the Board of Directors and the
      Compensation Committee with greater flexibility in determining the terms
      and conditions of employee options. 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 the options may
      be up to 10 years and are exercisable as determined by the committee
      provided that the option does not become exercisable before six months
      from the date of grant. At December 31, 1998, there were no additional
      options available for grant under the 1990 Plan. Generally, options vest
      25% per annum on the anniversary date of grant.

      Under the terms of the 1997 Plan, up to 2,000,000 shares of common stock
      are issuable upon exercise of options granted. The shares of common stock
      are reserved for issuance upon exercise of either incentive or non-
      incentive options, which may be granted from time to time by a committee
      of the Board of Directors to employees and others. The terms of the
      options may be up to 10 years and are exercisable as determined by the
      committee provided that the option does not become exercisable before six
      months from the date of grant. The grant prices must be no less than 50%
      and 100% of the fair market value for non-incentive and incentive options,
      respectively. Generally, options vest 25% per annum on the anniversary
      date of grant.

      Stock options outstanding under these plans are as follows:

<TABLE>
<CAPTION>
                                                                           1990 Plan                              1997 Plan
                                                                           Weighted-                              Weighted- 
                                                                             Average                                Average 
                                                         Shares       Exercise Price           Shares        Exercise Price   
                                                         ------       --------------           ------        --------------
<S>                                                   <C>                     <C>              <C>              <C> 
      Outstanding at December 31, 1995                   274,500                 --               --                 --
         Granted                                       1,475,000              $2.71               --                 --
         Exercised                                       (12,000)              1.16               --                 --
                                                       ---------              -----          -------              ----- 
                                                                                                                  
      Outstanding at December 31, 1996                 1,737,500              $2.34               --                 --
        Granted                                          411,900               2.40          203,100              $1.91
        Expired                                         (131,250)              1.66               --                 --
        Exercised                                        (12,500)              1.38               --                 --
                                                       ---------              -----          -------              ----- 
                                                                                                                  
      Outstanding at December 31, 1997                 2,005,650              $2.45          203,100              $1.91
        Granted                                               --                 --          772,500               1.62
        Expired                                         (240,000)              2.33               --                 --
        Exercised                                             --                 --               --                 --
                                                                                                                  
      Outstanding at December 31, 1998                 1,765,650              $2.47          975,600              $1.68
                                                       =========              =====          =======              =====
</TABLE>

                                      F-20
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------
                                                                                
(10) Continued

     The following table summarizes information about stock options outstanding
     at December 31, 1998 under the 1990 Plan and the 1997 Plan:

<TABLE>
<CAPTION>
            1990 PLAN
            ---------
                                                       Options Outstanding                 Options Exercisable
                                               ---------------------------------------------------------------------
                                                      Weighted-        Weighted-                                      
                                                  Average Remaining     Average                     Weighted-Average  
                                      Number       Contractual Life    Exercise         Number          Exercise      
     Range of Exercise Price        Outstanding       (in Years)         Price        Exercisable        Price        
     -----------------------        -----------       ----------         -----        -----------        -----
<S>                                 <C>               <C>            <C>              <C>              <C>
     .44 - .69                          250,000          0.88           $0.59           225,000          $0.61
     1.66  1.91                          85,650          2.76            1.78            54,225           1.71
     2.56  3.31                       1,430,000          4.91            2.84           751,898           2.78
                                      ---------          ----           -----           -------          -----
                                                                                                       
     Total 1990 Plan                  1,765,650         4.24          $2.47           1,031,123         $2.25
     ===============                  =========         ====          =====           =========         =====
</TABLE>
                                        

