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

                                   FORM 10-K/A

                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996

                                       OR

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

                         Commission file number 0-27750
                                                -------

                                 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.)

          1010 Third Avenue
          New York, New York                         10021
 ----------------------------------------       --------------
 (Address of principal executive offices)         (Zip Code)

Registrant's telephone number, including area code (212) 702-8300
                                                   --------------

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

                                Name of each exchange
     Title of each class         on which registered
     -------------------      ------------------------

                         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.  [X]


<PAGE>
 
    State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.

     Aggregate market value as of March 6, 1997 .............$100,988,838

     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 March 6, 1997..........5,315,202

                      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:

     1997 Proxy Statement -- Part III

<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS.

GENERAL

     IMPATH Inc. (the "Company" or "IMPATH") provides critical information
focused exclusively on cancer.  The Company provides the expertise to establish
correct diagnosis, accurate prognosis, treatment determination and patient
follow-up, all of which are essential for making medically optimal and cost-
effective cancer management decisions.  IMPATH believes it currently performs
more specialized analyses to establish correct diagnosis of difficult cancer
cases than any other institution in the world.  The Company also believes it is
the leader in providing the most comprehensive prognostic information essential
to the management of breast cancer.  IMPATH provided patient-specific prognostic
information on over 15% of all such cases in the U.S. last year and over 25% of
cases diagnosed in the New York metropolitan area, the Company's largest market.
The Company believes that large clinical laboratory companies are in general not
prepared to provide the type of intensive, highly technical, patient-specific
service that it thinks the market requires.  The few university-based medical
centers that have the professional expertise and advanced technologies required
to perform such analyses do not generally provide the same focus as the Company
on service (48 hour turn-around for IMPATH compared with 14 days or more for
academic centers) and on delivery of coordinated and integrated information.
The Company has capitalized on this competitive advantage to build one of the
most significant knowledge bases related to the diagnosis, prognosis and
treatment of cancer.  In addition, the significant volume of cases the Company
reviews is also enabling IMPATH to rapidly grow its diagnostic and prognostic
database into one of the largest and most comprehensive cancer databases and
tissue libraries in the world, with a specific emphasis on patient outcomes and
optimal treatment protocols.

     The market for cancer diagnosis, prognosis and treatment is significant and
growing.  According to the American Cancer Society, the estimated number of
cancer cases diagnosed annually in the United States (excluding certain skin
cancers) increased from approximately 782,000 in 1980 to approximately 1,200,000
in 1995, an increase of 53%.  This increase is attributable to a number of
factors, including a growing and aging population.  In addition, earlier
diagnosis and better information have led to more effective treatment and
increased the relative five-year survival rate of cancer patients from 39% in
1963 to 54% in 1990.  As a result, over 8,000,000 Americans alive today have
been diagnosed with cancer.  The Company anticipates that these trends will
continue and that the demand for information regarding cancer will continue to
increase.  The cost of treating cancer patients is also expected to escalate.
The National Cancer Institute estimates that direct medical costs associated
with cancer totaled approximately $35 billion in 1995, not including lost
productivity and mortality costs.


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                                                                               2
 
     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, 7,000 oncologists and 9,000 urologists, as well as other
specialists for whom cancer is important, such as surgeons, gynecologists and
radiologists.  Historically, pathologists have been the focus of the Company's
marketing efforts because they are responsible for providing the information
from which all cancer management decisions flow.

     Currently, IMPATH's major customers are the pathology departments of small
to medium sized community hospitals (100 to 500 beds).  According to the
American Hospital Association, there are approximately 3,200 hospitals of this
size in the United States.  Of these, approximately 2,650 are located in
geographic areas targeted by IMPATH (i.e., states with high cancer incidence).
The Company believes that direct medical costs associated with cancer will
increase more rapidly than those associated with most other diseases as a result
of the growth in the number of cancer patients and the high cost of new
therapies.  As a result, the delivery of cost-effective treatment will become
increasingly important.  The cornerstone of cost-effective cancer treatment is
accurate diagnosis and prognostic assessment: this constitutes IMPATH's core
business.

     The diagnosis, assessment and treatment of cancer is extremely complex and
requires a multidisciplinary approach.  Among the key specialties involved in
cancer management are surgery (for diagnosis and treatment), oncology (for
treatment and follow-up), radiology (for diagnosis and follow-up), radiation
oncology (for treatment) as well as a number of subspecialties for which cancer
is an important disease, such as urology and gynecology.  However, absolutely
central to all of the specialties and the decisions made by them is the accurate
diagnosis and prognostic assessment of the cancer.  This information (which is
necessary for any treatment decision) is provided by the pathologist.

