<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

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

                  For the Fiscal Year Ended December 31, 1998

                         Commission file number 0-27750
                                        

                         [LOGO OF IMPATH APPEARS HERE]


                                  IMPATH INC.
             (Exact name of registrant as specified in its charter)

                                        
           Delaware                                              13-3459685
           --------                                              ----------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                             Identification No.) 
 



         521 West 57th Street                                         
          New York, New York                                      10019    
          ------------------                                      -----
(Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code (212) 698-0300

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

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

                         Common Stock, $.005 par value
                        ------------------------------
                                Title of class

  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 as 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. [_]

  State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days.

    Aggregate market value as of February 26, 1999.....     $220,375,034
                                                                                
  Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.

    Common Stock, $.005 par value, as of February 26, 1999.....    8,749,381
                                                                                
                      DOCUMENTS INCORPORATED BY REFERENCE

  List hereunder the documents, all or portions of which are incorporated by
reference herein and the Part of the Form 10-K into which the document is
incorporated:
 
  1999 Proxy Statement-Part III
<PAGE>
 
                                    PART I

Item 1. Business.

Overview

  IMPATH Inc. ("IMPATH" or the Company") is a leader in providing critical
information essential for making medically optimal and cost-effective cancer
management decisions for individual cancer patients. The Company is focused
exclusively on the analysis of cancer, combining advanced technologies and
medical expertise to provide patient-specific diagnostic, prognostic and
treatment information to physicians involved in the treatment of cancer.

  IMPATH believes that it currently performs more specialized analyses for
difficult to diagnose cancer cases than any other institution in the world. The
Company also believes that it is the leader in providing comprehensive patient-
specific prognostic information for cancer. For example, IMPATH provided
patient-specific prognostic information on approximately 28% of all breast
cancer cases in the U.S. in 1998. The Company's fastest growing business is the
analysis of lymphomas and leukemias, with IMPATH analyzing 21,082 of such cases
in 1998, representing an increase of 76% over 1997. Lymphoma/leukemia analysis
represents an area in which IMPATH's expertise and utilization of sophisticated
technologies are integrated to provide information for optimal disease
management.

  The Company believes that its integration of patient-specific information will
be essential to a growing list of cancer diagnoses, most notably prostate,
colon, lung and bladder cancer. Furthermore, as an increased understanding of
the molecular basis of cancer leads to the development of new evaluation methods
and therapeutic tools, IMPATH expects that the information it provides will
become increasingly significant in optimizing the management of all phases of
cancer, including cancer predisposition, diagnosis, prognosis, treatment
determination and patient follow-up.

  The Company believes that there are significant opportunities for increased
penetration of the cancer information market. IMPATH's goal is to be the
comprehensive information resource to the cancer care community. IMPATH has a
growing cancer database consisting of information on over 425,000 cases (the
largest database of diagnostic and prognostic cancer information in the world);
more than 129,000 of these cases were added in 1998 alone. The Company believes
that this database, along with IMPATH's strategy of linking patient-specific
information with clinical outcomes, will provide a powerful platform for
establishing optimal treatment pathways for patients with cancer.

  The Company's revenues were $56.3 million in 1998, representing revenue growth
of 52% over 1997. In fact, the 1998 fiscal year was IMPATH's ninth consecutive
year of annual revenue growth in excess of 40%. Moreover, the fourth quarter of
1998 represented IMPATH's twentieth consecutive quarter of record revenues and
case volume. Income from operations and net income for 1998 were $8.5 million
and $6.9 million, respectively, an increase of 47% and 92% over 1997.

  Certain terms relating to the Company's business which are used in this Annual
Report on Form 10-K are explained in the Glossary included at the end of this
Item 1.

  This Annual Report on Form 10-K contains forward-looking statements about
IMPATH's plans for expansion. IMPATH's ability to achieve its plans for
expansion is dependent on a variety of factors, many of which are outside of
management's control. Some of the most significant factors, alone or in
combination, would be the failure to manage the Company's growth successfully,
the failure to integrate the businesses acquired by IMPATH successfully, an
unanticipated slowdown in the health care industry (as a result of cost-
containment measures, changes in governmental regulation or other factors), an
unanticipated failure in the commercialization of IMPATH's cancer information
database or an unanticipated loss of business. Accordingly, there can be no
assurances that IMPATH will achieve its goals for expansion.


                                    Page 1
<PAGE>
 
Cancer Information Market

  The market for cancer diagnosis, prognosis and treatment is significant and
growing. After heart disease, cancer is the leading cause of death in the United
States. Approximately eight million Americans alive today have been diagnosed
with cancer (excluding certain skin cancers). According to the American Cancer
Society, the estimated number of cancer cases diagnosed annually in the United
States (excluding certain skin cancers) grew from approximately 530,000 in 1963
to approximately 1.2 million in 1998, an increase of 126%. The growth in the
number of cancer cases in the United States is expected to accelerate as the
leading edge of the "baby boom" population approaches 55 years of age, the age
at which the incidence of cancer begins to rise sharply. Earlier diagnosis and
better information have led to more effective treatment and have increased the
five-year survival rate of cancer patients from 39% in 1963 to approximately 58%
in 1998.

  The National Cancer Institute estimates that the direct medical costs
associated with cancer will be approximately $37 billion in 1999. The Company
believes that these costs will increase rapidly as a result of the growth in the
number of cancer patients and the high cost of new therapies. Thus, the Company
anticipates that the demand for information regarding cancer and cancer
management will continue to increase.

  The diagnosis, prognosis, treatment determination and follow-up of cancer are
extremely complex processes which require a multidisciplinary approach. Among
the key specialties involved in cancer management are pathology (for diagnosis),
surgery (for diagnosis and treatment), oncology (for treatment and follow-up),
radiology (for diagnosis and follow-up) and radiation oncology (for treatment),
as well as a number of other specialties for which cancer is important, such as
urology and gynecology.

  IMPATH's potential market includes all physicians involved in the diagnosis
and treatment of cancer in the United States. This includes approximately 16,000
pathologists and more than 7,000 oncologists (excluding radiation oncologists),
as well as other specialists who treat cancer, such as surgeons and
gynecologists and transplant centers. Historically, pathologists have been the
focus of the Company's marketing efforts because they are responsible for
providing the information from which most cancer management decisions flow.

  IMPATH's primary customers are the pathology departments of small- to medium-
sized community hospitals (100 to 500 beds), where most cancer is diagnosed.
Based upon statistics compiled by the American Hospital Association, IMPATH
believes that there are approximately 2,550 hospitals which are potential users
of IMPATH's services. These hospitals generally do not perform their own
sophisticated cancer analyses because the low case volume per hospital does not
justify establishing and maintaining the required technological capabilities,
facilities and expert medical staff.

  Furthermore, health care providers increasingly are being organized into
managed care networks which emphasize cost containment. IMPATH believes that
these networks increasingly will outsource sophisticated cancer analysis in
order to optimize patient care and control costs. The care of the cancer patient
increasingly is being performed in outpatient settings, representing a shift
from traditional, hospital-based care. Certain evaluations, surgical procedures
and systemic treatments (e.g., chemotherapy) are now being performed at
outpatient facilities, and most patient follow-up is being performed in
outpatient settings rather than hospitals. These outpatient facilities generally
do not have the expertise and resources to provide the information necessary for
optimal cancer management.

  In order to make optimal cancer management decisions, providers and payors
require information about the specific characteristics of a patient's cancer
(e.g., how aggressive it is and how it can best be treated). In the past,
patients have been treated based upon information gathered on entire classes of
disease rather than on the individual's cancer. With the development of new
targeted cancer therapies, patient-specific information has become critical to
cancer treatment decisions.


                                    Page 2
<PAGE>
 
Competitive Advantages of IMPATH

  IMPATH pioneered the marketing of patient-specific diagnostic and prognostic
information to medical professionals involved in cancer management. The Company
believes that it now performs more analyses of difficult to diagnose cancer
cases than any other institution in the world and that it is the leader in
providing comprehensive patient-specific prognostic information for cancer.
IMPATH has established its leadership and reputation in the cancer information
market through its extensive expertise, its integration of technological
advances, its emphasis on customer service and education and the cost-
effectiveness of its services. IMPATH believes that these factors, which cannot
be duplicated without substantial investments of time and capital, provide it
with significant advantages over existing and potential competitors. In
addition, as the value of the information provided by IMPATH becomes more widely
recognized among the participants in the cancer management market, IMPATH
expects its role in all phases of this market to become even more important.

  Expertise.   IMPATH specializes in cancer tests that require a level of
medical knowledge and technical expertise not found in the average community
hospital and not readily accessible in academic medical centers. IMPATH believes
that its medical staff has more experience in providing comprehensive tissue-
based diagnostic and prognostic analyses of cancer than virtually any other
group of practitioners. IMPATH currently receives an average of 500 cases per
day. The experience derived from such a volume of cases leads to superior
professional and technical expertise. This expertise is reflected in IMPATH's
database of more than 425,000 cancer cases analyzed to date, with more than
129,000 cases added during 1998 alone. The Company is linking these data to
outcomes and cost information in order to demonstrate the value of IMPATH's
services to payors and to provide new cancer information services to providers,
payors, biopharmaceutical and large pharmaceutical companies and clinical
research organizations. See "--Company Strategy."

  Comprehensive Technology Integration.   IMPATH provides a comprehensive range
of cancer analyses using sophisticated technologies, including
immunohistochemistry, image analysis and flow cytometry, cytogenetics, molecular
pathology and serum analysis. These analyses are integrated through in-house
technical and medical expertise to provide a single source for optimal patient-
specific diagnostic, prognostic and treatment information, which is not
available from clinical laboratories, hospitals or academic centers. In the past
decade, many new evaluation methods and treatment regimens have been developed
as a result of the increased understanding of the cellular and molecular biology
of cancer. As new therapies targeting cancers with specific biological
characteristics emerge, IMPATH believes that the demand for cancer information
services that identify such characteristics will increase substantially. IMPATH
intends to continue to integrate technological advances rapidly and effectively
to meet this demand. See "--Technologies."

  Customer Service and Education.   IMPATH's medical staff and customer service
representatives emphasize quality of service, accuracy of results and speed of
turnaround. The medical staff provides frequent expert consultation and
generally returns results within 48 hours of receipt of a specimen. By contrast,
academic medical centers often require approximately 14 days to return results
and typically provide little consultation. In addition, IMPATH's sales force
focuses on educating clients as to the benefits of the Company's services in
managing cancer. In contrast, the sales forces of most clinical laboratory
companies market hundreds of disparate, cancer and non-cancer test services, and
IMPATH believes that sales personnel at these companies have limited familiarity
with the individual cancer tests offered. Many academic institutions, which
perform some of the same analyses as the Company, typically do not have
substantial marketing or customer service resources, and the pathology
laboratories at large regional hospitals are generally dedicated to servicing
only their affiliated physicians. The success of IMPATH's focus on customer
service and education is demonstrated not only by the Company's rapidly growing
case volume, but by the fact that IMPATH's case volume from its long-term
customers continues to grow. See "--Sales and Marketing."

  Cost-Effectiveness.   IMPATH provides physicians with diagnostic and
prognostic information necessary to determine the medically optimal therapy for
each patient's specific cancer. As a result, incorrect or unnecessary treatments
can often be avoided, along with the associated trauma, risk and cost, and
appropriate therapies can be implemented on a timely basis. In addition, because
of its high case volume, IMPATH benefits from significant economies of scale
which enable the Company to provide hospitals with a valuable, cost-effective
and expeditious 


                                    Page 3
<PAGE>
 
alternative to establishing and maintaining in-house pathology laboratories.
IMPATH also believes that it provides managed care networks and other payors
with a source of sophisticated cancer analyses which optimize patient care while
controlling costs.


Company Strategy

  IMPATH's objective is to be the leading cancer information company and the
comprehensive resource for integrating all aspects of the management of cancer
information. The Company is pursuing the following strategies to achieve its
objective:

  Increase market penetration of diagnostic and prognostic services.   IMPATH
believes that it has a significant opportunity to continue to increase its
revenues and case volume from existing clients as well as through new
relationships with hospitals, physicians and payors. The Company intends to
continue to grow its core business by increasing the number of cases received
from existing clients, continuing to incorporate new technologies and expanding
the services it offers to the oncology outpatient market. Case volume for 1995
was 43,287; in 1998 that figure increased to 129,081, representing an average
annual growth rate of 44.5%. In part as a result of the more complex analyses
per case required to assess tumor activity, the Company's average revenue
realization per case has increased as well. The average revenue realization per
case (excluding cytogenetic and serum analyses) has increased from approximately
$340 in 1995 to approximately $449 in 1998, representing an average annual
increase of 9.8%.

  Managed care networks represent an important business opportunity for the
Company because, in many cases, unnecessary treatment can be avoided and
significant cost savings can be achieved through the relatively inexpensive
services provided by the Company. An IMPATH case analysis typically costs
between $300 and $1,200 and contains information which can be critical for
physicians to avoid ineffective courses of therapy costing many thousands of
dollars. The Company intends to expand its presence in managed care by
aggressively marketing the cost-effectiveness and clinical benefits of its
services and assisting managed care companies in developing cancer treatment
protocols.

  In order to implement this strategy, the Company intends to continue to
identify and incorporate new technologies and scientific developments and to
recruit and train medical, scientific, customer service and sales personnel to
meet the demands of its expanding business.

  Pursue strategic acquisitions and alliances.   The Company has successfully
completed the acquisition and integration of several complementary regional
businesses which have added to the breadth and depth of its technological
expertise and services, and believes that there are other similar acquisition
candidates, including companies with significant national and international
presences. The Company intends to continue to pursue selective acquisitions of
companies that will enhance its cancer management information database. These
acquisitions also may include companies involved in health care information
services and companies that have expertise in the evaluation of medical data and
cost analysis.

  Expand and enhance database.   IMPATH believes that it has one of the most
significant knowledge bases related to the diagnosis, prognosis and treatment of
cancer. With more than 425,000 analyzed cases to date, IMPATH is rapidly
incorporating the diagnostic and prognostic information generated from the
analysis of these cases into its cancer information database.  Through the
acquisition of Medical Registry Services' tumor registry products, the Company
better understands the natural history of cancer as evidenced by more than 1.5
million patients dating back to 1989.  IMPATH has provided the diagnostic or
prognostic information on more than 55,000 of these patients.  The Company's
unique ability to link patient-specific tumor characteristics with outcomes
allows us to convert critical cancer data into knowledge.  IMPATH expects to
continue to link data obtained from diagnostic and prognostic analyses with
therapy choices and patient outcomes. The cancer database represents a
comprehensive resource for the management and treatment of certain cancers. In
addition, as the Company integrates cost information related to patient care
into its database, the Company believes that the database will become
increasingly valuable to the managed care industry. The Company intends to
continue to expand and 


                                    Page 4
<PAGE>
 
enhance its database through internal analysis and through strategic
partnerships and joint ventures with oncology networks, hospital groups, managed
care companies and biopharmaceutical and large pharmaceutical companies.

  Provide information to the biopharmaceutical industry.   IMPATH believes that
its resources will be valuable to the biopharmaceutical industry for evaluating
existing and emerging diagnostic and prognostic indicators for targeted cancer
therapies. The data would also permit a comparison of development-stage
therapeutics with existing therapies, from an effectiveness and cost
perspective. IMPATH's cancer database should also be a valuable resource for
pre-clinical drug development, where potential drug therapies are screened and
evaluated for specificity and potential market size.

  Target international expansion.   IMPATH believes that foreign markets
represent a significant opportunity for the Company to expand its cancer
information business. A principal focus of the Company's international strategy
will be selective acquisitions of established businesses providing services
similar to those provided by the Company. IMPATH also intends to pursue this
opportunity by partnering with international physician oncology networks and
hospital groups, and involvement in drug development efforts of international
pharmaceutical companies. These efforts initially will focus primarily on select
markets in Europe and South America and, once these relationships are
established, would expand into Southeast Asia, Japan, Canada and Australia.
These regions represent areas where sophisticated treatment technologies are
currently in use and which the Company believes would benefit from IMPATH's
services.


IMPATH's Role in the Cancer Management Pathway

  The management of cancer involves a series of distinct steps which must be
integrated in order to define a therapeutic strategy. At each step, information
critical to the decision-making process must be obtained in order to make the
optimal decision. Traditionally, the type of information applied to the
decision-making process has been limited, and related not to an individual's
cancer, but rather to an entire class of disease. IMPATH's core business is
providing, through the use of integrated advanced technology, information unique
to a particular patient with cancer.

  IMPATH concentrates on the use of advanced technologies to address many of the
shortcomings of traditional methods of cancer assessment. The Company believes
that its services will be critical to the efficient coordination and optimal
implementation of all phases of the cancer management pathway.

  Predisposition.   In the large majority of cancers, genetic defects occur in
the course of an individual's life that may lead to the development of cancer.
However, in some cases an individual has an inherited predisposition for
developing certain types of cancer. It is possible that the genes responsible
for this inheritance pattern may be identified prior to the overt manifestation
of that cancer. In fact, it is believed that as many as 5% of certain types of
cancers are based at least in part on an inherited predisposition. IMPATH
currently possesses the technological expertise to detect genetic defects
associated with predisposition to certain cancers. While very few predisposition
genes have been identified to date (for example, genes responsible for the
inherited forms of breast cancer, ovarian cancer, colon cancer and
retinoblastoma), this is a very active area of research. As these genes are
identified, IMPATH will be in the position to screen for these types of
inheritable cancers.

  Diagnosis.   IMPATH's core diagnostic analyses provide information regarding
tumors that are difficult to diagnose using conventional pathology procedures.
Although most tumors can be diagnosed based on visual examination by the
pathologist, as many as 15-20% (more than 180,000 per year in the U.S. alone) of
all cancers defy specific classification by this method. This may result in
treatment decisions that are approximated, incorrect or ineffective leading to
unnecessary treatment, complications and increased cost. Traditionally, the
therapeutic approach to a patient with cancer has been based on a purely
morphological assessment of the origin of the cancer and the extent of spread,
i.e., the tumor's appearance under the microscope (for example, does it look
like colon cancer?) and the tumor's presence in various metastatic sites (such
as regional lymph nodes and bone marrow). While this type of morphological
assessment is well accepted, it has serious and critical limitations.
Specifically, morphological assessment is able to provide very little
information about the biological aggressiveness of an individual's cancer and
can provide virtually no meaningful information regarding the treatment to which
the 


                                    Page 5
<PAGE>
 
patient's specific cancer will respond. IMPATH has shown that in a majority of
cases which defy standard classification, the use of advanced technologies and
the medical expertise provided by IMPATH lead to an accurate diagnosis, thus
ensuring optimization of therapy, greater predictability of outcome, increased
survival and decreased overall costs.