<TABLE>
<CAPTION>
            1997 PLAN
            ---------
                                                      Options Outstanding               Options Exercisable
                                               ------------------------------------------------------------------
                                                     Weighted-
                                                      Average       Weighted-                    
                                                     Remaining       Average                     Weighted-Average 
                                      Number        Contractual     Exercise         Number          Exercise    
     Range of Exercise Price        Outstanding   Life (in Years)     Price        Exercisable        Price       
     -----------------------        -----------   ---------------     -----        -----------        -----
<S>                                   <C>              <C>            <C>             <C>             <C>
     1.50-1.91                        975,600          7.91           $1.68           50,775          $1.91
                                      -------          ----           -----           ------          -----
                                                                                                     
     Total 1997 Plan                  975,600          7.91           $1.68           50,775          $1.91
     ===============                  =======          ====           =====           ======          =====
</TABLE>
                                        
    Nexell Stock Option Plan

    Under the terms of the Nexell Plan, up to an aggregate of (i) 1,000,000
    shares of Nexell common stock and (ii) 3,000,000 shares of VIMRX common
    stock are reserved for issuance upon the exercise of non-incentive options,
    which may be granted from time to time by a committee of the Board of
    Directors to employees and others. The terms of the options may be up to ten
    years and are exercisable as determined by the committee provided that
    options do not become exercisable before six months from the date of grant.
    Each grant provides for an exercise price of $5.00 per share of Nexell
    common stock (approximately $1.67 per share of VIMRX common stock in the
    event such options become exercisable for VIMRX common stock).  Generally,
    options vest at 25% per annum on the anniversary date of the grant.

                                  Nexell Plan
                                  -----------
                                        
<TABLE>
<CAPTION>
                                                                   Weighted Average
                                                         ------------------------------------
                                                           Shares              Exercise Price
                                                         ----------            --------------
<S>                                                        <C>                <C>

    Granted                                                1,188,100                $5.00
    Expired                                                  116,925                 5.00
    Outstanding at December 31, 1998                       1,071,175                 5.00
</TABLE>

                                      F-21
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(10) Continued

     Directors Stock Option Plan

     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:

 
<TABLE>
<CAPTION>
                                                                                       Weighted Average      
                                                                   Shares               Exercise Price       
                                                                   ------               --------------    
<S>                                                               <C>                        <C>                        
       Outstanding at December 31, 1995                            920,000                    0.86                       
       Exercised                                                  (200,000)                   0.89                       
                                                                  --------                   -----                  
       Outstanding at December 31, 1996                            720,000                    0.85                  
       Exercised                                                  (520,000)                   1.14                  
                                                                  --------                   -----                  
       Outstanding at December 31, 1997                            200,000                   $0.94                  
       Exercised                                                         0                       0                  
                                                                  --------                   -----                  
       Outstanding at December 31, 1998                            200,000                   $0.94                  
                                                                  ========                   =====   
</TABLE>         
                 
     At December 31, 1998, all the options under the Directors Plan are 
     exercisable, and the weighted average remaining contractual life is 1.88
     years.

     At December 31, 1998, there were 1,024,400 additional shares available for
     grant under the Plans.  The per share weighted-average fair value of the
     options granted during 1998, 1997 and 1996 are estimated at $1.66 per   
     share, $2.40 per share and $2.20 per share, respectively, on the date of
     grant using the Black-Scholes option-pricing model with the following   
     weighted average assumptions                                            

<TABLE>           
<CAPTION>
                                                                          1998       1997       1996
                                                                        --------   --------   --------
<S>                                                                     <C>        <C>        <C>
        Expected dividend yield                                               0%         0%         0%
        Expected volatility                                                  88%       110%       110% 
        Risk free interest rate                                             5.3%       6.2%       6.1%
        Expected Life                                                   5 years    5 years    5 years
                                                                        -------    -------    -------
</TABLE>
                                                                                
     The Company applies APB 25 in accounting for its stock option plans 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.  In the event that the fair value of the underlying
     common stock is equal to or below the grant price of the option at the date
     of grant, no compensation expense is recognized in the financial
     statements.  Had the Company determined compensation cost based on the fair
     value at the date of grant for its stock options under SFAS 123, the
     Company's net loss applicable to common stock would have been increased to
     the pro forma amounts indicated below:

                                      F-22
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------



(10) Continued

<TABLE>
<CAPTION>
                                                   1998                     1997                      1996
                                              -----------------        -----------------        -----------------
<S>                                           <C>                       <C>                      <C> 
      Net Loss:                   
           As reported                            $38,951,000               $56,199,000              $19,860,000
           Pro forma                              $40,699,000               $57,533,000              $20,745,000
                                         
      Loss per share:                     
           As reported                            $      0.58               $      1.02              $      0.50
           Pro forma                              $      0.60               $      1.04              $      0.53
</TABLE>                         

     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 nonemployee 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, 25% of
     which have vested at December 31, 1997.  The Company valued these shares at
     $400,000, which is being amortized over the vesting period.  No restricted
     shares were granted in the year ended December 31, 1997.
 
     Warrants to Acquire Common Stock

     As of December 31, 1998, 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.

     In addition, at December 31, 1996, the Company has issued warrants to
     purchase 365,000 shares of common stock at an exercise price of $.01 per
     share, exercisable through May 21, 2006 [see note 3(c)].  121,667 warrants
     were exercised in the year ended December 31, 1997.

     As of December 31, 1998, there were 2,325,000 warrants exercisable at a
     weighted-average exercise price of $1.50.

     Other Options

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

                                      F-23
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(10) Continued

<TABLE>
<CAPTION>
                                                                                                   
                                Number         Exercise Price         Number of                                                
                               of Units           Per Unit         Shares Reserved         Expiration Date                     
                               --------           --------         ---------------         ---------------                       
     <S>                        <C>               <C>                <C>                   <C>                                 
       1992 offering              120             $8,000               819,000             January 20, 1999                    
       1994 offering              135             $7,000             1,407,374             January 20, 1999                     
</TABLE>

     The units were subject to adjustment for dilution (as defined).  Each
     warrant entitled 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:
 
<TABLE>
<CAPTION>
                                                 
      Number of        Exercise         Expiration                                   
      Shares            Price             Date             Term           Note      
      ------          --------          --------           -----          ----      
     <S>               <C>               <C>           <C>                 <C>      
                                                                                    
     1,300,000         $0.94             5 years      November, 2000       (x)      
       100,000          1.47            10 years      March 11, 2006       (y)      
       100,000          1.47            10 years      March 11, 2006       (y)      
</TABLE>

     (x) In 1995 the aggregate value of this option was determined to be
         $351,000 and is being amortized over the vesting period.

     (y)  Options granted in connection with a March 1996 agreement whereby
          certain directors agreed to provide operating funds if needed through
          September 1996.

(11) Income Taxes

     As of December 31, 1998, the Company has approximately $89,275,000 of net
     operating loss carryforwards available to offset future federal and state
     taxable income.  The federal net operating loss carryforwards will expire
     beginning in the year 2002 through the year 2018 if not utilized.  The
     state net operating loss carryforwards have various expiration periods
     beginning in the year 2002 through the year 2018.  In addition, as of
     December 31, 1998, the Company has approximately $2,548,000 of research tax
     credits available to offset future federal tax liability.  These research
     tax credits will expire through the year 2018 if not utilized.

     Under the Tax Reform Act of 1986, the utilization of a corporation's net
     operating loss and tax credit carryforwards is limited following a greater
     than 50% in ownership during a three-year period.  Due to the Company's
     prior and current equity transactions, the Company's net operating loss and
     tax credit carryforwards may be subject to an annual limitation generally
     determined by multiplying the value of the Company on the date of the
     ownership change by the federal long-term tax exempt rate.  Any unused
     annual limitation may be carried forward to future years for the balance of
     the net operating loss and tax credit carryforward period.