  Prognostic Assessment.   IMPATH's prognostic tests provide information to
pathologists and oncologists regarding the aggressiveness of a tumor. The
increase in knowledge of tumor biology and the development of new technologies
have made it increasingly important to determine the aggressiveness of an
individual cancer in order to treat that cancer more rationally. One breast
cancer may have a low biological aggressiveness, and may therefore have a very
low propensity to recur, while another breast cancer (which appears identical
under the microscope) may be very aggressive. These tumors should be treated
very differently, but may not be if these differences are not identified. For
example, post-surgical systemic treatment, such as chemotherapy, for a cancer
that has a very low rate of recurrence produces limited beneficial effects, and
may only expose the patient to the morbidity and expense of such treatment. On
the other hand, an aggressive cancer should be treated aggressively at the
earliest possible time in order to achieve maximal therapeutic benefit. IMPATH's
prognostic expertise differentiates such difficult cases, providing the
oncologist with the critical information necessary to treat patients effectively
and to reduce morbidity and costs.

  Treatment Determination.   Traditionally, therapeutic approaches to cancer
have been based solely on the diagnosis and stage (or extent) of disease. For
example, a patient with breast cancer is treated with a particular combination
of chemotherapeutic drugs not because it is known that the cancer in question is
likely to respond, but rather because a certain proportion of other breast
cancers have responded in the past to similar treatment. In an increasing number
of cancer cases, IMPATH provides information that can help to predict the
specific types of therapy to which a particular tumor will, or will not,
respond. For example, in the case of breast cancer, IMPATH provides critical
information for the determination of likely patient responses to specific
therapies (e.g., hormonal treatment and chemotherapy) before such therapies are
administered. This type of information is becoming increasingly available for
other types of tumors as well. Thus, therapies that are most likely to be
beneficial can be instituted at the earliest possible time, when the impact will
be the greatest. In addition, therapies which will have little effect can be
avoided, thus decreasing morbidity and expense and accelerating the
implementation of appropriate treatment. The Company believes that this type of
patient-specific information will become essential for optimal cancer
management.

  Treatment Follow-up.   Once a cancer has been diagnosed, assessed and treated,
the patient must often undergo many years of follow-up care involving multiple
patient contacts and repeat analyses. This care not only provides for the
treatment of therapeutic complications (often resulting from inappropriate
therapy due to inaccurate diagnosis and insufficient assessment) but is designed
to determine, at the earliest possible time, if a patient has suffered a
recurrence. IMPATH has the expertise to provide highly sensitive patient
monitoring in an increasing number of cancers. For example, the Company is able
to establish whether or not certain types of lymphomas have recurred prior to
their detection by any standard method, even sensitive microscopic analysis. The
identification of tumor recurrence at the earliest possible time increases the
likelihood of a beneficial therapeutic response.

Technologies

  Recent advances in immunology, biochemistry and molecular biology have created
new tools with tremendous potential in the management of cancer patients. IMPATH
specializes in cancer tests that require a sophisticated level of medical
knowledge and technical expertise that is beyond the capability of pathology
laboratories in the average community hospital. In fact, the expertise required
to develop and maintain a high quality immuno- and molecular pathology
laboratory is found in a relatively small number of top level academic
institutions. Furthermore, even the most sophisticated medical centers perform
only a small fraction of the tests that IMPATH performs every day. This is
extremely important, as increased experience generally leads to superior
professional and technical expertise. The average community hospital pathologist
does not see a substantial volume or range of cases and, therefore, very rarely
has the experience to choose the correct testing methodology and to evaluate the
data, or the technical support to achieve high quality results. Even when these
technologies exist at academic medical centers, they typically exist in
different departments (e.g., pathology, genetics and molecular biology). The
Company believes that there is 


                                    Page 6
<PAGE>
 
usually no integration of information by these different departments, making it
more difficult for the referring physician to diagnose and provide optimal
treatment for a patient's specific cancer.

  IMPATH addresses these issues by virtue of its extensive experience in
applying and performing analyses and by the background and expertise of its
medical staff. IMPATH currently receives an average of 500 cases a day. Because
of IMPATH's significant case volume, its professionals have been able to expand
their considerable experience, and have been able to develop individual areas of
expertise. IMPATH's consultants and in-house staff include internationally known
experts in immuno- and molecular pathology and highly experienced technologists.

  IMPATH continues to identify and incorporate sophisticated technologies and
analyses, consistent with the Company's goal of remaining at the forefront of
scientific advances in cancer analysis. IMPATH integrates these technologies in
order to provide comprehensive cancer information critical for optimal cancer
management. Importantly, these techniques also allow for the identification of
patients who will not benefit from certain types of therapy, thus avoiding the
cost, pain and side effects of unnecessary treatment.

 
The following chart summarizes the Company's use of technologies in its analyses
of cancer:

<TABLE>
<CAPTION>
                                                                 Flow
                                                              Cytometry
             Category of Analysis                                and
                     and                        Immunohisto-    Image     Molecular                 Serum
                Type of Cancer                   chemistry     Analysis   Pathology  Cytogenetics  Analysis
                --------------                   ---------     --------   ---------  ------------  --------
<S>                                             <C>          <C>         <C>        <C>           <C> 
Predisposition.................................                               X
Diagnosis:
  Difficult to Diagnose Cancers................      X
  Lymphoma/Leukemia............................      X            X           X           X
Prognosis/Treatment Determination:
  Breast.......................................      X            X                                   X
  Lymphoma/Leukemia............................      X            X           X           X
  Prostate.....................................      X            X                                   X
  Other (e.g., Colon, Bladder, Ovarian)........      X            X                                   X
Follow-up:
  Breast.......................................                               X                       X
  Lymphoma/Leukemia............................                               X           X
  Prostate.....................................                               X                       X
  Other (e.g., Colon, Bladder, Ovarian)........                               X                       X
</TABLE>
                                        



 Immunohistochemistry

  Immunohistochemistry (IHC) is a technique wherein a monoclonal antibody is
used to identify disease-specific cellular antigens. A primary antibody to an
antigen of interest is incubated with test tissue sections followed by a
secondary antibody complex. If the antigen is present in tissue, the primary
antibody binds and the antigen-antibody reaction can be visually detected by a
color product. Because cell antigens are not absolutely tissue- or tumor-
specific, the immunopathologist must use panels of antibodies to construct a
"fingerprint" for identification. Immunohistochemistry is superior to standard
biochemical assays because it provides faster results, can be used on smaller
tissue samples, has less stringent requirements for specimen storage, and, most
importantly, predicts outcomes more accurately.


                                    Page 7
<PAGE>
 
 Flow Cytometry and Image Analysis

  Various components of tumor cells can be quantified by flow cytometry and/or
image analysis. In flow cytometry, a cell sample is stained with appropriate
fluorochromes and passed through a flow chamber designed to align the stream of
cells so that they are individually struck by a focused laser beam. The
scattered light and fluorescent emissions are separated according to wavelength
by appropriate filters and mirrors and directed to detectors which convert the
emissions into electronic signals that are analyzed and stored for future
display by a computer. The data are displayed on a graph of frequency (number of
cells versus fluorescent energy) for a single parameter analysis or as a
scattergraph for a multi-parameter evaluation. The fluorochromes used to stain
cells in flow cytometry include compounds that bind to DNA and/or RNA, but
fluoresce at different wavelengths for each, or that can attach to antibodies
against cell surface antibodies. In image analysis, a pathologist selects the
area of the specimen to be examined, and a computerized instrument using a
microscope and camera then measures various components of tumor cells based on
staining intensity.


 Molecular Pathology

  The next generation of commercial diagnostic and prognostic testing is
generally expected to be based on molecular biology, since a disease or
condition may be associated with the presence of an abnormality in DNA or RNA. A
specimen may be tested for a particular disease or condition by finding and
marking this abnormality. Currently, the use of molecular pathology is confined
predominantly to academic centers. However, IMPATH already performs a wide range
of molecular pathology analyses, including in situ hybridization (ISH). Similar
to IHC except that a DNA probe is used rather than a monoclonal antibody, in
situ hybridization employs recombinant DNA technology with labeled probes to
locate and identify nucleic acid sequences within cells. IMPATH also uses a DNA-
based technology called Southern blotting that detects genetic rearrangements
that confirm abnormalities known to be present in certain tumors. More recently,
fluorescence has been used to label probes, replacing the historical use of
radioactive isotopes, in a technique called fluorescence in situ hybridization
(FISH). Another promising molecular pathology technique already in use at IMPATH
is the amplification of specific DNA sequences by thermal cycling and subsequent
electrophoresis, the most sensitive method of detecting alteration in DNA.


 Cytogenetics

  Cytogenetic analysis evaluates the genetic changes that occur at the
chromosome level. Humans have 23 pairs of chromosomes, or 46 individual
chromosomes in every cell. Cytogenetic methods provide for the identification of
each individual chromosome using DNA-specific staining techniques to produce the
unique band pattern that is characteristic of each chromosome, providing for the
identification of chromosomal abnormalities like balanced translocations,
deletions and gene amplifications that are consistently associated with certain
cancers. The analysis involves the utilization of fresh cells obtained from
blood, bone marrow or tissue specimens which have been cultured to enhance cell
growth and division. The cells are then harvested and prepared in such a manner
that the chromosomes and the distinct patterns of each can be seen through a
microscope. The identification of chromosome changes has become extremely useful
in the diagnosis and prognostic assessment of lymphomas, leukemias, soft tissue
cancers (sarcomas) and pediatric cancers. The scope of this technology is
expected to expand to carcinomas (such as colon, lung and prostate cancer) in
the near future.


 Serum Analysis

  Blood serum markers are proteins circulating in the blood which are produced
in excess by malignant tumors. These serum proteins serve as an indicator of
tumor regression (decreased presence of markers) or tumor progression (increased
presence of markers). Because these proteins are present in minute amounts, the
technology required for detection relied, until recently, on an immunochemical
procedure involving the use of radioactive isotopes. Now, however, a new
generation of non-radioactive techniques is available to detect blood serum
markers employing, among other methods, chemiluminescence--a novel system based
on emitted light as an indicator of 


                                    Page 8
<PAGE>
 
activity. IMPATH uses its serum technology to assist oncologists in patient
follow-up. For example, by monitoring levels of certain known markers, the
Company can help to confirm remission or the recurrence of ovarian and prostate
cancers.


Cancer Management Through Information

  Optimal management of cancer means the best outcome at the lowest possible
cost. At each step along a management pathway, the best choice is not
necessarily the lowest cost alternative, but one which leads to the best outcome
at the lowest overall cost. A patient with cancer has many treatment options, at
widely varying costs, ranging for example from no further intervention to
expensive experimental procedures such as bone marrow/stem cell transplants;
however, the choice of a more expensive option may lead to a better outcome with
fewer recurrences. This not only optimizes patient benefit (an obvious advantage
as health care will be increasingly evaluated on the basis of outcome) but can
actually lead to lower overall cost; the cost of treating recurrent disease is
generally far greater than initial post-surgical interventions. Thus, outcomes
and cost-effectiveness should be synergistic, and not mutually exclusive. The
key to cost-effectiveness is choosing the most appropriate management pathway
for the individual patient. This can only be done through the use of information
derived from a patient's tumor that defines its biological uniqueness, and
allows for identification of the most appropriate therapeutic options.

  Finally, cancer management is not static; approaches that represent current
best practices may well be added to or modified by new developments, a process
that has tremendous impetus in research institutions and biopharmaceutical
companies.

  With more than 425,000 analyzed cases to date, IMPATH is rapidly incorporating
the diagnostic and prognostic information generated from its analyses of cases
into its cancer database. The demographics of these cases are: 197,178 breast
cancer prognostics and treatment profiles; 124,406 complex cancer diagnoses;
61,558 lymphoma and leukemia classifications; and 41,974 analyses of other
cancers (e.g., prostate, bladder, uterine).

  In order to provide high quality and cost-effective cancer care, oncology
practices are consolidating into comprehensive coordinated cancer treatment
groups and managed care organizations are increasing their presence in the
oncology marketplace. IMPATH believes that it can provide these groups with
information that is critical in providing such care. IMPATH also believes that
the information it provides will become increasingly important to these groups
as the Company develops its outcomes-oriented database to provide information
for the optimal, cost-effective utilization of resources.

  IMPATH believes that the use of its services will have two fundamental impacts
on cancer management: (1) optimization of patient-specific care, and (2) the
cost-effective delivery of that care. As a result, IMPATH expects to become an
increasingly significant factor in helping to establish quality standards for
these cancer management groups. IMPATH believes that it is well positioned to
become a vital component in the integrated management of cancer.


                                    Page 9
<PAGE>
 
Applications of IMPATH's Cancer Information Services

  Presented below are examples of how the information provided by IMPATH can be
critical to optimal cancer management.


 Breast Cancer Management--Risk Assessment and Evaluation of Therapeutic Options

  Breast cancer is the most common cancer in women in the United States.
Annually, more than 175,000 cases are diagnosed and over 44,000 women die of
this disease. While the incidence of breast cancer has been increasing, the
number of deaths resulting from this disease has been slowly but steadily
decreasing. It is now widely recognized that earlier detection (by mammography
and self examination) has played a significant role in decreased mortality.
However, a significant advancement in the management of breast cancer has been
the development of technologies that provide patient-specific information that
allows oncologists to optimize treatment for each individual woman's cancer.

  Traditional analysis of breast cancer only assesses a patient based on what a
tumor has already done, i.e., its current size and whether it has metastasized
to regional lymph nodes. This approach does not provide information specific to
the individual patient, but can only assess how populations of patients will
fare. This approach to providing therapy in breast cancer has traditionally been
based on how breast cancer generally responds to a particular regimen, and not
the potential of a particular tumor to respond to such therapy.

  IMPATH's approach to breast cancer analysis is based on providing the most
patient-specific information possible through the use of sophisticated
technology. IMPATH provides information in two fundamental areas, from which
virtually all post-surgical management decisions can be based.

  Risk Assessment.   IMPATH provides information necessary to determine the
aggressiveness of a tumor, not based on an assessment of the current state of
the tumor, but rather on the specific cellular and molecular changes that take
place in that individual tumor. This information is critical for optimal cancer
management. For example, a patient with a tumor that has a very high likelihood
of producing overt metastases must be treated rapidly and aggressively. On the
other hand, a patient with a tumor that has very little chance of developing
metastasis is not likely to benefit from aggressive systemic treatment, and may
only suffer the complications and cost of such treatment.

  Assessment of Therapeutic Options.   IMPATH uses some of the most significant
advances in the understanding of cancer to assess more accurately the likelihood
of response (or lack of responsiveness) of a tumor to a particular type of
systemic therapy. This allows for better, more cost-effective cancer management,
as patients can now be treated with the type of therapy to which they are most
likely to respond, and can avoid treatments to which they are unlikely to
respond.

  Selected examples of how IMPATH assesses risk and therapeutic options are set
forth below:

  Hormone Receptors.   The presence of estrogen and progesterone receptors in
breast cancer identifies women who are more likely to respond to hormonal
manipulation of the tumor, a commonly used therapy. This important test is now
required by the American College of Surgeons. The hormonal receptor status, as
examined by IHC, has been shown to be better correlated with clinical outcome
than standard biochemical assays. Furthermore, smaller tumor specimens,
including fine needle aspirates (FNAs), which are obtained through a less
invasive, less painful and less costly procedure, can only be effectively
examined by IHC.

  Oncogene Analyses.   The Her-2/neu oncogene identifies tumors that are more
biologically aggressive and therefore require more intensive treatment. The Her-
2/neu oncogene may also identify breast cancers that are resistant to certain
types of chemotherapy.


                                    Page 10
<PAGE>
 
     Cell Proliferation/DNA Ploidy Analysis.   Proliferative rate and ploidy
have been well documented as important prognostic indicators in many cancers,
including breast cancer and colon cancer. The ploidy compares the DNA content of
a tumor cell with that of a normal cell. The proliferative rate measures the
percentage of cells that are actively dividing. High proliferative rates and
abnormal DNA content have been strongly correlated with faster progression and
earlier recurrences. Using image analysis and flow cytometry, the DNA of the
tumor can be examined by IMPATH using tissue specimens, FNAs and other cell
specimens. IHC can also be used visually to evaluate cell proliferation.

     Detection of Occult Bone Marrow and Lymph Node Micrometastases.   The
single most reliable indicator of outcomes in most cancers is whether or not a
tumor has spread (metastasized). However, in many cases the conventional
pathologic examination is unable to detect tumor spread, even in patients who
will eventually suffer tumor metastases. The basis for the development of cancer
metastases is the presence of the undetected spread of tumor. Technology
developed by IMPATH's founders allows for the detection of the microscopic
spread of cancer prior to detection by conventional methods, including sensitive
microscopic examination. The detection of lymph node and bone marrow
micrometastases identifies patients at greatest risk for developing overt
metastatic disease and may identify those who will most benefit from aggressive
adjuvant chemotherapy. Furthermore, identifying those patients who do not have
lymph node (or bone marrow) micrometastases may indicate those who will not
require such therapy, and who thus can be spared the pain, side effects and
substantial costs of chemotherapy. IMPATH believes that it is one of a limited
number of companies currently offering tests for the detection of
micrometastases, and that the detection of occult lymph node and bone marrow
micrometastases will be important in identifying the risk of developing overt
metastases for a wide variety of cancers, including breast, lung, colon and
prostate cancer. Furthermore, in patients undergoing high-dose chemotherapy
followed by stem cell transplants from one location to another within the
patient's body, a correct assessment of tumor cells in the patient's bone marrow
may be important to evaluate accurately the response to therapy and to avoid
reinfusing a patient with cancerous cells.

     Because of its unique approach to breast cancer, IMPATH believes that it is
the leader in providing the most comprehensive prognostic information essential
to the management of breast cancer. In 1998, the Company provided patient-
specific prognostic information on approximately 28% of all such cases in the
U.S, and in and over 35% of cases diagnosed in the New York metropolitan area,
California and Florida, the Company's largest markets. The Company's specialized
expertise in breast cancer has not only allowed it to play a significant role in
optimizing patient-specific breast cancer treatment nationwide but has also
allowed it to be well positioned to develop the most comprehensive outcomes-
focused database in breast cancer.


  Lymphoma/Leukemia Management--Integration of Technology in Overall Cancer
  Management

     The value of IMPATH's integrated approach to providing cancer information
is demonstrated in the clinical management of hematopoietic malignancies, such
as lymphomas and leukemias, particularly as scientific advances improve our
understanding of these diseases. The clinical management of hematopoietic
malignancies requires a comprehensive approach that includes analysis by
hematopathologists and the use of advanced diagnostic and prognostic technology.
Most community hospitals do not have hematopathologists or the technologies
required for such analyses. The Company employs four hematopathologists and uses
molecular and cellular technology to diagnose and classify these hematopoietic
malignancies. Using the information from an IMPATH analysis, a physician can
tailor therapy to optimize the outcome for a patient. These same technologies
are applied to evaluate a patient's response to therapy, and to evaluate the
progression or remission of the disease.