                                      F-24
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------

(11) Continued

     The components of the deferred taxes at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                        1998                         1997
                                                                  ---------------               --------------
     <S>                                                            <C>                           <C>
     Net operating loss carryforwards                                $ 35,581,000                 $ 24,109,000
     Research tax credit carryforwards                                  2,548,000                    1,404,000
     Purchased R&D                                                     14,112,000                   15,680,000
     Accrued Expenses and Other                                           349,000                       59,000
                                                                 
     Total Deferred Tax Asset                                          52,590,000                   41,252,000
     Valuation Allowance                                              (52,590,000)                 (41,252,000)
                                                                  ---------------               --------------
                                                                 
     Net Deferred Tax Asset                                                    --                           --
                                                                  ===============               ==============
</TABLE>
                                                                                
     Deferred tax assets and liabilities reflect the net tax effects of
     temporary differences between carrying amounts of assets and liabilities
     for financial reporting purposes and the carrying amounts used for federal
     income tax purposes.  In assessing the realizability of deferred tax
     assets, management considers whether it is more likely than not that some
     portion or all of the deferred tax assets will not be realized.  The
     ultimate realization of deferred tax assets is dependent upon the
     generation of future taxable income during the periods in which temporary
     differences representing net future deductible amounts become deductible.
     Due to the uncertainty of the Company's ability to realize the benefit of
     the deferred tax asset, the deferred tax assets are fully offset by a
     valuation allowance at December 31, 1998 and 1997.


(12) Contingencies

     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 Innovir's oligozymes, in which event a license from
     such third party would be required.

     The Company is involved in various other claims and legal actions arising
     in the ordinary course of business.  In the opinion of management, the
     ultimate disposition of these matters will not have a material adverse
     effect on the Company's consolidated financial position, results of
     operations, or liquidity.

                                      F-25
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(13) Geographic Information

     The Company operates in only one "dominant segment," as substantially all
     of its combined revenues, losses and assets are derived and utilized in the
     development and commercialization of pharmaceutical products.  All sales in
     1998 and 1997 were to Baxter Healthcare.

<TABLE>
<CAPTION>
                                                                          1998                  1997                  1996
                                                                          ----                  ----                  ----   
            <S>                                                       <C>                  <C>                    <C>     
        Revenues from Customers:
        ------------------------

            United States                                             $  13,443,000        $   5,002,000          $           0
            International                                                         0                    0                      0
                                                                      -------------        -------------          -------------
                                                                      $  13,443,000        $   5,002,000          $           0
                                                                      =============        =============          =============
 
        Net Income / (loss):
        --------------------
            United States                                              ($31,038,000)        ($53,444,000)          ($18,325,000)
            International                                                (3,925,000)          (2,755.000)            (1,535,000)
                                                                      -------------        -------------          -------------
                                                                       ($34,963,000)        ($56,199,000)          ($19,860,000)
                                                                      =============        =============          =============
 
         Identifiable assets:
         --------------------
            United States                                             $  87,199,000        $ 120,496,000          $  50,639,000
            International                                                   402,000            1,451,000              1,053,000
                                                                      -------------        -------------          -------------
                                                                      $  87,601,000        $ 121,947,000          $  51,692,000
                                                                      =============        =============          =============
</TABLE>


(14) Subsequent Events

     In January 1999, the Company announced that it intends to acquire 100% of
     its 80.5% held subsidiary, Nexell, and to restructure the Company under the
     Nexell name. The corporate headquarters will relocate to Nexell's offices
     in Irvine, California. Costs related to this restructuring , which will be
     recorded in the first quarter of 1999, are expected to be $632,000 and
     include employee termination payments and asset valuation allowances
     charged to expense of approximately $240,000 and $392,000 respectively.