     Lymphoma.   The clinical significance of IMPATH's diagnostic technology is
illustrated by the fact that during 1998, of all the suspected lymphoma cases
sent to IMPATH for analysis, approximately 10-15% were found to be an infection
or inflammation rather than cancer. Prior to the development of certain
technologies used by IMPATH, such cases may have been misdiagnosed as cancer. In
the cases identified by IMPATH as not being cancer, patients who were suspected
of having a hematopoietic malignancy were spared the trauma, risk and cost
associated with unnecessary treatment. Of the cases sent to IMPATH in 1998 that
were in fact lymphomas, the technology applied by the Company permitted an
assignment of the "grade" of the lymphoma, a process recommended by the


                                    Page 11
<PAGE>
 
International Lymphoma Study Group (1994). The grading of lymphomas is an
important process that influences the treatment decisions of physicians and can
result in better outcomes for a lymphoma patient.

     Leukemia.   Similar to lymphomas, leukemias represent a type of cancer
where the classification and grading of the disease provides critical
information that influences the selection of therapy, predicts the response to
therapy and indicates the likely outcomes for the patient. The characteristics
that distinguish the various types of leukemias can be identified by the
technology employed by IMPATH. For example, in many cases, chromosome
abnormalities identified by this technology permit the unequivocal assignment of
the disease to a particular class of leukemia. As new biological characteristics
associated with leukemia classes continue to be identified, the Company believes
that it is well positioned to incorporate into its analyses additional tests to
detect these characteristics.


  Management of Other Cancers

     Diagnostic, prognostic and therapeutic information is being integrated
increasingly into the management of other cancers. As medical research
progresses and as increasing numbers of treatment options evolve, IMPATH
believes that its expertise will play an increasing role in the decision making
processes for all cancers.

     For example, prostate cancer, like breast cancer, is a disease that is
responsive to hormonal manipulation. As in the case of estrogen receptors in
breast cancer, the presence of androgen receptors in prostate cancer can now be
evaluated. IMPATH believes that this information will become increasingly
important in the treatment and management of prostate cancer. The growth rate of
the tumor is also critical; for instance, a 50-year old man with a rapidly
growing cancer must be treated differently than a 90-year old man with a very
slow-growing prostate cancer. IMPATH provides this information for prostate and
other cancers, including breast, colon and bladder cancers.

     The determination of patient-specific characteristics in optimizing therapy
is becoming essential as more outcomes-related biological determinants are
defined. Important examples of this are mutations in tumor suppressor genes and
oncogenes (such as Her-2/neu). The presence of these mutations in a patient with
specific types of tumors (e.g., bladder, breast or colon) identifies the
biological aggressiveness of that individual's tumor. Other characteristics help
to establish the responsiveness to therapy. For example, if a patient's cancer
has the multi-drug resistance (MDR) receptor, his/her tumor will be unresponsive
to many forms of drug therapy including, for example, taxol therapy for ovarian
and other cancers.

     Furthermore, the most significant problem in treating cancer is the
accurate, early assessment of disease dissemination, i.e., metastases. IMPATH
has a special expertise in identifying the presence of lymph node and bone
marrow micrometastases, often earlier than practitioners using conventional
methods. This analysis is now useful in the correct staging of prostate, colon
or lung cancers and increasingly in other types of cancers.

     Information that establishes the biological aggressiveness of an
individual's tumor and predicts response to therapy for that particular patient
is crucial to optimizing outcome for that patient. IMPATH believes that its
expertise in this area, as well as its access to increasing numbers of cancer
specimens, will allow it to continue to expand its comprehensive database for
predicting outcomes in various types of cancer. The Company believes that this
database will be increasingly important to the medically optimal and cost-
effective management of the cancer patient.


Sales and Marketing

     Sales Force.   As of December 31, 1998, the Company's sales force consisted
of 36 employees, including a Senior Vice President - Sales and Marketing, three
Directors, and 32 sales representatives. The IMPATH sales force consists of
highly trained individuals with extensive scientific backgrounds and successful
sales records with health care companies. The sales force focuses on educating
clients about the benefits of the Company's services in managing cancer. IMPATH
believes that the technical and clinical knowledge of its sales force
distinguishes it from other companies.


                                    Page 12
<PAGE>
 
     Marketing Support.   IMPATH supports its sales force with extensive
customer service and marketing programs. Due to the technical and scientific
complexity of IMPATH's business, the Company has established a strong
interactive relationship with its clients. This relationship serves to increase
the reliance of the client on IMPATH and is a significant tool for encouraging
business growth within the current customer base. The marketing process
emphasizes educating physicians regarding the development of new technologies
and the value of the information provided by IMPATH.

     Customer Service.   The Company emphasizes customer service, including the
provision of a comprehensive detailed report to the referring physician after
each analysis is completed. These reports serve to educate pathologists and
clinicians, many of whom may not be familiar with the analyses performed by
IMPATH, as well as to provide authoritative support for the accuracy and
validity of such analyses. In general, the Company returns its completed
analysis and report to the referring physician or clinician within 48 hours of
receipt of the tissue specimen, compared with approximately 14 days for academic
institutions. Further, the Company's medical staff provides frequent expert
consultation. The Company also employs several customer service representatives,
who are responsible for inquiries made by referring physicians and provide
support for the Company's sales staff. The success of IMPATH's focus on customer
service and education is demonstrated not only by the Company's rapidly growing
case volume, but by the fact that IMPATH's case volume from its long-term
customers continues to grow.


Competition

     The Company provides services in a segment of the health care industry that
is highly fragmented and extremely competitive. The Company's actual or
potential competitors include large university or teaching hospitals; large
clinical laboratories that have substantially greater financial, marketing and
logistical resources than the Company; special purpose clinical laboratories
that have limited test offerings and a highly focused product and marketing
strategy; and the Company's customers or potential customers who may choose to
perform services similar to those performed by the Company. It is anticipated
that competition will continue to increase due to such factors as the perceived
potential for commercial applications of biotechnology and the continued
availability of investment capital and government funding for cancer-related
research. There are several large clinical laboratory companies which market a
broad range of services nationally, and which have substantially greater
financial, selling, logistical and laboratory resources than the Company. In
addition, management has identified a number of specialized clinical
laboratories in the U.S. which have test offerings which are less comprehensive
than those of IMPATH and highly focused product and marketing strategies.


Reimbursement

     The Company typically bills third-party payors, such as private insurance
plans, managed care plans and Medicare, as well as hospitals, for its services.

     During 1996, 1997 and 1998, the Company received the following estimated
percentages of its total revenues for diagnostic and prognostic services from
the respective payors identified below:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                  -----------------------
          Payor                                                   1996       1997       1998
          -----                                                   ----       ----       ----
          <S>                                                     <C>        <C>        <C>
          Hospitals  ............................................ 37%        26%        21%
          Private Insurance/Managed Care  ....................... 35         44         50
          Medicare  ............................................. 25         25         25
          Individual Patients  .................................. 3          5          4
                                                                  -          -          -
          Total  ................................................ 100%       100%       100%
                                                                  ===        ====       ====
</TABLE>

     For a discussion of the changes in these percentages in 1998, see Item 7 of
this Annual Report on Form 10-K.


                                    Page 13
<PAGE>
 
  Medicare is a federal health insurance program that provides health insurance
coverage for certain disabled persons, for persons aged 65 and older and for
certain persons with end-stage renal disease. Medicaid is the state-administered
and state- and federally-funded program for certain low-income individuals. To
date, the Company has derived no revenues from the Medicaid program. As a
participating provider, the Company bills Medicare for covered services and
accepts Medicare reimbursement as payment in full for its services, subject to
applicable co-payments and deductibles.

  Prior to the passage of the Balanced Budget Act of 1997, Medicare
beneficiaries could (i) receive services on a fee-for-service basis pursuant to
which Medicare generally pays providers based on a national fee schedule subject
to the applicable copayment or (ii) elect to enroll with a managed care
organization which had entered into a direct contract with Medicare whereby the
organization is paid a predetermined amount for each covered Medicare
beneficiary without regard to the frequency, extent or nature of services
delivered.  The Balanced Budget Act of 1997 reforms Medicare in a number of
respects, including the phase out of existing Medicare risk contracts and the
creation of the Medicare+Choice program.  The Medicare+Choice program allows
Medicare beneficiaries, in addition to traditional fee-for-service Medicare, to
have access to a wide array of private health plan choices beyond the previously
existing managed care arrangements.  These additional plan options include
"Coordinated Care Plans" which an HMO with or without point of service option; a
Provider-Sponsored Organization plan; a Preferred Provider Organization plan;
and a demonstration Medical Savings Account project.  Given the infancy of the
Medicare+Choice program, the Company cannot predict what effect, if any, the
program will have on the Company's future Medicare revenues.

  Revenues from analyses performed for other patients are derived principally
from other third-party payors, including commercial insurers, Blue Cross/Blue
Shield plans, health maintenance and preferred provider organizations and from
hospitals (who in turn usually bill any third-party payors or patients). With
respect to third-party payors, management has elected, to date, not to accept
reimbursement rates set by such non-governmental third-party payors as payment
in full. With respect to hospitals, management negotiates the terms applicable
to each arrangement.

  The Company currently receives Medicare reimbursement through three Medicare
carriers. Reimbursement rates for some services of the type or similar to the
type performed by the Company have been established by Medicare and some other
third-party payors, but have not been established for all services or by all
carriers with respect to any particular service. Most carriers, including
Medicare, do not cover services they determine to be experimental or
investigational, or otherwise not reasonable and necessary for diagnosis or
treatment. However, a formal coverage determination is made with respect to
relatively few new procedures. When such determinations do occur for Medicare
purposes, they most commonly are made by the local Medicare carrier which
processes claims for reimbursement within the carrier's geographic jurisdiction.
Medicare may retroactively audit and review its payments to the Company, and may
determine that certain payments for services must be returned. With respect to
other third-party payors, a positive coverage determination, or reimbursement
without such determination, by one or more third-party payors does not assure
reimbursement by other third-party payors. Significant disapprovals of payment
for any of the Company's services by various carriers, reductions or delays in
the establishment of reimbursement rates, and carrier limitations on the
coverage of the Company's services or the use of the Company as a service
provider could have a material adverse effect on the Company's future revenues.

  Most services furnished by the Company are characterized for the purposes of
the Medicare program as physician pathology services. As of January 1, 1992, all
physician services, including pathology services, have been reimbursed by
Medicare based on a new methodology known as the resource-based relative value
scale ("RBRVS"), which was phased in over a four-year period. A Final Notice
updating the RBRVS payment methodology, published November 25, 1992, as well as
updates issued subsequently, have not had any significant effect on the
Company's reimbursement rates. Under the Balanced Budget Act of 1997, Congress
revised the RBRVS system to use a single conversion factor, rather than the
previous three, and to change the manner in which fees are updated. The Company
cannot predict what the potential impact of the change to the RBRVS system will
be on the Company's future Medicare reimbursement. A small portion of the
services furnished by the Company are characterized for purposes of the Medicare
program as clinical laboratory services and reimbursed by Medicare under its
clinical laboratory fee 

                                    Page 14
<PAGE>
 
schedule. The Balanced Budget Act of 1997 froze the clinical laboratory fee
schedule payments for the years 1998-2002. Such freeze is not expected to have a
material adverse effect on the Company's revenues.



Quality Assurance

  IMPATH engages in a number of quality control procedures, many of which the
Company believes exceed industry norms. For instance, the Company does not buy
untested commercially available reagent test kits. Instead, each of IMPATH's
reagents is selected from various suppliers based on an exhaustive in-house test
of purity, batch-to-batch variability, potency and performance. IMPATH believes
that its quality review procedures are superior to other centers performing
similar analyses. In addition, the quality assurance program of the Company's
facilities includes close attention to the Company's Standard Operating
Procedures, continuing education and technical training of technologists,
statistical quality control of all analytical processes, instrument maintenance,
and regular inspection by governmental agencies and the College of American
Pathologists (the "CAP"). The CAP is an independent non-governmental
organization of board-certified pathologists which offers an accreditation
program to which facilities can voluntarily subscribe. The CAP accreditation
program involves both periodic inspections of the Company's facilities and
participation in the CAP's proficiency testing program for all categories in
which its facilities seek to attain or maintain accreditation. The Company's
facilities are CAP accredited, certified by Medicare, licensed by New York
State, the City of New York and the States of California and Arizona and holds a
certificate of accreditation under the Clinical Laboratories Improvement Act of
1967 ("CLIA"). The Company believes it has obtained all licenses and permits
required to operate its facilities. IMPATH follows the quality control and
quality assurance procedures established by CLIA, the CAP and various New York
State, California, Arizona and New York City agencies.

  The Company's New York and California facilities are supervised by medical
directors whose qualifications meet all regulatory requirements. The Company's
Arizona facility is supervised by a laboratory director whose qualifications
meet all regulatory requirements governing the cytogenetics testing which is
performed at the facility. The primary role of the Company's medical directors
and laboratory director is to ensure the accuracy and quality of the Company's
analyses. As a further quality assurance procedure, the Company periodically
undergoes peer review with third-party facilities, including Norris Cancer
Center and Memorial Sloan-Kettering Cancer Center. In peer review, particularly
challenging diagnostic cases are referred by the Company to these cancer centers
for verification of antibody tests and IMPATH's diagnostic conclusions. The
results of these consultations are tabulated and discussed at monthly quality
assurance meetings at the Company's offices.

  The Company also participates in a number of proficiency testing programs
under which, in general, the testing body submits pre-tested samples to a
facility in order to measure the facility's results against the known
proficiency test value. The proficiency programs are conducted by groups such as
the CAP and state and federal government regulatory agencies.


Government Regulation

  As a provider of health care related services, the Company is currently
subject to extensive and frequently changing federal, state and local
regulations governing licensure, billing, financial relationships, referrals,
conduct of operations, purchases of existing businesses, cost containment,
direct employment of licensed professionals by business corporations and other
aspects of the Company's business relationships. The various types of regulatory
activity affect the Company's business either by controlling its growth,
restricting licensure of the business entity or by controlling the reimbursement
for services provided.

  Laboratory Licensure.   The Company's facilities are certified or licensed
under the federal Medicare program and CLIA, as amended by the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA '88"). Licensure is maintained
under the clinical laboratory licensure laws of New York, California and
Arizona, where the Company's facilities are located. The Company believes it has
obtained all material laboratory licenses required for its

                                    Page 15
<PAGE>
 
operations. In addition, the California facility is licensed by the federal
Nuclear Regulatory Commission and all three facilities are accredited by the
CAP.

  The federal and state certification and licensure programs establish standards
for the day-to-day operation of facilities, including, but not limited to,
personnel and quality control. Compliance with such standards is verified by
periodic inspections by inspectors employed by federal or state regulatory
agencies. The Health Care Financing Administration conducts an on-site survey
every two years. In addition, federal regulatory authorities require
participation in a proficiency testing program approved by the Department of
Health and Human Services ("HHS") for each of the specialties and
subspecialties for which a facility seeks approval from Medicare and
accreditation  under CLIA '88 requires participation in proficiency testing
programs which involve actual testing of specimens by the facility that have
been prepared by an entity running an approved program for testing.

  The Final Rule implementing CLIA '88, published by HHS on February 28, 1992,
became effective September 1, 1992. This Final Rule covers all laboratories in
the United States, including the Company's facilities. The Company has reviewed
the Final Rule (and subsequent revisions thereto), including, among other
things, the rule's requirements regarding facility administration, participation
in proficiency testing, patient test management (including patient preparation,
proper specimen collection, identification, preservation, transportation,
processing and result reporting), quality control, quality assurance and
personnel, for the types of analyses undertaken by the Company, and believes
that it complies with these requirements. However, no assurances can be given
that the Company's facilities will pass all future inspections conducted to
ensure compliance with CLIA '88 or with any other applicable licensure or
certification laws.

  Anti-Kickback/Self-Referral Regulations.   The Social Security Act imposes
criminal penalties and exclusions from federal health care programs (including
Medicare) upon persons who make or receive kickbacks, bribes or rebates in
connection with a federal health care program (including Medicare). The anti-
kickback rules prohibit providers and others from soliciting, offering,
receiving or paying, directly or indirectly, any remuneration in return for
either making a referral for a service or item covered by a federal health care
program (including Medicare) or ordering any such covered service or item. In
order to provide guidance with respect to the anti-kickback rules, the Office of
the Inspector General ("OIG") issued final regulations outlining certain "safe
harbor" practices, which although potentially capable of inducing prohibited
referrals, would not be prohibited if all applicable requirements are met. A
relationship which fails to satisfy a safe harbor is not necessarily illegal,
but could be scrutinized on a case-by-case basis. The OIG has issued final rules
regarding its recently mandated proposals for accepting and issuing advisory
opinions on the anti-kickback rules.

  Because the anti-kickback rules have been broadly interpreted, they could
limit the manner in which the Company conducts its business. The Company
believes that it currently complies with the anti-kickback rules in planning its
activities, and believes that its activities, even if not within a safe harbor,
do not violate the anti-kickback statute. However, no assurance can be given
regarding compliance in any particular factual situation. Exclusion of the
Company from the Medicare program could result in a significant loss of
reimbursement and have a significant adverse effect on the Company.

  Under another provision, known as the "Stark" law or "self-referral"
prohibition, physicians who have an investment or compensation relationship with
an entity furnishing clinical laboratory services (including pathology services)
may not, subject to certain exceptions, refer clinical laboratory analyses for
Medicare patients to that entity. Similarly, facilities may not bill Medicare or
any other party for services furnished pursuant to a prohibited referral.
Violation of these provisions may result in disallowance of Medicare claims for
the affected analysis services, as well as the imposition of civil monetary
penalties and program exclusion. Under the Stark law and the regulations
implementing the law, a physician may make payments to a clinical laboratory in
exchange for the facility's provision of clinical laboratory services and
continue to refer Medicare patients to that laboratory.

  A number of states, including New York and California, have enacted
prohibitions similar to the Stark law covering referrals of non-Medicare as well
as Medicare business. These rules are very restrictive, prohibit submission of
claims for payment for prohibited referrals and provide for the imposition of
civil monetary and criminal penalties. The Company has no prohibited
relationships with any of its referrers. However, the Company is 


                                    Page 16
<PAGE>
 
unable to predict how these laws may be applied in the future, or whether the
federal government or states in which the Company operates will enact more
restrictive legislation or restrictions that could under certain circumstances
impact the Company's operations.

  Any exclusion or suspension from participation in the Medicare program, any
loss of licensure or accreditation, or any inability to obtain any required
license or permit, whether arising from any action by HHS, any state or any
other regulatory authority, would have a material adverse effect on the
Company's business. Any significant civil monetary or criminal penalty resulting
from such proceedings could have a material adverse effect on the Company.

  Fee-Splitting; Corporate Practice of Medicine.   The laws of many states
prohibit physicians from sharing professional fees with non-physicians and
prohibit non-physician entities, such as the Company, from practicing medicine
(including pathology) and from employing physicians to practice medicine
(including pathology). The laws in most states regarding the corporate practice
of medicine have been subjected to limited judicial and regulatory
interpretation. The Company believes its current and planned activities do not
constitute fee-splitting or violate any prohibition against the corporate
practice of medicine. However, there can be no assurance that future
interpretations of such laws will not require structural or organizational
modifications of the Company's existing business. In addition, statutes in
certain states in which the Company does not currently operate could require the
Company to modify its structure.