     In February 1999, the Company entered into an agreement with Baxter through
     which the Company will acquire Baxter's 19.5% interest in Nexell in
     exchange for:

          .  3,000,000 shares of Common Stock,

          .  an adjustment of the conversion price of the 70,202 outstanding
             shares of Series A Preferred Stock, $1,000,

          .  liquidation value, now owned by Baxter from $5.50 per share to
             $2.75 per share: all outstanding shares of Series A Preferred
             automatically convert into Common Stock on December 17, 2004,

          .  a warrant to purchase 5,200,000 shares of Common Stock at a price
             of $1.15 per share, and 

                                      F-26
<PAGE>
 
VIMRX PHARMACEUTICALS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1998 and 1997
--------------------------------------------------------------------------------


(14)  Continued

          .    approximately $33,000,000 principal amount of 6 1/2% Convertible
               Subordinated Debentures (replacing the $30,000,000 principal
               amount of Nexell's 6 1/2% convertible subordinated debentures
               plus accrued interest through the closing date of the
               Acquisition) convertible, commencing November 30, 2002, into
               Common Stock at a conversion price equal to 95% of the market
               price at the time of conversion.

      On January 29, 1999 Nexell consummated an agreement (the "CellPro
      Acquisition Agreement") with CellPro Incorporated ("CellPro"), formerly
      one of Nexell's principal competitors, to purchase substantially all the
      intellectual property assets of CellPro, together with certain related
      tangible and intangible assets in exchange for 1,882,215 shares of VIMRX's
      common stock valued by the parties at $3,000,000.


Pro Forma Balance Sheet

            The unaudited proforma balance sheet has been prepared as if the 
      acquisition of Baxter's 19.5% interest in Nexell and the purchase of the 
      intellectual property assets of CellPro had ocurred on December 31, 1998.

            The proforma balance sheet includes adjustments to the value of 
      intangible assets and shareholders' equity arising from the acquisition.

                 Unaudited Pro Forma Balance Sheet Information
                                   31-Dec-98

             Other intangible assets                    $    15,565,000
             Goodwill                                        40,826,000
             All other assets                                50,223,000
                                                        ---------------
             Total assets                               $   106,614,000
                                                        ===============
             Total liabilities                          $    39,009,000
                                                        ---------------

             Minority interest                                       --

             Shareholders' equity                                    --

                  Class A convertible preferred stock               100
                  Common stock                                   72,000
                  Additional paid-in capital                205,333,900
                  Accumulated deficit                      (137,542,000)
                                                                     --
                  All other shareholders' equity account       (259,000)
                                                        ---------------
                  Total                                      67,605,000
                                                        ---------------
             Total liabilities and shareholders' equity $   106,614,000
                                                        =============== 

                                      F-27

<PAGE>
 
                                  SIGNATURES

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

                                       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 report
has been signed below by the following persons on behalf of the registrant and 
in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 

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

<S>                                     <C>                                          <C> 
/s/ Richard L. Dunning                  President and Chief Executive Officer        March 29, 1999
--------------------------------        (Principal Executive Officer)
    Richard L. Dunning

/s/ Donald G. Drapkin                   Chairman of the Board and Director           March 29, 1999
--------------------------------
    Donald G. Drapkin

/s/ Francis M. O'Connell                 Vice President, Finance and Controller      March 29, 1999
--------------------------------         (Principal Financial and Accounting
    Francis M. O'Connell                 Officer)

/s/ Laurence D. Fink                     Director                                    March 29, 1999
--------------------------------
    Laurence D. Fink

/s/ Linda G. Robinson                    Director                                    March 29, 1999
--------------------------------
    Linda G. Robinson

/s/ Lindsay A. Rosenwald, M.D.           Director                                    March 29, 1999
--------------------------------
    Lindsay A. Rosenwald, M.D.

/s/ Eric A. Rose, M.D.                   Director                                    March 29, 1999
--------------------------------
    Eric A. Rose, M.D.

/s/ Victor W. Schmitt                    Director                                    March 29, 1999
--------------------------------
    Victor W. Schmitt

/s/ Michael Weiner, M.D.                 Director                                    March 29, 1999
--------------------------------
    Michael Weiner, M.D.
</TABLE>