  Food and Drug Administration.   The Food and Drug Administration ("FDA")
regulates certain monoclonal antibodies purchased by the Company but does not
currently regulate the analytical services which are the Company's principal
business. However, the FDA is currently reviewing issues concerning the use of
monoclonal antibodies for analytical services and the decisions the FDA
ultimately makes could impact the Company.

  Other.   Certain federal and state laws govern the handling and disposal of
medical specimens, infectious and hazardous wastes and radioactive materials.
Failure to comply could subject an entity covered by these laws to fines,
criminal penalties and/or other enforcement actions.

  Pursuant to the Occupational Safety and Health Act, facilities have a general
duty to provide a workplace to their employees that is safe from hazard. Over
the past few years, the Occupational Safety and Health Administration ("OSHA")
has issued rules relevant to certain hazards that are found in facilities such
as the Company's. Failure to comply with these regulations, other applicable
OSHA rules or with the general duty to provide a safe work place could subject
an employer, including a facility employer such as the Company, to substantial
fines and penalties.

  The confidentiality of patient medical records is subject to substantial
regulation by the state and federal governments. State and federal laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Legislation governing the dissemination and use of
medical record information is continually being proposed at both the state and
federal levels. Additional legislation may require that holders or users of
confidential patient medical information implement measures to maintain the
security of such information and may regulate the dissemination of even
anonymous patient information. Furthermore, physicians and other persons
providing patient information to the Company are also required to comply with
these laws and regulations. If a patient's privacy is violated, or if the
Company is found to have violated any state or federal statute or regulation
with regard to confidentiality, dissemination or use of patient medical
information, the Company could be liable for damages, or for fines or penalties.
The Company believes that it is in material compliance with all applicable state
and federal laws and regulations governing the confidentiality, dissemination
and use of medical record information. However, there can be no assurance that
differing interpretations of existing laws and regulations or the adoption of
new laws and regulations would not have a material adverse effect on the ability
of the Company to obtain or sue patient information which, in turn, could have a
material adverse effect on the Company's plans to develop and market its cancer
information database.

 
                                    Page 17
<PAGE>
 
Insurance

  The Company is presently covered by general liability insurance in the amount
of $6.0 million per occurrence and $7.0 million in the aggregate, professional
liability insurance in the amount of $6.0 million per occurrence and $8.0
million in the aggregate for the Company's Medical Directors and other
physicians, and Directors and Officers liability insurance in the amount of $3.0
million per occurrence and in the aggregate. The Company's liability insurance
covers claims relating to the handling and disposal of medical specimens and
infectious and hazardous waste, except in the event of malfeasance or fraud by
the Company. Management believes that these amounts and types of coverage are
adequate to protect the Company and its property against material loss.


Employees

  As of December 31, 1998, the Company had 429 full-time and 31 permanent part-
time employees, of which 108 were management, administrative and clerical
personnel, 45 were engaged primarily in marketing and sales activities and 307
were engaged in laboratory and related operations. None of the Company's
employees is covered by collective bargaining agreements. The Company believes
its employee relations are good.


                                    GLOSSARY

Adjuvant Chemotherapy: Therapeutic drugs used to inhibit and destroy cancer
  cells in addition to conventional treatment (e.g., surgery).

Antibody: A protein molecule produced by the immune system that specifically
  binds with an antigen.

Antigen: Any of a variety of materials that induce the body's immune system to
  produce antibodies.

Cancer: A generic term for any kind of malignant tumor.

Clinical: Pertaining to the sign, symptoms and course of a disease.

Diagnosis: The process for deciding what disease is present.

DNA: Deoxyribonucleic acid. The biochemical constituents of genes in
  chromosomes.

Electrophoresis: A method of analysis in which chemicals, usually proteins, are
  separated one from another by their respective electrical charges.

Fine Needle Aspirate or FNA: Specimen acquired through insertion of a thin
  needle into a lesion whereby cells are withdrawn using negative pressure.

Flow Cytometry: Method of analysis used to examine the staining of single cell
  suspensions by focusing a laser beam on each cell and measuring the emitted
  fluorescence.

Fluorochrome: Fluorescent light generated by excitation and emission of light of
  specific wavelengths using molecules with fluorescent properties.

Hematopathologist: A pathologist specializing in the study of hematolymphoid
  diseases, including hematopoietic malignancies.

Hematopoietic Malignancies: Cancer of the blood, lymph nodes, bone marrow and
  related structures.


                                    Page 18
<PAGE>
 
Her-2/neu: Oncoprotein (product of an oncogene); overexpression is a negative
  prognostic and predictive indicator in certain cancers (primarily breast
  cancer).

Hormone: A chemical substance produced by an organ which has a specific
  regulatory effect on the activity of organs.

Immunohistochemistry or IHC: Technique that uses antibodies to identify and mark
  antigens expressed by cells in tissues using specific enzymes (e.g.,
  peroxidase alkaline phosphatase).

In Situ Hybridization: Use of labeled fragments of DNA (probes) that can bind
  (hybridize) to specific, complementary sequences.

Lymph Nodes: Nodular structures scattered along the path of lymphatics. They
  produce and store white blood cells and filter harmful substances out of the
  system. They are often the first site of cancer metastases.

Lymphoma: Any neoplasm of lymphoid tissue origin.

Marker: A characteristic of any cell or cellular structure (e.g., a gene,
  chromosome or enzyme).

Metastases: The spread of cancerous cells from the primary site of the disease.

Micrometastases: Presence of a small number of tumor cells, particularly in the
  lymph nodes and bone marrow, not readily detected by microscopic examination.

Monoclonal Antibody: An antibody produced by a single clone of cells comprising
  a single species of antibody molecules. Reacts with only one antigen
  (epitope).

Mutation: An event which changes the structure of DNA in chromosomes; mutations
  can often be seen in cancer cells.

Neoplasm: The uncontrolled growth of cells resulting in a mass (tumor); often
  refers to cancer.

Nucleic Acid Sequences: A family of substances of large molecular weight, found
  in chromosomes, nucleoli, mitochondria and cytoplasm of all cells.

Occult Tumor: Clinically unidentified primary tumor with recognized metastases.

Oncogene: Abnormal genes derived from proto-oncogenes (normal counterparts); are
  associated with many cancers.

Oncology: The study of cancer.

Pathology: That branch of medicine which studies essential nature of disease,
  especially the structural and functional changes in tissues and organs of the
  body which cause or are caused by disease.

Ploidy: The number of chromosomal sets.

Prognostic: Referring to potential outcome of a disease.

Proliferation: Cell cycle kinetics, reproduction or multiplication of a cell.

Reagent: A substance used to detect, measure or react with another substance.

Receptor: A protein which specifically binds to another and mediates the
  biological activity of the other.


                                    Page 19
<PAGE>
 
Recombinant DNA: DNA resulting from the insertion into the chain, by chemical or
  biological means, of a sequence of DNA (in whole or partial) not originally in
  that chain.

RNA: Ribonucleic acid. A nucleic acid found in all living cells and one of the
  major chemical constituents of nucleoli and ribosomes; involved in the
  transmission of genetic information from DNA to proteins.

Sarcoma: A malignant neoplasm derived from connective tissues.

Scattergraph: A density graph of flow cytometry data where individual cells are
  displayed as positive or negative for two antigens. The graph is divided by x
  and y axes to define positive and negative. The density of dots, color warmth
  and intensity is proportional to the number of cells per unit area.

Serum: Fluid component of blood (noncellular).

Southern Blotting: A technique in which DNA is fragmented, electrophoresed and
  reacted with labelled fragments of DNA (probes).

Specimen: Material sent in for evaluation, either tissue or cell suspensions
  (i.e., body fluids).

Staining: To apply reagents to cells in order to impart color to specific
  components.

Stem Cell Transplant: Progenitor (precursor) cells used for the bone marrow
  rejuvenation.

Taxol: A chemotherapeutic agent (derived from the bark of the yew tree) having
  broad anti-tumor activity.

Thermal Cycling: Cyclical heating and cooling in the presence of target DNA and
  specific DNA primers.

Tumor: A swelling or enlargement; a growth or neoplasm, often referring to
  cancer.

Tumor Suppressor Gene: A gene involved in the normal growth regulation of cells.
  Abnormalities (mutations) of tumor suppressor genes are associated with the
  cause and progression of cancer based on abnormal cell growth.


                                    Page 20
<PAGE>
 
Item 2.   Properties.

  The Company's main facility and executive offices are located at 521 West 57th
Street, New York, New York, where the Company leases approximately 28,700 square
feet of space under a 12 1/2-year lease expiring in November 2010. The lease
provides for minimum aggregate annual rental payments of approximately $344,000.
The Company is also required to pay for repairs, property taxes and insurance
relating to this facility.

  The Company's California facility and offices are located at 5230 Pacific
Concourse Drive, Los Angeles, California, where the Company has entered into a
lease expiring November 2000 for approximately 22,750 square feet of space. This
facility commenced operations in December 1995. The lease provides for minimum
annual rental payments of approximately $381,000. The Company is also required
to pay for repairs, property taxes and insurance relating to this facility.

  The Company's Arizona facility and offices are located at 810 E. Hammond
Avenue, Phoenix, Arizona, where the Company leases approximately 11,200 square
feet of space under a lease which expires September 2006. The Company commenced
operations at this facility in January 1997, when it completed the acquisition
of certain assets of Oncogenetics, Inc. The lease provides for minimum annual
rental payments of approximately $70,000. The Company is also responsible for
all maintenance, property taxes and insurance relating to the facility.

  The facility and offices of the Company's BIS division are located at 19231
Victory Boulevard, Reseda, California, where the Company leases approximately
3,046 square feet of space under a month-to-month lease.  The lease provides for
minimum aggregate annual rental payments of approximately $38,640.  The Company
is also required to pay for repairs, property taxes and insurance relating to
this facility.

  The facility and offices of the Company's Medical Registry Services subsidiary
is located at One University Plaza, Hackensack, New Jersey, where the Company
has entered into a lease expiring July 2000 for approximately 3,792 square feet
of space.  The lease provides for minimum annual rental payments of
approximately $62,040.  The Company is also required to pay for repairs,
property taxes and insurance relating to this facility.

  The office of the Company's Physician Choice subsidiary is located at 3
Bethesda Metro, Bethesda, Maryland, where the Company leases two small offices
under a month to month lease.  The lease provides for minimum annual rental
payments of approximately $26,760.  The Company is also responsible for all
maintenance, property taxes and insurance relating to this space.

Item 3.   Legal Proceedings.

  From time to time, the Company is a party to various legal proceedings
incidental to its business. The Company believes that none of these legal
proceedings will have a material adverse effect on the Company's financial
position, results of operations or liquidity.

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

  Not applicable.


                                    Page 21
<PAGE>
 
                                    PART II

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

  The Company's Common Stock trades on the Nasdaq National Market under the
symbol "IMPH." The following table sets forth the range of high and low bid
prices per share for the Common Stock for the period from January 1, 1997
through March 15, 1999.

                                                        High      Low
                                                      --------  --------
  Fiscal 1997
  First Quarter....................................   $20 7/8  $15 3/4
  Second Quarter...................................    27 5/8   17 1/4
  Third Quarter....................................    32 1/2   21 7/8
  Fourth Quarter...................................    34 5/8   22 1/2
                                                                    
  Fiscal 1998                                                       
  First Quarter....................................    40 3/8   29 3/4
  Second Quarter...................................    39 5/8   22 1/2
  Third Quarter....................................    31 3/4   18 3/8
  Fourth Quarter...................................    40 1/8   20 7/8
 
  Fiscal 1999
  First Quarter (through March 15, 1999)...........    28 5/8   22 7/8
                                                                                
  On March 15, 1999, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $25.00.

  As of January 31, 1999, there were approximately 67 record holders of the
Common Stock.


                                    Page 22
<PAGE>
 
Item 6.   Selected Financial Data.

  The following table sets forth selected consolidated financial and operating
data of the Company as of December 31 in each of 1994 through 1998 and for each
of the years in the five-year period ended December 31, 1998. The consolidated
statement of operations and consolidated balance sheet data have been derived
from the Company's consolidated financial statements, which have been audited by
KPMG LLP, independent certified public accountants. Such consolidated balance
sheets as of December 31, 1997 and 1998 and statements of operations for each of
the years in the three-year period ended December 31, 1998 and the notes thereto
are included in Item 14(a) of this Annual Report on Form 10-K. The historical
consolidated financial data should be read in conjunction with and are qualified
in their entirety by reference to the consolidated financial statements of the
Company and the related notes thereto and to Item 7 of this Annual Report on
Form 10-K.

<TABLE>
<CAPTION>
                                                                 (in thousands, except per share data)
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                        1994         1995         1996         1997        1998
                                                     -----------  -----------  -----------  ----------  ----------
<S>                                                 <C>          <C>          <C>          <C>         <C> 
Consolidated Statement of Operations Data:
Total revenues....................................  .   $10,014      $14,714      $21,965      $37,063    $ 56,259
 
  Salaries and related costs......................  .     4,682        6,830        9,432       15,056      21,532
  Selling, general and administrative.............  .     4,196        6,467        9,108       14,701      22,714
  Depreciation and amortization...................  .       155          396          787        1,521       3,492
                                                        -------      -------      -------      -------    --------
Total operating expenses..........................  .     9,033       13,693       19,327       31,278      47,738
                                                        -------      -------      -------      -------    --------
Income from operations............................  .       981        1,021        2,638        5,785       8,521
Other income (expense)............................  .       (15)          22        1,030          716       3,002
                                                        -------      -------      -------      -------    --------
Income before income tax expense..................  .       966        1,043        3,668        6,501      11,523
Income tax expense................................  .        98           --        1,621        2,852       4,575
                                                        -------      -------      -------      -------    --------
Net income........................................  .       868        1,043        2,047        3,649       6,948
Accrued dividends on Preferred Stock(1)...........  .      (427)        (478)         (82)          --          --
                                                        -------      -------      -------      -------    --------
Net income available to common
 stockholders.....................................  .   $   441      $   565      $ 1,965      $ 3,649    $  6,948
                                                        =======      =======      =======      =======    ======== 
Per common and common equivalent share:
  Basic:
    Net income per common share(1)................  .                $  0.36      $  0.41      $  0.68    $   0.91
                                                                     =======      =======      =======    ========
    Weighted average common and common
     equivalent shares outstanding(2).............  .                  2,921        4,961        5,398       7,635
                                                                     =======      =======      =======    ======== 
  Dilutive:
    Net income per common share assuming
     dilution(1)..................................  .                $  0.31      $  0.38      $  0.63    $   0.87 
                                                                     =======      =======      =======    ========    
    Weighted average common and common
     equivalent shares outstanding assuming                                                               
     dilution(2)..................................  .                  3,371        5,404        5,809       8,002
                                                                     =======      =======      =======    ======== 
<CAPTION>                                                                                                           
 
                                                                           Year Ended December 31,
                                                                           -----------------------
                                                           1994         1995         1996         1997        1998
                                                         --------     --------     --------     --------    ---------
<S>                                                     <C>          <C>         <C>          <C>         <C>             
Consolidated Selected Operating Data:
Number of cases reported..........................  .    33,618       43,287       55,539       87,884     129,081
Number of hospitals served........................  .     1,021        1,118        1,360        1,670       1,740
Number of oncology practices served...............  .        --           --           --          141         290
</TABLE>
                                                                                

                                    Page 23
<PAGE>
 
<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                                -----------------------
                                                   1994        1995       1996       1997       1998
                                                 ---------  ---------  ---------  ---------  ----------
                                                                     (In thousands)
<S>                                             <C>          <C>        <C>        <C>        <C>
Consolidated Balance Sheet Data:
Working capital................................ .  $ 2,500      $3,622    $30,768    $21,951    $ 80,696
Total assets................................... .    4,144       9,261     37,581     46,342     150,033
Long-term obligations, net of current portion.. .      249       1,130      1,430      2,726       4,026
Redeemable preferred stock..................... .    6,407          --         --         --          --
Total stockholders' equity (deficiency)........ .   (3,266)      5,655     33,638     38,309     124,587
</TABLE>

(1) Reflects dividends accrued on the Preferred Stock. Dividends accrued prior
    to February 10, 1995 were forgiven in conjunction with the issuance of
    Series D Preferred Stock. Dividends accrued from February 10, 1995 in the
    amount of $560,000 were paid and ceased to accrue upon conversion of the
    Preferred Stock on February 26, 1996.
(2) Weighted average shares outstanding give effect to the conversion of the
    outstanding shares of Preferred Stock into shares of Common Stock in
    accordance with the terms thereof on February 26, 1996 and reflect the 1-
    for-2.8218735 reverse split of the outstanding shares of Common Stock.



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

  The following discussion of the financial condition and results of operations
should be read in conjunction with the financial statements and the notes
thereto included in Item 14(a) of this Annual Report on Form 10-K.


Overview

  IMPATH was founded in 1988 and has become a leader in providing critical
information essential for making medically optimal and cost-effective cancer
management decisions for individual cancer patients. The Company is focused
exclusively on the analysis of cancer, combining advanced technologies and
medical expertise to provide patient-specific diagnostic, prognostic and
treatment information to physicians involved in the treatment of cancer. With
expected medical cost increases attributable to the growth in the number of
cancer patients and the high cost of new therapies, the Company anticipates
significant and growing demand for cancer management information. IMPATH has
established its leadership and reputation through its extensive expertise, its
integration of technological advances, its emphasis on customer service and
education and the cost-effectiveness of its services.

  The Company's revenues, which have increased an average of approximately 54%
annually since 1994, have been derived from performing specialized cancer
analyses for which IMPATH typically bills various third-party payors, such as
private insurance plans, managed care plans and governmental programs (e.g.,
Medicare), as well as hospitals and individual patients. Over the last few
years, the Company has experienced increased pressures on reimbursement and
expects such pressures to cause reduced unit pricing for diagnostic and
prognostic analyses in future periods.  The revenue generated from private
insurance and managed care has increased significantly as a percentage of total
revenue in the last two years as a result of increased focus by the Company's
sales force on oncology officers as well as a desire by the Company's hospital
clients to have the Company bill third parties directly.  Despite those
pressures, the Company has experienced increasing average reimbursement trends
due to changes in its product mix and application of new technologies.  The
Company also derives revenues by licensing its tumor registry software to
community hospitals and state agencies as well as providing contract laboratory
services and cancer database and pharmacoeconomic information to pharmaceutical
companies.

 
                                    Page 24
<PAGE>
 
  The following table sets forth the percentages of total revenues represented
by certain items reflected in the Company's consolidated statements of
operations. The Company's business generally has been unaffected by seasonality,
except for slower growth in revenues during the third quarter of its fiscal year
due to reduced summertime activity.

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                           ------------------------------------
                                                               1996        1997         1998
                                                           -----------  -----------  ----------
<S>                                                        <C>          <C>          <C>
        Total revenues............................            100.0%       100.0%      100.0%
        Operating expenses:                                                                 
          Salaries and related costs..............             42.9         40.6        38.3
          Selling, general and administrative.....             41.5         39.8        40.4
          Depreciation and amortization...........              3.6          4.0         6.2
                                                              -----        -----       -----
        Total operating expenses..................             88.0         84.4        84.9
                                                              -----        -----       -----
                                                                                            
        Operating income..........................             12.0         15.6        15.1
                                                              -----        -----       -----
                                                                                            
        Net income................................              9.3          9.8        12.4
                                                              =====        =====       ===== 
</TABLE>
                                        

Recent Acquisitions

    On July 29, 1998 the Company purchased certain assets of Biologic &
Immunologic Science Laboratories, Inc. ("BIS"), a privately held cancer
diagnostics company based in Reseda, California for $3.6 million. The terms
provided for an initial payment of $2.0 million, and $800,000 payable in three
equal semi-annual installments beginning December 1998, after which another
$800,000 is payable in three equal semi-annual installments contingent on
achievement of previously established revenue targets, with interest accruing at
8% per annum. This transaction will allow IMPATH to expand its core diagnostic
and prognostic business and build on IMPATH's scientific leadership in lymph
node and bone marrow micrometastases detection in early and late stage cancer.
Additionally, BIS will further enhance the Company's ability to provide unique
cancer information to physicians for evaluating and treating cancer patients and
to the biopharmaceutical industry in assessing biologically relevant
characteristics for targeted drug development and in selecting patients for
clinical trials and in evaluating the efficacy of various therapies.

    On August 31, 1998 the Company acquired Medical Registry Services, Inc.
("MRS") for the issuance of  550,000 shares of IMPATH common stock valued at
$13,750,000.  After the consideration of certain other expenses related to the
acquisition and after recording net tangible assets of MRS, the Company recorded
approximately $17.3 million in intangibles.  MRS is a leading developer and
marketer of cancer registry software products that are currently utilized in
over 400 hospitals throughout the United States.  The products are used to
collect and manage critical diagnostic, treatment, follow-up and outcomes data
on cancer patients.  The Company and MRS, which at the time of the acquisition
had approximately 200 common clients, began a relationship through a strategic
joint venture in January, 1997.  The acquisition of MRS significantly enhances
IMPATH's oncology information capabilities by matching its diagnostic and
prognostic data with treatment and outcomes information from MRS.  Additionally,
it provides IMPATH with an ongoing link to its clients as its ability to supply
hospitals and oncologists with critical information for optimal disease
management will continue to expand.  MRS's revenues are derived from licensing
fees paid by hospitals utilizing its proprietary tumor registry software.

    On September 2, 1998 the Company acquired Physician Choice, Inc.  ("PCI")
for the sum of $1.0 million, with $400,000 payable immediately, an additional
$400,000 payable in four equal semi-annual installments beginning March, 1999
with interest accruing at 8% per annum and $200,000 payable in IMPATH common
stock.  An initial 1,980 shares common stock, having a fair market value of
$50,000, were issued on September 2, 1998, with the remaining shares to be
issued in three equal annual installments beginning September 2, 1999.  PCI is a
leading 

                                    Page 25
<PAGE>
 
provider of post-clinical, pre-marketing, cost-benefit analyses to
pharmaceutical and biotechnology companies in connection with new oncology drugs
entering the marketplace. By focusing on cancer, and utilizing health care
outcomes and other efficacy measures, PCI has achieved a better understanding of
the way healthcare is delivered in that specialty. PCI's revenues are generated
on a per project basis from pharmaceutical and biotechnology companies.

    The aforementioned acquisitions will all be accounted for using the purchase
method with results of operations of the respective entities being included with
the results of the Company since the respective acquisition dates.

    The excess of the purchase price over the net assets acquired on both the
BIS and PCI acquisitions principally relate to customer lists, which are
included in intangible assets on the accompanying December 31, 1998 balance
sheet and will be amortized over periods of up to fifteen years.  The excess of
the purchase price over the net assets acquired for the MRS purchase primarily
relates to the customer list, trade name, software and goodwill which are
included in intangible assets on the accompanying December 31, 1998 balance
sheet and will be amortized over periods of 5 to 20 years.


Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

  The Company's total revenues in 1998 and 1997 were $56.3 million and $37.1
million, respectively, representing an increase of $19.2 million, or 51.8%, in
1998. This growth was primarily due to a 47% increase in case volume resulting
from increased sales and marketing activities and increases in contract
laboratory and information services provided to biopharmaceutical companies.  In
addition, the Company recorded revenues of approximately $1.4 million from
licensing fees for its tumor registry products since the acquisition of MRS in
August 1998.

  Salaries and related costs in 1998 and 1997 were $21.5 million and $15.1
million, respectively, representing an increase of $6.4 million, or 42.4% in
1998. This increase was primarily due to personnel costs associated with the
Company's product case volume growth as well as increases in personnel headcount
resulting from the Company's acquisitions during 1998. As a percentage of total
revenues, salaries and related costs decreased to 38.3% in 1998 from 40.6% in
1997. This decrease was facilitated by the Company's successful expansion
strategy of incorporating complementary and synergistic technologies, as well as
streamlining operational and administrative duties.

  Selling, general and administrative expenses in 1998 and 1997 were $22.7
million and $14.7 million, respectively, representing an increase of $8.0
million, or 54.4%, in 1998. This increase was due to an increase in bad debt
expense of approximately $1.7 million associated with higher revenues, as well
as the continuing payor mix shift from direct hospital billings to private
insurance resulting in higher revenues and patient co-payments that generate
higher bad debt.  In addition, the Company incurred over $2.7 million in
incremental supply and courier costs due to increased volume and the logistics
required to service the Company's rapidly growing oncology office-based
business. The Company also incurred additional travel-related expenses and
professional fees associated with expanded sales, marketing and investor
relations activities of $620,000. Additionally, as a direct result of growth,
the Company incurred an additional $670,000 in telecommunications expense and
repair and maintenance of equipment.  As a percentage of total revenues,
selling, general and administrative expenses increased to 40.4% in 1998 compared
to 39.8% in 1997.

  Depreciation and amortization in 1998 and 1997 was $3.5 million and $1.5
million, respectively, representing an increase of $2.0 million, or 133.3%, in
1998.  This increase was primarily the result of an additional $1.2 million
amortization associated with leasehold improvements made at the Company's new
facility in New York during the first quarter of 1998.  Additionally, the
Company also incurred an increase in intangible amortization of $775,000
associated with the Company's recent acquisitions.  As a percentage of total
revenues, depreciation and amortization expenses increased to 6.2% in 1998
compared to 4.0% in 1997.

  Income from operations in 1998 and 1997 was $8.5 million and $5.8 million,
respectively, representing an increase of $2.7 million, or 46.6%, in 1998. The
1998 figure reflects a slight decrease in operating margin due to 


                                    Page 26
<PAGE>
 
increased depreciation and amortization expense associated with capital
expenditures and goodwill associated with the Company's acquisitions. As a
percentage of total revenues, income from operations decreased to 15.1% in 1998
from 15.6% in 1997.

  Other income, net for 1998 and 1997 was $3.0 million and $716,000,
respectively, representing an increase of approximately $2.2 million in 1998.
This increase was the result of interest income generated from the proceeds of
the Company's secondary public offering of common stock in March 1998, partially
offset by increased interest expense due to additional capital lease
obligations.

  The tax provision for 1998 of approximately $4.6 million reflects federal,
state and local income tax expense. The effective tax rate for 1998 was 39.7%
compared to 43.9% in 1997.  This decrease resulted from a reduction in the
Company's state and local tax provision associated with tax exempt interest
income, as well as expansion of the Company's operations outside of New York,
which has a lower effective state tax rate.

  Net income in 1998 and 1997 was $6.9 million and $3.6 million, respectively,
representing an increase of $3.3 million, or 91.7%, in 1998 due to the factors
described above.  As a percentage of total revenues, net income increased to
12.4% in 1998 from 9.8% in 1997.


Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

  The Company's total revenues in 1997 and 1996 were $37.1 million and $22.0
million, respectively, representing an increase of $15.1 million, or 68.7%, in
1997. This growth was primarily due to a 58% increase in case volume resulting
from increased sales and marketing activities and to the successful integration
of the Company's acquisitions of certain assets of Oncogenetics,
Immunodiagnostic, GenCare and Aeron. In addition, revenue realization per case
increased as a result of product mix changes towards cases which yield higher
reimbursement rates and payor mix shifts away from direct hospital billing
towards private insurance.

  Salaries and related costs in 1997 and 1996 were $15.1 million and $9.4
million, respectively, representing an increase of $5.7 million, or 59.6%, in
1997. This increase was primarily due to direct personnel costs associated with
existing product case volume growth as well as the Company's acquisitions during
1997. As a percentage of total revenues, salaries and related costs decreased to
40.6% in 1997 from 42.9% in 1996.

  Selling, general and administrative expenses in 1997 and 1996 were $14.7
million and $9.1 million, respectively, representing an increase of $5.6
million, or 61.5%, in 1997. This increase was due to an increase in bad debt
expense of approximately $2.0 million associated with higher revenues, as well
as a payor mix shift from direct hospital billings to private insurance
resulting in higher revenues and patient co-payments that generate higher bad
debt. The Company also incurred $1.5 million in additional selling, general and
administrative expenses associated with the Company's Arizona-based cancer
cytogenetics testing facility which was acquired from Oncogenetics in January
1997. In addition, the Company incurred over $1.4 million in incremental supply
and courier costs due to increased volume and the logistics required to service
the Company's rapidly growing oncology office-based business. The Company also
incurred higher travel-related expenses and professional fees associated with
expanded sales, marketing and investor relations activities. As a percentage of
total revenues, selling, general and administrative expenses decreased to 39.6%
in 1997 compared to 41.4% in 1996.

  Depreciation and amortization in 1997 and 1996 was $1.52 million and $787,000,
respectively, representing an increase of $734,000, or 93.3%, in 1997.  This
increase was primarily due to additional capital expenditures, intangible
amortization associated with the Company's acquisitions and amortization of
third-party development costs for the outcomes database.  As a percentage of
total revenues, depreciation and amortization expenses increased to 4.0% in 1997
compared to 3.6% in 1996.

  Income from operations in 1997 and 1996 was $5.8 million and $2.6 million,
respectively, representing an increase of $3.2 million, or 119.3%, in 1997. The
1997 figure reflects increased Company operating margins from its core
diagnostic and prognostic services. As a percentage of total revenues, income
from operations increased to 15.6% in 1997 from 12.0% in 1996.


                                    Page 27
<PAGE>
 
  Other income, net for 1997 and 1996 was $716,000 and $1.0 million,
respectively, representing a decrease of approximately $300,000 in 1997. This
decrease was the result of lower investment returns resulting from the use of
the Company's cash and cash equivalents in order to fund the Company's expansion
and database development activities.

  The tax provision for 1997 of approximately $2.9 million reflects federal,
state and local income tax expense. The 44% effective tax rate is consistent
with the 1996 rate.

  Net income in 1997 and 1996 was $3.6 million and $2.0 million, respectively,
representing an increase of $1.6 million, or 78.2%, in 1997 which was due to the
factors described above. As a percentage of total revenues, net income increased
to 9.8% in 1997 from 9.1% in 1996.


Liquidity and Capital Resources

  Since its inception, the Company has raised approximately $103.9 million of
capital through the public offerings of its Common Stock and $6.6 million from
private placements of Preferred Stock, all of which was converted into Common
Stock at the closing of the Company's initial public offering in February 1996.
The Company's working capital and capital expenditure needs have increased and
are expected to continue to increase as the Company expands its existing
facilities and pursues its growth strategy. See "Business--Company Strategy."

  The Company's cash and cash equivalent balances at December 31, 1998 and 1997
were approximately $45.6 million and $325,000, respectively, representing a
increase of $45.3 million in 1998. The Company also had approximately $30.0
million invested in a portfolio of investment-grade fixed-income securities at
December 31, 1998, representing a $16.0 million increase over the $14.0 million
which was invested in this portfolio at December 31, 1997.  The significant
increase related to the Company's secondary offering of securities in March 1998
which raised $71 million in net proceeds.

  For 1998, net cash generated from operating activities was approximately $1.7
million. This was the result of cash inflows from the Company's net income,
partially offset by increases in accounts receivable, net of allowance for bad
debt provisions of $6.1 million due to rapid sales growth. The Company also
increased its accounts payable and accrued expenses by approximately $2.1
million.  The Company's net accounts receivable at December 31, 1998 comprised
34.9% of sales, up from 32.2% in 1997.  This increase is due to the additional
time required to obtain information essential to billing third party payors
which now comprise 75% of sales in 1998, compared to 69% in 1997.

  During 1998, the Company used approximately $2.8 million of cash to fund its
growth strategy through the acquisition of certain assets of BIS and PCI. See
"--Recent Acquisitions." In addition, the Company used $9.5 million of cash
during 1998 for the continuing development of the Company's clinical and billing
systems, as well as its data warehouse and other proprietary software products,
and used approximately $3.6 million of cash to purchase fixed assets through
capital lease financing and expansion of its facilities.

  The Company received approximately $917,000 during 1998 through the issuance
of Common Stock upon the exercise of incentive stock options and warrants. In
addition, the Company used approximately $1.8 million to satisfy its capital
lease obligations.  The Company repurchased 306,600 shares of common stock for
$7.9 million through December 31, 1998.  In addition, through March 26, 1999,
the Company repurchased an additional 316,350 shares for $8.1 million.

  In March 1998, the Company increased its line of credit to an aggregate amount
of $10.0 million. Borrowing under the line will bear interest at the prime rate.
The availability of a $10.0 million replacement line of credit, which was
approved in November 1998 and will bear interest at LIBOR plus 2.25%.  In
December 1998, the Company drew $10.0 million against such line.  Approximately
$4.5 million was repaid in January 1999, with the 

                                    Page 28
<PAGE>
 
remainder paid in February 1999. The line of credit has certain financial
covenants with which the Company was in compliance with at December 31, 1998.

  The Company's growth strategy is anticipated to be financed through its
current cash resources, cash flow from operations and existing third-party
credit facilities. The Company believes the combination of these sources will be
sufficient to fund its operations and to satisfy the Company's cash requirements
for the next 12 months and the foreseeable future. There may be circumstances,
however, that would accelerate the Company's use of its liquid resources. If
this occurs, the Company may, from time to time, incur additional indebtedness
or issue, in public or private transactions, equity or debt securities. However,
there can be no assurance that suitable debt or equity financing will be
available to the Company.


Impact of Inflation and Changing Prices

  The impact of inflation and changing prices on the Company has been primarily
limited to salary, laboratory and operating supplies and rent increases and has
not been material to date to the Company's operations. In the future, the
Company may not be able to raise the prices for its cases by an amount
sufficient to cover the cost of inflation, although the Company is responding to
these concerns by attempting to increase the volume and adjust the product mix
of its business.


Year 2000

  The Company is finalizing its review of its business systems, including its
computer systems and laboratory equipment, and has been sending written
inquiries to its customers and vendors as to their progress in identifying and
addressing problems that their systems may face in correctly interpreting and
processing date information as the year 2000 approaches.  This review is
expected to be completed by April 1999.  Based on this review, the Company will
implement a plan to achieve year 2000 compliance.  The Company is in the final
stages of the installation of a newly developed clinical and billing information
system which addresses year 2000 issues.  The Company believes that it will
achieve year 2000 compliance in a manner which will be non-disruptive to its
operations.  All subsidiaries purchased in 1998 are year 2000 compliant.  In
addition, the Company has commenced work on various types of contingency
planning to address potential problem areas with internal systems, suppliers and
other third parties.  Year 2000 compliance should not have a material adverse
effect on the Company, including the Company's financial condition, results of
operations or cash flow.  The Company has incurred no costs to date related to
year 2000.  The Company estimates the cost of its year 2000 efforts to be
approximately $150,000.  The total cost estimate is based on management's
current assessment and is subject to change.

  However, the Company may encounter problems with supplier and or revenue
sources which could adversely affect the Company's financial condition, results
of operations or cash flow.  The Company cannot accurately predict the
occurrence and or outcome of any such problems, nor can the dollar amount of
such problems be estimated.  In addition, there can be no assurance that the
failure to ensure year 2000 compliance by a third party would not have a
material adverse effect on the Company.

Recently Issued Accounting Standards

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective for our financial
statements beginning January 1, 2000.  SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value.  The Company does no expect the adoption
of this Statement to have a material impact on the financial statements.

  The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-up activities, which is
effective for the 1999 financial statements.  The Company does not expect
adoption of this SOP to have a material impact on the financial statements.


                                    Page 29
<PAGE>
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

  The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements.  Actual results may differ
materially from those described.

  Our holdings of financial instruments are comprised of U.S. corporate debt,
U.S. government debt and commercial paper.  All such instruments are classified
as securities available for sale.  We do not invest in portfolio equity
securities or commodities or use financial derivatives for trading purposes.
Our debt security portfolio represents funds held temporarily pending use in our
business and operations.  We manage these funds accordingly.  We seek reasonable
assuredness of the safety of principal and market liquidity by investing in
rated fixed income securities while at the same time seeking to achieve a
favorable rate or return.  Our market risk exposure consists principally of
exposure to changes in interest rates.  Our holdings are also exposed to the
risks of changes in the credit quality of issuers.  We typically invest in the
shorter-end of the maturity spectrum, and at December 31, 1998, more than 76% of
our holdings were in instruments maturing in two years or less and more than 82%
of such holdings matured in one year or less.


Item 8.   Financial Statements and Supplementary Data.

  For information concerning this item, see Item 14(a) below.


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

  Not applicable.


                                    PART III

Item 10.   Directors and Executive Officers of the Registrant.

  For information concerning this item, see text under the captions "Election of
Directors" and "Executive Officers" in the 1999 Proxy Statement of the Company
(the "Proxy Statement") to be filed subsequent to the filing of this Annual
Report on Form 10-K, which information is incorporated herein by reference.



Item 11.   Executive Compensation.

  For information concerning this item, see text under the captions "Executive
Compensation," "Employment-Related Agreements with Executive Officers,"
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Performance Graph" and "Report of the Compensation Committee" in the Proxy
Statement, which information is incorporated herein by reference.


Item 12.   Security Ownership of Certain Beneficial Owners and Management.

  For information concerning this item, see text under the captions "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and
Executive Officers" in the Proxy Statement, which information is incorporated
herein by reference.


                                    Page 30
<PAGE>
 
Item 13.   Certain Relationships and Related Transactions.

  For information concerning this item, see text under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement, which
information is incorporated herein by reference.

                                    PART IV

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

  (a) (1) Financial Statements:

     The financial statements of the Company contained in this Annual Report on
  Form 10-K are listed in the attached Index to Financial Statements.

      (2) Financial Statement Schedules:

     All schedules have been omitted because they are inapplicable or the
  information is provided in the consolidated financial statements, including
  the notes thereto.

      (3) Exhibits:

     The exhibits required to be filed as part of this Annual Report on Form 10-
  K are listed in the attached Index to Exhibits. Exhibits 10.2, 10.3, 10.13,
  10.14, 10.15, 10.16 and 10.17 are the management contracts and compensatory
  plans or arrangements required to be filed as part of this Annual Report on
  Form 10-K.

  (b) Current Reports on Form 8-K:

      (1) Report on Form 8-K filed November 12, 1998 which report was amended by
     Amendment No. 1 on Form 8-K/A filed March 26, 1999.


                                    Page 31
<PAGE>
 
 
                               POWER OF ATTORNEY

  The Registrant and each person whose signature appears below hereby appoint
each of Anu D. Saad, Ph.D. and John P. Gandolfo as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
Registrant and each such person, individually and in each capacity stated below,
one or more amendments to this Annual Report on Form 10-K, which amendments may
make such changes in this Report as the attorney-in-fact acting in the premises
deems appropriate and to file any such amendment to this Report with the
Securities and Exchange Commission.

                                  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.


Dated: March 29, 1999

                                 IMPATH Inc.

                                 By /s/ Anu D. Saad
                                 -----------------------------------------------
                                             Anu D. Saad, Ph.D.
                                       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. 

Dated: March 29, 1999

                                 By  /s/ Anu D. Saad
                                 -----------------------------------------------
                                              Anu D. Saad, Ph.D.
                                      President, Chief Executive Officer 
                                                and Director
                                         

Dated: March 29, 1999


                                 By /s/ John P. Gandolfo
                                 -----------------------------------------------
                                               John P. Gandolfo
                                         Executive Vice President, Chief 
                                     Operating Officer, Chief Financial Officer 
                                         and Principal Accounting Officer
                                        
Dated: March 29, 1999


                                 By /s/ John L. Cassis
                                 -----------------------------------------------
                                                 John L. Cassis
                                         Chairman of the Board and Director
                                        
                                    Page 32

<PAGE>
 
Dated: March 29, 1999

                                 By /s/Richard J. Cote
                                 -----------------------------------------------
                                                Richard J. Cote, M.D
                                                      Director
                                        
Dated: March 29, 1999

                                 By 
                                 -----------------------------------------------
                                                   George Frazza
                                                      Director
                                        
Dated: March 29, 1999

                                 By /s/Richard Kessler
                                 -----------------------------------------------
                                                  Richard Kessler
                                                      Director
                                        

Dated: March 29, 1999

                                 By /s/Joseph A. Mollica
                                 -----------------------------------------------
                                              Joseph A. Mollica, Ph.D
                                                      Director
                                        
Dated: March 29, 1999


                                 By /s/Marcel Rozencweig
                                 -----------------------------------------------
                                               Marcel Rozencweig, M.D
                                                      Director
                                        
                                    Page 33
 
<PAGE>
 
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                                 <C>
Independent Auditors' Report  .....................................................................         F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998  .....................................         F-3

Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998  .......         F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997
   and 1998  ......................................................................................  F-5 to F-7 

Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998  .......         F-8

Notes to Consolidated Financial Statements  ....................................................... F-9 to F-22
</TABLE>

                                    Page 1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
IMPATH Inc.:

  We have audited the accompanying consolidated balance sheets of IMPATH Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IMPATH Inc.
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.



                                       KPMG LLP

Short Hills, New Jersey
February 18, 1999

                                    Page 2
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1998

<TABLE>
<CAPTION>
                                                                                    1997                   1998
                                                                                -----------            ------------ 
                                 Assets
Current assets:
<S>                                                                             <C>                    <C> 
  Cash and cash equivalents  ............................................       $   325,285            $ 45,556,005
  Marketable securities, at market value  ...............................        13,952,148              29,971,456
  Accounts receivable, net of allowance for doubtful accounts of
    $4,760,117 in 1997 and $3,958,235 in 1998  ..........................        11,948,229              19,619,451
  Prepaid expenses  .....................................................           276,073                 442,480
  Prepaid taxes  ........................................................                --               1,758,407
  Deferred tax assets  ..................................................            53,427               1,334,591
  Other current assets  .................................................           703,753               1,306,653
                                                                                -----------            ------------
        Total current assets  ...........................................        27,258,915              99,989,043
Fixed assets, less accumulated depreciation and amortization  ...........        10,475,575              21,239,884
Deposits and other non-current assets  ..................................           334,167                 203,491
Intangible assets, net of accumulated amortization of $383,534 in 1997
  and $1,462,204 in 1998  ...............................................         8,273,636              28,600,749
                                                                                -----------            ------------
        Total assets  ...................................................       $46,342,293            $150,033,167
                                                                                ===========            ============
 
                     Liabilities and Stockholders' Equity
Current liabilities:
  Current portion of capital lease obligations  .........................       $ 1,222,281            $  1,622,366
  Current portion of note payable  ......................................           700,000               1,271,915
  Short term borrowings  ................................................                --              10,000,000
  Accounts payable  .....................................................           956,648               2,713,228
  Deferred revenues  ....................................................                --               1,866,241
  Construction payments payable  ........................................         1,542,199                      --
  Income taxes payable  .................................................           158,094                      --
  Accrued expenses   ....................................................           728,353               1,819,752
                                                                                -----------            ------------
        Total current liabilities  ......................................         5,307,575              19,293,502
                                                                                -----------            ------------
Capital lease obligations, net of current portion  ......................         2,451,587               3,792,833
Note payable, net of current portion  ...................................           274,000                 233,333
Deferred tax payable  ...................................................                --               2,126,531
Stockholders' equity:
  Preferred stock, $.005 par value, authorized 2,000,000 shares;
    0 and 0 shares issued in 1997 and 1998 respectively
  Common stock, $.005 par value, authorized 20,000,000 shares;
    5,458,827 and 8,538,345 shares issued in 1997 and 1998,
    respectively; 5,451,739 and 8,224,657 shares outstanding in
    1997 and 1998  ......................................................            27,294                  42,690
  Additional paid-in capital  ...........................................        33,893,774             120,904,861
  Retained earnings  ....................................................         5,148,077              12,095,622
  Accumulated other comprehensive income (loss)  ........................           (83,881)                (48,602)
                                                                                -----------            ------------
                                                                                 38,985,264             132,994,571
  Less:
     Cost of 7,088 and 313,688 shares of common stock held in
     treasury in 1997 and 1998, respectively  ...........................              (100)             (7,908,841)
     Deferred compensation  .............................................          (676,033)               (498,762)
  Commitments and contingencies
                                                                                -----------            ------------
        Total stockholders' equity  .....................................        38,309,131             124,586,968
                                                                                -----------            ------------
        Total liabilities and stockholders' equity  .....................       $46,342,293            $150,033,167
                                                                                ===========            ============
</TABLE>
                                       
          See accompanying notes to consolidated financial statements.

                                    Page 3
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                    1996            1997             1998
                                                                -----------      -----------      ----------- 
Revenues:
<S>                                                             <C>              <C>              <C>
  Net diagnostic and prognostic services  ...................   $21,755,193      $36,821,738      $53,183,356
  Biopharmaceutical services  ...............................       210,270          241,743        1,685,984
  Tumor registry services  ..................................            --               --        1,390,106
                                                                -----------      -----------      -----------
     Total revenues  ........................................    21,965,463       37,063,481       56,259,446
                                                                -----------      -----------      -----------
Operating expenses:
  Salaries and related costs  ...............................     9,432,397       15,056,221       21,532,443
  Selling, general and administrative  ......................     9,108,232       14,701,081       22,713,156
  Depreciation and amortization  ............................       786,852        1,521,251        3,492,482
                                                                -----------      -----------      -----------
     Total operating expenses  ..............................    19,327,481       31,278,553       47,738,081
                                                                -----------      -----------      -----------
     Income from operations  ................................     2,637,982        5,784,928        8,521,365
Interest income  ............................................       506,086          677,109        3,661,063
Interest expense  ...........................................      (224,112)        (339,903)        (659,078)
Gains on marketable securities, net  ........................       747,903          379,001               --
                                                                -----------      -----------      -----------
     Income before income tax expense  ......................     3,667,859        6,501,135       11,523,350
Income tax expense  .........................................     1,620,309        2,851,936        4,575,805
                                                                -----------      -----------      -----------
     Net income  ............................................     2,047,550        3,649,199        6,947,545
Accrued dividends on preferred stock  .......................       (82,346)              --               --
                                                                -----------      -----------      -----------
Net income available to common stockholders  ................   $ 1,965,204      $ 3,649,199      $ 6,947,545
                                                                ===========      ===========      ===========
Per common and common equivalent share:
Basic:
  Net income per common share  ..............................   $      0.41      $      0.68            $0.91
                                                                ===========      ===========      ===========
  Weighted average common shares outstanding  ...............     4,961,000        5,398,000        7,635,000
                                                                ===========      ===========      ===========
Dilutive:
  Net income per common share--assuming dilution  ...........   $      0.38      $      0.63            $0.87
                                                                ===========      ===========      ===========
  Weighted average common and common equivalent
    shares outstanding--assuming dilution  ..................     5,404,000        5,809,000        8,002,000
                                                                ===========      ===========      ===========
</TABLE>

         See accompanying notes to consolidated financial statements. 

                                    Page 4
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                                                                                 
                                                                              Nonredeemable           Additional    Accumulated  
                                                                              -------------           ----------    -----------  
                                                                               Convertible              Paid-in      (deficit)   
                                                                               -----------              -------      --------
                                                     Common stock            Preferred stock            Capital       retained   
                                                     ------------            ---------------            -------       -------- 
                                                  Shares      Amount      Shares        Amount        (deficiency)    earnings   
                                                  ------      ------      ------        ------        ------------    -------- 
<S>                                             <C>          <C>         <C>          <C>             <C>            <C> 
Balance at December 31, 1995  ...............     455,007    $ 2,275     7,192,724    $ 6,565,285     $    11,447    $ (548,672)  
Common shares issued upon exercise of                                                              
  stock options  ............................      75,846        379            --             --         124,302            --   
Accrual of preferred stock dividends on                                                            
  redeemable preferred stock  ...............          --         --            --             --         (82,346)           --   
Conversion of redeemable preferred stock                                                           
  into common stock  ........................   2,548,933     12,745    (7,192,724)    (6,565,285)      6,552,540            --   
Common shares issued in the initial public                                                         
  offering  .................................   2,242,500     11,212            --             --      25,726,054            --   
Compensation associated with issuance                                                              
  of options to non-employees  ..............          --         --            --             --          25,263            --   
Amortization of deferred compensation  ......          --         --            --             --              --            --   
Repayments of loans to stockholders  ........          --         --            --             --              --            --   
Net income for the year ended                                                                      
  December 31, 1996  ........................          --         --            --             --              --     2,047,550   
                                                ---------    -------    ----------    -----------     -----------    ----------   
Balance at December 31, 1996  ...............   5,322,286     26,611            --             --      32,357,260     1,498,878   
Common shares issued upon exercise of                                                              
  stock options  ............................     125,357        627            --             --         474,862            --   
Common shares issued upon exercise of                                                              
  warrants  .................................      11,184         56            --             --          39,086            --   
Compensation associated with issuance of                                                                                          
  options to non-employees  .................          --         --            --             --         679,752            -- 
Issuance of options related to Immunopath                                                          
  acquisition  ..............................          --         --            --             --         191,218            -- 
Tax benefit related to stock option                                                                
  exercises  ................................          --         --            --             --         171,531            -- 
Repayment of officer loans  .................          --         --            --             --              --            -- 
Amortization of deferred compensation  ......          --         --            --             --         (19,935)           -- 
                                                                                                   
Comprehensive income:                                                                              
Change in unrealized net depreciation of                                                           
  securities  ...............................          --         --            --             --              --            -- 
Net income for the year ended December 31,             --         --            --             --              --     3,649,199 
  1997  .....................................   ---------    -------    ----------    -----------     -----------    ---------- 
                                                                                                                                
Total comprehensive income  .................                                                                                   
Balance at December 31, 1997  ...............   5,458,827     27,294            --             --      33,893,774     5,148,077 

<CAPTION> 

                                                Accumulated
                                                -----------
                                                   other                   Notes
                                                   -----                   -----
                                               comprehensive             receivable      Deferred
                                               -------------             ----------      --------
                                                  income      Treasury     from           compen-
                                                  ------      -------      -----          -------
                                                 (expense)     stock    stockholders      sation         Total
                                                 ---------     -----    ------------      ------         -----   
<S>                                             <C>            <C>        <C>          <C>            <C>
Balance at December 31, 1995  ...............   $      --      $(100)     $(31,335)    $ (343,907)    $ 5,654,993
Common shares issued upon exercise of          
  stock options  ............................          --         --            --             --         124,681
Accrual of preferred stock dividends on        
  redeemable preferred stock  ...............          --         --            --             --         (82,346)
Conversion of redeemable preferred stock       
  into common stock  ........................          --         --            --             --              --
Common shares issued in the initial public     
  offering  .................................          --         --            --             --      25,737,266
Compensation associated with issuance          
  of options to non-employees  ..............          --         --            --             --          25,263
Amortization of deferred compensation  ......          --         --            --        127,584         127,584
Repayments of loans to stockholders  ........          --         --         2,914             --           2,914
Net income for the year ended                  
  December 31, 1996  ........................          --         --            --             --       2,047,550
                                                ---------    -------    ----------    -----------     -----------
Balance at December 31, 1996  ...............          --       (100)      (28,421)      (216,323)     33,637,905
Common shares issued upon exercise of          
  stock options  ............................          --         --            --             --         475,489
Common shares issued upon exercise of          
  warrants  .................................          --         --            --             --          39,142
Compensation associated with issuance of                                                                         
  options to non-employees  .................          --         --            --       (679,752)             --
Issuance of options related to Immunopath      
  acquisition  ..............................          --         --            --             --         191,218
Tax benefit related to stock option            
  exercises  ................................          --         --            --             --         171,531
Repayment of officer loans  .................          --         --        28,421             --          28,421
Amortization of deferred compensation  ......          --         --            --        220,042         200,107
                                               
Comprehensive income:                          
Change in unrealized net depreciation of       
  securities  ...............................     (83,881)        --            --             --         (83,881)
Net income for the year ended December 31,                                                                     
  1997  .....................................          --         --            --             --       3,649,199
                                                ---------    -------    ----------    -----------     -----------    
Total comprehensive income  .................                                                           3,565,318
Balance at December 31, 1997  ...............     (83,881)      (100)           --       (676,033)     38,309,131
</TABLE>

                                    Page 5
<PAGE>

                                                                     (Continued)

                                    Page 6

<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)

                  Years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                              Nonredeemable                                       
                                                                              -------------
                                                                               convertible                                        
                                                                               -----------
                                                   Common stock              preferred stock            Paid-in     Accumulated   
                                                   ------------              ---------------            -------     -----------
                                               Shares         Amount        Shares       Amount         capital       earnings   
                                               ------         ------        ------       ------         -------       --------
<S>                                            <C>         <C>        <C>             <C>            <C>            <C>           
Balance at December 31, 1997  ................. 5,458,827    $27,294              --            --   $ 33,893,774   $ 5,148,077
Common shares issued upon exercise of stock                                       --            --
   options  ...................................   198,207        990                                      814,120            --
Common shares issued upon exercise of                                             --            --
   warrant  ...................................    29,331        146                                      102,660            --
Common shares issued upon secondary offering,                                     --            --                           --
    net  ...................................... 2,300,000     11,500                                   71,437,994
Common shares issued upon acquisition of                                          --            --                           --
    Physicians Choice, Inc. (PCI)..............     1,980         10                                       49,990
Compensation associated with issuance of                                          --            --
   options to non-employees  ..................        --         --                                       80,462            --
Common shares issued upon acquisition of                                          --            --
    Medical Registry Service, Inc. (MRS)  .....   550,000      2,750                                   13,747,250            --
Repurchase of common shares  ..................        --         --              --            --             --            --
Amortization of deferred compensation  ........        --         --              --            --             --            --
Tax benefit related to stock option exercises..        --         --              --            --        778,611            --
Comprehensive income:                                                                          
Change in unrealized net depreciation of                                                       
    securities  ...............................        --         --              --            --             --            --
Net income for the year ended December 31,                                                     
   1998  ......................................        --         --              --            --             --     6,947,545
                                                ---------    -------  --------------  ------------   ------------  ------------
Total comprehensive income.....................

Balance at December 31, 1998  ................. 8,538,345    $42,690              --            --   $120,904,861   $12,095,622
                                                =========    =======  ==============  ============   ============  ============

<CAPTION>
                                                           Accumulated                      Deferred
                                                           -----------                      --------
                                                       Other comprehensive     Treasury      compen-
                                                       -------------------     --------      -------
                                                        income (expenses)        stock       sation       Total
                                                        -----------------        -----       ------       -----
<S>                                                    <C>                    <C>           <C>        <C>
Balance at December 31, 1997  .................                  $(83,881)          $(100)  $(676,033)  $ 38,309,131
Common shares issued upon exercise of stock
   options  ...................................                        --              --          --        815,110
Common shares issued upon exercise of
   warrant  ...................................                        --              --          --        102,806
Common shares issued upon secondary offering,                          --              --          --
    net  ......................................                                                           71,449,494
Common shares issued upon acquisition of                               --              --          --
    Physicians Choice, Inc. (PCI)..............                                                               50,000
Compensation associated with issuance of
   options to non-employees  ..................                        --              --     (80,462)            --
Common shares issued upon acquisition of
    Medical Registry Service, Inc. (MRS)  .....                        --              --          --     13,750,000
Repurchase of common shares  ..................                        --      (7,908,741)         --     (7,908,741)
Amortization of deferred compensation  ........                        --              --     257,733        257,733
Tax benefit related to stock option exercises..                        --              --          --        778,611
Comprehensive income:
Change in unrealized net depreciation of
    securities  ...............................                    35,279              --          --         35,279
Net income for the year ended December 31,
   1998  ......................................                        --              --          --      6,947,545 
                                                        -----------------   -------------   ---------   ------------
Total comprehensive income.....................                                                            6,982,824 

Balance at December 31, 1998  .................                  $(48,602)    $(7,908,841)  $(498,762)  $124,586,968
                                                        =================   =============   =========   ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                    Page 7
                                                   
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                                                       1996           1997          1998
                                                                                   ------------   -----------   ------------ 
Cash flows from operating activities:
<S>                                                                                <C>            <C>           <C>
  Net income  ..................................................................   $  2,047,550   $ 3,649,199   $  6,947,545
  Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
      Depreciation and amortization  ...........................................        786,852     1,521,251      3,492,482
      Provision for uncollectible accounts receivable  .........................      2,434,511     4,390,581      6,100,789
      Deferred taxes  ..........................................................       (854,285)    1,305,858       (395,164)
      Non-cash compensation  ...................................................        152,847       200,107        257,733
      Changes in assets and liabilities (net of the effects from acquisitions of
      business):
        Increase in accounts receivable, net  ..................................     (5,686,947)   (8,803,998)   (13,683,381)
        Increase in prepaid expenses and other current assets  .................       (251,238)     (455,227)      (718,396)
        (Increase) decrease in deposits and other non-current assets  ..........        (18,917)     (235,289)       130,676
        (Decrease) increase in accounts payable/accrued expenses  ..............       (381,951)     (381,729)     2,073,948
        Decrease in construction payments payable  .............................             --            --     (1,542,199)
        Increase (decrease) in income taxes payable  ...........................        613,778      (362,568)    (1,137,890)
        Increase in deferred revenues  .........................................             --            --        196,210
                                                                                   ------------   -----------   ------------
Net cash provided by (used in) operating activities  ...........................     (1,157,800)      828,185      1,722,353
                                                                                   ------------   -----------   ------------
 
Cash flows from investing activities:
  (Purchases) of marketable securities  ........................................    (23,395,398)   (1,122,368)   (49,989,700)
  Sales/maturities of marketable securities  ...................................             --    10,481,737     34,005,671
  Acquisitions of businesses, net of cash acquired  ............................       (800,000)   (6,185,030)    (2,775,393)
  Capital expenditures  ........................................................       (434,324)   (4,063,195)    (9,491,394)
                                                                                   ------------   -----------   ------------
Net cash (used in) investing activities  .......................................    (24,629,722)     (888,856)   (28,250,816)
                                                                                   ------------   -----------   ------------
 
Cash flows from financing activities:
  Issuance of common stock  ....................................................     25,861,947       514,631        917,916
  Decrease in registration costs  ..............................................        746,462            --             --
  Payment of dividends on preferred stock  .....................................       (560,346)           --             --
  Repurchase of common stock  ..................................................             --            --     (7,908,741)
  Proceeds of secondary offering, net of registration costs  ...................             --            --     71,449,494
  (Repayments) proceeds from bank loans  .......................................       (283,333)           --     10,000,000
  Payments of notes payable  ...................................................             --            --       (863,752)
  Payments of capital lease obligations  .......................................       (550,914)   (1,098,999)    (1,835,734)
  Repayments of loans to stockholders  .........................................          2,914        28,421             --
                                                                                   ------------   -----------   ------------
Net cash provided by (used in) financing activities  ...........................     25,216,730      (555,947)    71,759,183
                                                                                   ------------   -----------   ------------
 
Net increase (decrease) in cash and cash equivalents  ..........................       (570,792)     (616,618)    45,230,720
Cash and cash equivalents at beginning of period  ..............................      1,512,695       941,903        325,285
                                                                                   ------------   -----------   ------------
Cash and cash equivalents at end of period  ....................................   $    941,903   $   325,285   $ 45,556,005
                                                                                   ============   ===========   ============
Supplemental disclosures of cash flow information:
  Cash paid during the period for income taxes  ................................   $  1,941,013   $ 1,771,044   $  6,108,858
                                                                                   ============   ===========   ============
  Cash paid during the period for interest  ....................................   $    224,112   $   339,963   $    581,278
                                                                                   ============   ===========   ============
  Fixed assets acquired pursuant to capital leases  ............................   $  1,417,569   $ 2,638,364   $  3,577,065
                                                                                   ============   ===========   ============
  Note payable related to acquisition of business  .............................   $         --   $   974,000   $  1,395,000
                                                                                   ============   ===========   ============
  Accrual of dividends on preferred stock  .....................................   $     82,346   $        --   $         --
                                                                                   ============   ===========   ============
  Common stock issued for acquisitions  ........................................   $         --   $        --   $ 13,800,000
                                                                                   ============   ===========   ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                    Page 8
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Organization

  IMPATH Inc. (the "Company") was incorporated on March 1, 1988 under the
laws of the State of Delaware. The Company was organized for the purpose of
establishing a specialized facility dedicated to the use of the most
sophisticated technologies to provide diagnostic and prognostic information to
physicians specializing in cancer. The Company conducts these analyses by
utilizing immunohistochemistry, flow cytometry and image analysis, molecular
pathology, cytogenetics and serum analysis technologies. The consolidated
financial statements include the accounts of all the majority-owned
subsidiaries. All intercompany balances have been eliminated in consolidation.
The Company's revenues are derived through:

     Diagnostic and prognostic analytical services to hospitals, medical
  centers, clinical laboratories and physicians; and

     Monoclonal antibody and molecular probe characterization services to
  biotechnology companies and other researchers; and

     Licensing of tumor registry software to community hospitals and state
  agencies.

  The Company submits its invoices for diagnostic and prognostic analytical
services to its clients, primary and secondary insurers, or individual patients.
The Company does not require collateral from its clients as security for payment
of its invoices.


(2)  Significant Accounting Policies

 (a) Cash Equivalents

  Cash equivalents consist principally of money market funds at December 31,
1997 and 1998. For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.  Cost approximates fair market
value for these instruments.

 (b) Marketable Securities

  In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 through September 30, 1997 the Company's investments (consisting primarily
of government and corporate fixed income securities) were classified as trading
securities and were stated at fair market value at each balance sheet date with
unrealized gains, net, in the amount of $80,720 for the year ended December 31,
1996 (and unrealized gains, net, of $404,970 for the nine-month period ended
September 30, 1997) reported in the accompanying consolidated statements of
operations. Effective October 1, 1997, due to a change in the Company's
investment strategy, the portfolio of securities are now considered available
for sale as prescribed by SFAS No. 115. As a result, unrealized depreciation
since October 1, 1997 is recorded as an accumulated other comprehensive income
(expense) in stockholders' equity, net of related deferred taxes.  At December
31, 1997 and 1998, the Company's marketable securities were again primarily
government, municipal and corporate fixed income securities.  At December 31,
1998, approximately $23 million of the securities are redeemable in one to two
years (of which approximately $17.5 million are corporate fixed income
securities, $5.0 million are municipal securities and $500,000 are government
securities), and approximately $7 million are due between three to four years
(of which approximately $6.5 million are corporate fixed income securities and
$500,000 are government securities).

                                    Page 9
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (c) Fixed Assets

  Fixed assets are stated at cost. Depreciation of furniture, fixtures,
laboratory equipment and personal computers is provided over their estimated
useful lives (which range from three to seven years) using the straight-line
method, and leasehold improvements are being amortized over the shorter of the
related lease term or the lives of the improvements using the straight-line
method.  Software development costs primarily represent external costs
capitalized for software developed to meet the specific needs of the Company.
These costs are being amortized over a five- to seven-year period using the
straight-line method.  Effective January 1, 1998, the Company adopted the
provisions of AICPA statement of position 98-1 "Accounting for Software Costs".
The adoption of the statement resulted in approximately $500,000, or
approximately $0.04 per diluted share after taxes, of internal payroll costs
being capitalized in 1998 as they related directly to system implemenation.

 (d) Revenue Recognition

  Revenues are recognized on an accrual basis as earned at such time as the
Company has completed performance of its diagnostic or prognostic services.
Revenue is reported at the estimated net realizable amounts from patients,
third-party and government payors, and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with certain
payors. Retroactive adjustments are accrued on an estimated basis in the period
the related services are rendered and adjusted in future periods as final
settlements are determined.

  Revenue from the license of tumor registry software is deferred and recognized
on a straight-line basis over the term of the agreement. All license agreements
have support and maintenance obligations by the Company.

  Laws and regulations related to government programs are complex and subject to
interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation.

 (e) Intangible Assets

  Goodwill, which represents the excess of purchase price over fair value of
identifiable net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 years.  The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.  The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds.  The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.  Other acquired
intangibles, the majority being customer lists, are being amortized over their
estimated useful lives of between five to twenty years.

 (f) Income Taxes

  Income taxes are provided pursuant to the asset and liability method as
described in SFAS No. 109. SFAS No. 109 requires that the Company recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the consolidated financial statements or tax
returns. Under SFAS No. 109, deferred tax assets and liabilities are determined
on the basis of the difference between the tax basis of assets and liabilities
and their respective financial reporting amounts ("temporary differences") at
enacted tax rates in effect for the years in which the differences are expected
to reverse.

                                    Page 10
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

 (g) Concentration of Credit Risks

  The Company invests its cash, cash equivalents and marketable securities in
deposits with money market funds of major U.S. financial institutions, and fixed
income securities. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. To date, the
Company has not experienced any significant losses on its cash, cash equivalents
and marketable securities.

 (h) Equity Security Transactions

  From inception through the Company's initial public offering in February 1996
(the "IPO"), the Board of Directors had established the fair value of common
shares, Series A, B, C and D mandatorily redeemable convertible preferred stock,
stock options and warrants based on facts and circumstances existing at the
dates such equity transactions occurred, including the price at which equity
instruments were sold to independent third parties. Subsequent to the IPO, fair
market value of equity instruments is determined based on the quoted market
price of the Company's stock.

 (i) Stock-Based Compensation

  In accordance with SFAS No. 123,"Accounting for Stock-Based Compensation,"
the Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock. Such amounts are amortized
over the respective vesting periods of the option grant. The Company uses the
fair value-based method of accounting for stock-based compensation to non-
employees. Under the fair value-based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
vesting period.

 (j) Net Income Per Common Share

  "Basic" earnings per common share equal net income divided by weighted
average common shares outstanding during the period. "Dilutive" earnings per
common share equal net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. Common stock
equivalents are shares assumed to be issued if outstanding stock options and
warrants were exercised. Common stock equivalents that are anti-dilutive are
excluded from net income per common share.

  The calculation of shares used in computing net income per common share for
both the basic and dilutive calculations has included all series of mandatory
redeemable preferred stock assuming conversion into shares of common stock from
their respective original dates of issuance. For periods prior to the Company's
IPO, net income per common share--assuming dilution is based on the weighted
average number of shares of common stock outstanding including common equivalent
shares from stock options and warrants. All stock options and warrants issued
during the one-year period prior to the IPO at prices below the anticipated IPO
price are presumed to have been issued in contemplation of the IPO and have been
included in the calculation of net income per common share as if they were
outstanding for all periods presented.

                                    Page 11
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
Following is a reconciliation of the shares used in calculating basic and
dilutive net income per common share (net income available to common
stockholders as reported is the numerator in each calculation):

<TABLE>
<CAPTION>
                                                                 1996         1997         1998
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
  Weighted average common shares outstanding  .............   4,536,000    5,398,000    7,635,000
  Effect of assumed conversion of preferred stock  ........     425,000           --           --
                                                              ---------    ---------    ---------
  Weighted average common and common equivalent
    shares outstanding  ...................................   4,961,000    5,398,000    7,635,000
  Effect of dilutive securities--options  .................     443,000      411,000      367,000
                                                              ---------    ---------    ---------
  Weighted average common and common equivalent
    shares outstanding--assuming dilution  ................   5,404,000    5,809,000    8,002,000
                                                              =========    =========    =========
</TABLE>

 (k) Use of Estimates

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

 (l) Long-Lived Assets

  The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.  This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset.  If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.  Assets
to be disposed of are reported at the lower of the carrying amount on fair value
less costs to sell.

 (m) Comprehensive Income


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

 
(3) Fair Value of Financial Instruments

  SFAS No. 107,"Disclosure about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.

  The carrying amounts of all financial instruments except investments in
marketable securites approximate fair value because of the short maturity of
those instruments. Fair values of investments in marketable securities are based
on quoted market prices.


                                    Page 12
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

(4) Accounts Receivable

  In accordance with Generally Accepted Accounting Principles ("GAAP") and
consistent with healthcare industry practices, IMPATH presents its accounts
receivable at net realizable value.  Net accounts receivable balances are
comprised of the following as of December 31, 1997 and 1998.



<TABLE>
<CAPTION>
                                                              1997                   1998
                                                              ----                   ----
<S>                                                        <C>                   <C> 
Gross accounts receivable                                  $21,854,353           $ 35,138,046
Allowance for doubtful accounts                             (4,760,117)            (3,958,235)
Contractual allowance reserve                               (5,146,007)           (11,560,360)
                                                           -----------           ------------
                                                           $11,948,229           $ 19,619,451
                                                           ===========           ============
</TABLE>
                                                                                
  Accounts receivable, by payor class, as a percentage of total net receivables
at December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                             1997      1998
                                                             ----      ----
<S>                                                          <C>       <C>
  Medicare  ..............................................     17%       12%
  Commercial insurance  ..................................     42        44
  Hospitals, clinics and other institutions  .............     24        25
  Patients  ..............................................     17        19
                                                             ----      ----
                                                              100%      100%
                                                             ====      ====
</TABLE>

(5)   Fixed Assets

  At December 31, 1997 and 1998, fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                               1997          1998
                                                           -----------   -----------
<S>                                                        <C>           <C>
  Personal computers  .................................    $ 2,150,760   $ 4,571,227
  Software development costs  .........................      3,937,576    10,508,280
  Furniture, fixtures and laboratory equipment  .......      3,402,770     5,990,837
  Leasehold improvements  .............................        764,202     5,316,091
  Construction in progress  ...........................      2,953,006             -
                                                           -----------   -----------
                                                            13,208,314    26,386,435
  Less accumulated depreciation and amortization  .....      2,732,739     5,146,551
                                                           -----------   -----------
                                                           $10,475,575   $21,239,884
                                                           ===========   ===========
</TABLE>

  Included in the above at December 31, 1997 and 1998 are gross assets under
capital leases of approximately $5,532,841 and $9,109,906, respectively, and the
related accumulated amortization at such dates is approximately $1,500,515 and
$2,427,255, respectively.

                                    Page 13
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        
(6)  Acquisitions

     In October 1996, the Company entered into an agreement with Oncogenetics
Inc. to purchase customer lists pertaining to its diagnostic and prognostic
cancer business for a sum of $800,000. In conjunction with this purchase the
Company obtained the option to purchase the cytogenetics business of the seller
for $1, plus assumption of a $750,000 note payable (which was paid just after
the transaction). The option was exercised in January 1997.

     In February 1997, the Company purchased certain assets of Immunodiagnostic
Laboratories, Inc. ("Immunodiagnostic"), which operates an oncology division
specializing in sophisticated cancer analytical assays, in order to provide
diagnostic and prognostic information to pathologists, oncologists and others
specializing in cancer. The purchase price included an initial payment at
closing of $425,000 plus the issuance of options to purchase 20,000 shares of
the Company's common stock at $17.44 per share (estimated value of $191,218).

     In September 1997, the Company acquired certain assets of GenCare for an
initial payment of $4,600,000. GenCare is a New Jersey-based cancer laboratory
specializing in tissue-based testing and tumor marker analyses.

     In October 1997, the Company purchased certain assets of Aeron
Biotechnology, Inc. ("Aeron"), a California-based cancer testing facility
specializing in breast cancer prognostic analysis. The purchase price for Aeron
included an initial payment of $376,000 made at closing. Additionally, the
Company paid $180,000 for certain other assets owned by Aeron.

     The acquisitions of Immunodiagnostic, GenCare and Aeron all have an
individual contingent purchase price arrangement based on the future operating
results of the respective business. Such payments could range up to
approximately $1,000,000 and bear interest at 9% per annum.

     The aggregate acquisitions in 1997 were all treated as purchases with the
results of operations of each transaction being included in the consolidated
results from the respective acquisition date. The incremental operating results
were not material to the results of operation of the Company. The purchase
prices represented primarily payments for customer lists, which are included in
intangible assets on the accompanying consolidated balance sheets and will be
amortized over periods of up to fifteen years.

     In July 1998 the Company purchased certain assets of Biologic & Immunologic
Science Laboratories, Inc. (BIS), a privately held cancer diagnostics company
based in Reseda, California for $3.6 million.  The terms provided for an initial
payment of $2,000,000, and $800,000 payable in three equal semi-annual
installments beginning December 1998, after which another $800,000 is payable in
three equal semi-annual installments contingent on previously established
revenue targets with interest accruing at 8% per annum.

     In August 1998 the Company acquired Medical Registry Services, Inc. (MRS)
for the issuance of 550,000 shares of IMPATH Inc. common stock valued at
$13,750,000. After the consideration of certain other expenses related to the
acquisition and after recording net tangible assets of MRS, the Company recorded
approximately $17.3 million in intangibles (includes approximately $12 million
of goodwill). MRS is a leading developer and marketer of cancer registry
software products that are currently utilized in over 400 hospitals throughout
the United States. The products are used to collect and manage critical
diagnostic, treatment, follow-up and outcomes data on cancer patients.

     MRS's revenues are derived from licensing fees paid by hospitals utilizing
its proprietary tumor registry software. Had the MRS acquisition been effected
as a purchase as of the beginning of 1998 and 1997, respectively, the following
unaudited proforma results would have been reflected for the year ended December
31, 1997 and 1998.


                                    Page 14
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                                           1997                            1998        
                                                                           ----                            ----        
<S>                                                                    <C>                             <C>              
Revenues                                                               $40.5 million                   $59.1 million    
Net income                                                              $3.0 million                    $6.6 million    
Net income per common share-assuming dilution                            $     0.47                     $     0.79
                                                                         ----------                      ----------
Weighted average share-assuming dilution                                  6,359,000                       8,369,000
                                                                         ==========                      ==========
</TABLE>
                                        
These proforma results are not neccesarily indicitive of the results that would
have actually occurred had the transaction been completed at that time.

On September 2, 1998 the Company acquired Physicians Choice, Inc. (PCI) for the
sum of $1.0 million, with $400,000 payable immediately and an additional
$400,000 payable in four equal semi-annual installments beginning March 1999
with interest accruing at 8% per annum.  In addition, the terms provided for an
issuance of $200,000 in IMPATH Inc. common stock.  An initial 1,980 shares
($50,000 FMV) of common stock were issued on September 2, 1998, with the
remaining shares to be issued in three equal annual installments beginning
September 2, 1999.

The aforementioned acquisitions will all be accounted for using the purchase
method with results of operations of the respective entities being included with
the results of the Company since the acquisition date.

The excess of the purchase price over the net assets acquired on both the BIS
and PCI acquisitions principally relate to customer lists, which are included in
intangible assets on the accompany December 31, 1998 balance sheet and will be
amortized over periods of up to fifteen years.  The excess of the purchase price
over the net assets acquired for the MRS purchase primarily relates to the
customer list, trade name, software and goodwill which are included in
intangible assets on the accompanying December 31, 1998 balance sheet and will
be amortized over periods of 5 to 20 years.  Had the BIS and PCI acquisitions
described above been effected as of the beginning of 1998, the Company's
operating results would not have been materially different.


(7)  Accrued Expenses

     Accrued expenses are comprised of the following as of December 31, 1997 and
1998:

<TABLE>
<CAPTION>
                                         1997                    1998
                                         ----                    -----
<S>                                    <C>                     <C>
  Salaries and related costs  .......  $345,000                $  756,000
  Other accrued expenses  ...........   383,353                 1,063,752
                                       --------                ----------
                                       $728,353                $1,819,752
                                       ========                ==========
</TABLE>


(8)  Indebtedness

     The Company increased its line of credit to an aggregate amount of
$10,000,000 with Fleet Bank. Borrowing under the line will bear interest at
LIBOR plus 2.25%. In December 1998, the Company drew $10,000,000 against such
line. Approximately $4.5 million was repaid in January 1999, with the remainder
paid in full during February 1999. The line of credit has certain financial
covenants for which the Company was in compliance with at December 31, 1998.


                                    Page 15
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

(9)  Stockholders' Equity

   (a) Common Stock

     On October 13, 1995, the Board of Directors authorized the Company to file
a registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with an initial public offering. Such
offering was consummated on February 26, 1996 for a total of 2,242,500 common
shares at an offering price of $13 per share. The net proceeds to the Company
amounted to approximately $25,737,000. In March 1998, the Company raised
approximately $71,000,000 of additional capital through an underwritten
secondary public offering of 2,300,000 common shares of stock.

   (b) Treasury Stock

     In December 1998, the Company initiated a share buyback program to acquire
up to $25,000,000 worth of stock. As of December 31, 1998, the Company acquired
306,600 shares of common stock for approximately $7.9 million.

   (c) Preferred Stock

     Effective February 10, 1995, the Company sold 1,612,904 shares of its 8%
Series D Convertible Participating Preferred Stock and warrants to purchase
42,529 shares of its common stock at $3.50 per share for an aggregate sales
price of $2,000,000 (before issuance costs). The warrants are exercisable for a
period of six years. In 1997, 11,184 of such warrants were exercised and in 1998
another 29,331 were exercised.  The holders of this preferred stock had the
right to convert their shares into shares of common stock, subject to certain
adjustments. Concurrent with the issuance of the 8% Series D Convertible
Participating Preferred Stock and common stock warrants, the terms of the
outstanding Series A, B and C Redeemable Preferred Stock were revised, resulting
in the elimination of all previously existing redemption rights, elimination of
all previously accrued dividends in the amount of $1,799,909 and a change in the
future dividend rate from 9% to 8%.

     In June 1988 and March 1990, the Company sold 1,776,318 and 100,000 shares,
respectively, of its Series A 9% Convertible Preferred Stock (subsequently
amended to 8%) with a par value of $.01 per share for $1,350,000 (before
issuance costs) and $76,000, respectively.

     In March 1990, the Company issued 668,182 shares of its Series B 9%
Convertible Preferred Stock (subsequently amended to 8%; terms are substantially
identical to those of the Series A 8% Convertible Preferred Stock) for an
aggregate consideration of $587,998 (before issuance costs).

     In March 1991, the Company issued 1,638,887 shares of its Series C 9%
Convertible Preferred Stock (subsequently amended to 8%; terms are substantially
identical to those of the Series A 8% Convertible Preferred Stock) for an
aggregate consideration of $1,475,000 (before issuance costs). In June and July
1993, the Company issued 1,396,433 additional shares of its Series C 9%
Convertible Preferred Stock (subsequently amended to 8%) for an aggregate
consideration of $1,256,789.

     Upon the consummation of the Company's IPO on February 26, 1996, all
preferred shares were converted into 2,548,933 shares of common stock and all
accrued dividends commencing February 10, 1995, totaling approximately $560,000,
were paid.

 
                                    Page 16
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

 (d) Stock Option Plans

     In February 1989, the Company adopted (and subsequently amended) a Stock
Option Plan (the "Plan") which provides for granting to certain key employees
of the Company, directors and consultants, options to purchase up to 884,688
shares of common stock. Options granted are exercisable over a period not to
exceed ten years and generally vest over five years.

     In August 1995, four directors were granted options to purchase a total of
42,528 shares of common stock at an exercise price of $3.50 per share under the
Company's Stock Option Plan, which vest ratably over 36 months.  Management of
the Company estimated the fair market value of the underlying common stock to be
approximately $8.00 per share and, accordingly, recorded deferred compensation
of $191,000, which amount is being amortized ratably over the vesting period. In
October 1995, three additional directors were granted options to purchase a
total of 31,896 shares of common stock at an exercise price of $3.50 per share,
which vest ratably over 36 months.  Management of the Company estimated fair
market value of the underlying common stock to be approximately $9.50 per share
and, accordingly, recorded deferred compensation of $191,000, which amount is
being amortized ratably over the vesting period.

     In April 1997, the Company adopted the IMPATH Inc. 1997 Long-Term Incentive
Plan (the "Incentive Plan"), which provides for granting to certain key
employees of the Company, directors and consultants, options to purchase up to
300,000 shares of common stock. Options granted are exercisable over a period
not to exceed ten years and generally vest over four years. Options to purchase
79,000 shares were granted to consultants under the Incentive Plan in 1997.
Options to purchase 69,000 shares were granted to consultants under the
Incentive Plan in 1998.  Compensation cost will be amortized per these grants
over the vesting period of the options.
 
     The Company has elected not to implement the fair value based accounting
method for employee stock options, but has elected to disclose the pro forma net
income and earnings per share as if such method had been used to account for
stock-based compensation cost as described in SFAS No. 123 in the Statement.

     The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $8.10, $14.88 and $16.68, respectively, on the dates of
grant using the Black Scholes option-pricing model with the following weighted-
average assumptions: 1996--expected dividend yield 0%, risk-free interest rate
of 7.0%, expected volatility 60% and an expected life of 7 years; 1997--expected
dividend yield 0%, risk-free interest rate of 7.0%, expected volatility of 60%
and an expected life of 7 years; 1998--expected dividend yield 0%, risk-free
interest rate of 7.0%, expected volatility of 60% and an expected life of 7
years.

     The Company applies APB Opinion No. 25 in accounting for its options and,
accordingly, no compensation cost has been recognized for its stock options
issued at exercise prices equal to the fair market value of the stock on the
grant date, with the exception of certain stock options issued in 1996 through
1998 to nonemployees as previously described.



                                    Page 17
 
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                        
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                            1996            1997            1998
                                                                         ----------      ----------      ----------
<S>                                                    <C>               <C>             <C>             <C>
  Net income available to common stockholders........  As reported       $2,047,550      $3,649,199      $6,947,545
                                                       Pro forma         $1,903,858      $3,211,328      $5,879,393
 
  Net income per share--assuming dilution............  As reported       $     0.38      $     0.63      $     0.87
                                                       Pro forma         $     0.37      $     0.55      $     0.73
</TABLE>


  Pro forma net income reflects only options granted in 1995 through 1998.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.

  The following is a summary of option activity during the years ended December
31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
                                                                                 Weighted
                                                        Shares                    average    
                                                        under          Price      exercise   
                                                       options       Range ($)   price ($)   
                                                     ------------  ------------- ----------  
<S>                                                  <C>           <C>             <C>
  Options outstanding at December 31, 1995  .........   533,357       0.28-8.00      2.57    
  Granted  ..........................................   247,077     11.13-18.38     14.05    
  Exercised  ........................................   (75,846)     0.28-13.00      1.66    
  Canceled  .........................................   (14,962)     2.15-13.00      5.62    
                                                       --------                              
  Options outstanding at December 31, 1996  .........   689,626      0.28-18.38      6.72    
  Granted  ..........................................   342,612     17.25-31.38     23.12    
  Exercised  ........................................  (125,357)     0.28-25.25      3.84    
  Canceled  .........................................   (28,705)     2.54-25.25     16.53    
                                                       --------                              
  Options outstanding at December 31, 1997  .........   878,176      0.28-31.38     13.21    
  Granted  ..........................................   189,698     20.50-37.25     25.47    
  Exercised  ........................................  (198,207)     0.28-26.88      4.29    
  Canceled  .........................................   (41,399)     2.54-31.88     22.20    
                                                       --------                              
  Options outstanding at December 31, 1998  .........   828,268      0.28-37.25     17.70    
                                                       ========     ===========     =====    
</TABLE>



                                    Page 18
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1998:

<TABLE>
<CAPTION> 
                                         
                                 Weighted                                    
                                -----------                                   
                       Number     average    Weighted    Number    Weighted   
                    ----------- -----------  ---------  ---------  ---------  
   Range of             out-     remaining    average   exercis-    average   
--------------      ----------- -----------  ---------  ---------  ---------  
   exercise         standing at contractual  exercise    able at   exercise   
--------------      ----------- -----------  ---------  ---------  ---------  
    Prices            12/31/98     life        price     12/31/98    price    
--------------      ----------- -----------  ---------  ---------  ---------  
<S>                 <C>         <C>          <C>        <C>        <C>
  $  0.28-0.34             887    2.3 years     $ 0.33        887     $ 0.33
          0.56           1,773   2.31 years       0.56      1,773       0.56
    2.12- 3.50         147,043   5.68 years       3.05    135,278       3.01
    8.00-12.63          41,208   7.32 years      10.25     14,145       9.05
   13.00-13.75         102,905   7.06 years      13.07     56,523      13.06
   16.75-18.38          97,677   7.87 years      17.19     43,640      17.19
   18.50-24.75         208,117   8.99 years      21.39     53,085      20.15
   25.13-26.88         163,058   8.97 years      26.87     39,560      26.88
   27.25-31.38          50,400   9.44 years      27.91      6,802      28.09
   32.13-35.50           8,200   9.74 years      32.87        380      33.99
   36.88-37.25           7,000   9.31 years      36.99      1,062      37.00
                      --------                           --------
    0.28-37.25         828,268                            353,135
   ===========        ========                           ========
</TABLE>

  At December 31, 1998, the Company had 852,934 shares reserved for options and
warrants outstanding, as well as future option grants.


(10)   401(k) Retirement Savings Plan

     Effective June 1, 1995, the Company adopted the IMPATH Inc. 401(k)
Retirement Savings Plan (the "Plan") benefiting certain employees. Employees who
are over the age of 21 and have completed six months of service are eligible for
voluntary participation in the Plan. Employees may contribute 1% to 20% of their
total salaries on a before tax basis, and the Company will match up to 50% of
the first 4% of employee contributions. Plan participants who were employees as
of June 1, 1996 are 100% vested in all contributions. Any employees hired
subsequent to June 1, 1996 are 100% vested in their own contributions and will
become vested in employer contributions over a three-year period. Employer
contributions for the year ended December 31, 1996, 1997 and 1998 were $50,990,
$70,439 and $133,842, respectively.


                                    Page 19
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                        
(11)   Income Taxes

      The components of the provision (benefit) for income taxes for 1996, 1997
and 1998 are as follows:

<TABLE>
<CAPTION>
                                                          1996         1997          1998
                                                      ------------  -----------  ------------
      Current:
<S>                                                   <C>           <C>          <C>
         Federal  ...................................  $1,566,987    $  972,484   $3,345,462
         State and local  ...........................     907,607       573,594    1,625,507
                                                       ----------    ----------   ----------
                                                        2,474,594     1,546,078    4,970,969
                                                       ----------    ----------   ----------
      Deferred:
         Federal  ...................................    (541,047)    1,015,667     (255,671)
         State and local  ...........................    (313,238)      290,191     (139,493)
                                                       ----------    ----------   ----------
                                                         (854,285)    1,305,858     (395,164)
                                                       ----------    ----------   ----------
                                                       $1,620,309    $2,851,936   $4,575,805
                                                       ==========    ==========   ----------
</TABLE>

      Deferred tax components at December 31, 1997 and 1998 are as follows: 

<TABLE>
<CAPTION>
                                                1997            1998
                                           --------------  --------------
      Assets:
<S>                                        <C>             <C>
      Allowance for doubtful accounts  ..      $      --     $   405,035
      Deferred compensation  ............        169,882         244,110
      Depreciation  .....................        263,359              --
      Deferred revenue  .................             --         640,000
                                               ---------     -----------
                                                 433,241       1,289,145
      Liabilities:  
      Intangible assets - acquisitions...             --      (1,880,531)
      Other..............................       (379,814)       (200,554)
                                               ---------     -----------
                                                (379,814)     (2,081,085)
                                               ---------     ===========
 
      Deferred tax assets (liabilities),       $  53,427     $  (791,940)
       net  .............................      =========     ===========
</TABLE>

      Management of the Company believes that it is more likely than not that
future tax benefits will be realized as a result of the recent operating
performance of the Company.

      A reconciliation of the Federal statutory income tax rate to the effective
tax rate for the years ended December 31, 1996, 1997 and 1998 follows:

<TABLE>
<CAPTION>
                                                                   1996       1997       1998
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
      Federal statutory income tax rate  .........................   34.0%      34.0%      35.0%
      State and local taxes, net of Federal income tax benefit  ..   10.7       10.2        7.3
      Tax exempt interest income..................................     --         --       (2.9)
      Change in valuation allowance  .............................   (2.3)        --         --
      Other  .....................................................    1.8       (0.3)       0.3
                                                                     ----       ----       ----
                                                                     44.2%      43.9%      39.7%
                                                                     ====       ====       ====
</TABLE>

  The Company recognized a tax benefit for stock options exercised as a
reduction in taxes payable and a corresponding increase in additional paid in
capital totaling $171,531 and $778,611 in 1997 and 1998, respectively.


                                    Page 20
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

(12)   Leases

  The Company utilizes laboratory and office facilities and leases equipment
pursuant to the terms of operating and capital leases, which expire through 2009
(certain leases expiring in 1999 are cancelable at the Company's option).

 
  The present value of future minimum lease payments (including those cancelable
at the Company's option and subject to increases in the Consumer Price Index and
real estate taxes) for the capital leases and the future minimum lease payments
for operating leases are as follows:

<TABLE>
<CAPTION>
                                                                              Operating         Capital
                                                                              ---------         -------
Year ending December 31,                                                       leases           leases 
------------------------                                                       ------           ------  
<S>                                                                       <C>            <C>
  1999...................................................................    $1,459,496       $ 2,058,408
  2000  .................................................................     1,272,038         2,000,550
  2001  .................................................................       800,728         1,524,807
  2002  .................................................................       679,215           676,084
  2003  .................................................................       665,511             8,811
  Thereafter  ...........................................................     3,807,638                --
                                                                             ----------       -----------
                                                                             $8,684,626         6,268,660
                                                                             ==========
  Less amount representing interest (rates range from 5.75% to 9.75%)....                        (853,461)
                                                                                              -----------
  Present value of minimum lease payments  ..............................                       5,415,199
  Less current portion  .................................................                      (1,622,366)
                                                                                              -----------
                                                                                              $ 3,792,833
                                                                                              ===========
</TABLE>

     For the years 1996, 1997 and 1998, rent expense was $749,168, $1,169,763,
and $1,272,661 respectively.

(13) Related Party Transactions

     The Company paid $93,112, $128,329 and $104,000 in the years ended December
31, 1996, 1997 and 1998, respectively, to a Director who also performs certain
consulting services to the Company.

(14)   Commitments and Contingencies

     The Company is involved in various legal actions in the normal course of
business, some of which seek monetary damages. The Company believes any ultimate
liability associated with these contingencies would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.

     Certain executive officers of the Company have entered into agreements
which provide severance of up to one year's salary in the event of termination
without cause.

                                    Page 21
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                        

(15)   Quarterly Financial Data (unaudited)
  (dollars in thousands except per share data)


 
<TABLE>
<CAPTION>
                                                                                 Per Share of  Common Stock
                                                                                          Net Income
                                                                                          ----------
        Quarter                                       Revenues     Net Income      Basic         Diluted
        -------                                       --------     ----------      -----         -------
<S>                                                 <C>           <C>           <C>           <C>
        1998
        Fourth                                           $16,540        $2,014         $0.24          $0.23
        Third                                             14,571         2,067          0.26           0.25
        Second                                            13,435         1,789          0.23           0.22
        First                                             11,713         1,078          0.18           0.17
-----------------------------------------------------------------------------------------------------------
        Total                                            $56,259        $6,948         $0.91          $0.87
-----------------------------------------------------------------------------------------------------------
        1997
        Fourth                                           $10,605        $1,295         $0.25          $0.22
        Third                                              9,328           923          0.16           0.16
        Second                                             9,285           868          0.16           0.15
        First                                              7,845           563          0.11           0.10
-----------------------------------------------------------------------------------------------------------
        Total                                            $37,063        $3,649         $0.68          $0.63
-----------------------------------------------------------------------------------------------------------
</TABLE>
                                                                                
                                    Page 22
<PAGE>
 
                               INDEX TO EXHIBITS

EXHIBIT
NUMBER                            DESCRIPTION                               PAGE
------                            -----------                               ----

3.1         Restated Certificate of Incorporation, as amended               *
3.2         Form of Certificate of Amendment regarding authorization        *
            of additional preferred stock 
3.3         By-laws                                                         *
4.1         Regulation Rights Agreement dated February 10, 1995 among       *
            IMPATH Inc. and certain of its shareholders                     *
10.1        Master Lease Agreement dated April 11, 1995 between IMPATH      *
            Inc. and Financing For Science International, Inc.
10.2        Employment letter dated October 26, 1993 between Bruce C.       *
            Horten, M.D., and IMPATH Inc.
10.3        Employment letter dated March 7, 1994 between John P.           *
            Gandolfo and IMPATH Inc.
10.4        Space Lease dated August 29, 1988, as amended, between          *
            166 East 61st Street Associates and IMPATH Inc. (formerly   
            known as BioPath, Inc.)
10.5        Sublease dated April 1992, between Zeller 1010 Formals,         *
            Inc. and IMPATH Inc.
10.6        Space Lease dated September 27, 1991, as amended, between       *
            166 East 61st Street Associates and IMPATH Inc. (formerly
            known as Impath Laboratories Inc.)
10.7        Assignment and Assumption of Lease Agreement dated August 1,    *
            1990, as amended, between Mitchell Manning Associates, Inc. 
            and IMPATH Inc.
10.8        Space Lease Agreement dated April 20, 1995 between OMA Del      *
            Aire Properties and IMPATH Inc. (formerly known as Impath
            Laboratories Inc.)
10.9        Floating Rate Promissory Note in the principal amount of        *
            $300,000 made by IMPATH Inc. in favor of Chemical Bank
10.10       1989 Stock Option Plan                                          *
10.11       Form of Indemnification Agreement with directors                *
10.12       Lease Modification Agreement dated as of April 24, 1995         *
            between 166 East 61st Street Associates and IMPATH Inc. 
            (formerly known as Impath Laboratories Inc.)
10.13       Letter Agreement dated December 12, 1997 between Anu D.         **
            Saad, Ph.D., and IMPATH Inc.
10.14       Letter Agreement dated December 12, 1997 between John P.        **
            Gandolfo and IMPATH Inc.
10.15       Letter Agreement dated December 12, 1997 between Bruce C.       **
            Horten, M.D., and IMPATH Inc.
10.16       Letter Agreement dated December 12, 1997 between Moacyr         **
            Da Silva, M.D., and IMPATH Inc. 
10.17       Letter Agreement dated December 12, 1997 between Richard P.     **
            Adelson and IMPATH Inc.
10.18       1997 Long Term Incentive Plan                                   ***
10.19       Agreement of Lease dated as of June 26, 1997 between            **
            International Flavors & Fragrances Inc. and IMPATH Inc.
23          Consent of KPMG Peat Marwick LLP
24          Power of Attorney (see "Power of Attorney" in Form 10-K)
27          Financial Data Schedule

--------
*    Incorporated by reference to the exhibit of the same number filed with the
     Registration Statement on Form S-1 of IMPATH Inc. (File No. 33-98916).
**   Incorporated by reference to the exhibit of the same number filed with the
     Annual Report on Form 10-K for the year ended December 31, 1997.
***  Incorporated by reference to Exhibit A to the Proxy Statement of IMPATH 
     Inc. dated April 25, 1997 (File No. 000-27750).