     Through the development and use of sophisticated technologies, IMPATH
provides patient-specific diagnostic and prognostic information to pathologists,
urologists and oncologists specializing in the disease of cancer.  IMPATH
believes that the use of its services is critical in both the optimization of
patient care as well as the cost-effective delivery of that care.  Historically,
the treatment of cancer has frequently used an approach based upon how a
particular drug or therapy worked on the population as a whole; if one therapy
(i.e., a particular chemotherapy, radiation therapy or other treatment) proved
ineffective then another was tried until a successful therapy was found or all
possibilities were exhausted.  IMPATH provides care givers with the necessary
information, based upon a given individual's specific cancer, to diagnose
correctly a difficult tumor and very often know whether a therapy is the optimal
one before it is tried, thus targeting only those therapies appropriate to an
individual's specific cancer and avoiding the trauma, risk and cost of
unnecessary treatment.  In a significant number of instances, IMPATH's analysis
of particularly difficult cases has helped doctors avoid misdiagnosis.  The
Company believes that
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significant cost savings can be achieved through the relatively inexpensive but
highly valuable services provided by IMPATH.  Furthermore, as an increased
understanding of the molecular basis of cancer leads to the development of new
evaluation methods and therapeutic tools, the information provided by IMPATH is
expected to become increasingly significant in optimizing the management of all
phases of cancer, including cancer predisposition, diagnosis, prognostic and
therapeutic assessment and treatment follow-up.

     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.

CANCER INFORMATION MARKET

     Oncology analysis currently represents a small but important portion of the
overall clinical testing market and has significant growth opportunities.  The
emphasis on cost-containment within the health care industry has placed a heavy
burden on the hospital laboratory.  Hospitals are demanding more cost-effective
operations, while providing services that satisfy the medical staff, encourage
patient admissions, discourage patient transfers and generate maximum revenue.
Thus the target hospitals are often faced with the following choices: operating
a small scale, under-utilized and costly immuno- and molecular pathology
laboratory in-house; referring these tests to a major medical center, resulting
in long turnaround service times and the possibility of losing the patient
entirely to that center; or referring the case to an outside, independent
laboratory, substantially all of which provide a limited number of mostly
automated tests with little or no analysis of test results.  IMPATH provides a
valuable, cost-effective and expeditious alternative for these hospitals by
providing a single source for a broad range of sophisticated, labor-intensive
diagnostic and prognostic analyses for cancer patients.

     The continuing trend towards the organization of health care providers into
managed care networks that emphasize cost containment is the major focus of
medical delivery.  IMPATH believes that, as a result of this trend, there will
be a major effort to outsource sophisticated cancer analysis in order to
optimize patient care and control costs.  IMPATH is positioned to take advantage
of this trend by providing diagnostic and prognostic information that is the
basis for optimal and less costly therapy choices.  In many cases, unnecessary
treatment can be avoided.

     In the past decade, the oncology analysis industry has experienced many new
products and services resulting from the increased understanding of cancer and
its cellular and molecular biology.  As new therapies emerge, management
believes the demand for services that provide information regarding specific
diagnosis, prognosis and therapeutic assessment for individual cancers will
increase substantially.  In fact, the effort to identify new cancer therapies
represents an enormous multinational effort which is yielding, and is likely to
continue to yield, a great many new therapeutic

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options.  IMPATH believes that it is in an ideal position to take advantage of
this growing and evolving market; its services are synergistic with the
development of new therapies because these therapies will often require specific
information about individual cancers to achieve optimal effect.  As such
therapies become available to the public, they can only be applied and evaluated
using the types of information provided by IMPATH.  Thus, IMPATH believes it is
well positioned to take advantage of the advances in cancer therapy into the
future.

COMPANY STRATEGY

     The Company's objective is to be the leading cancer information company and
to become the comprehensive resource for integrating all aspects of the
management of cancer information.  The Company believes that its position as a
leader in providing valuable information on cancer, its demonstrated expertise
in the application of sophisticated technologies for better and more cost-
effective treatment of cancer, its large case flow and diagnostic and prognostic
database and the distinguished reputation of its scientific staff give the
Company significant competitive advantages.  The Company is pursuing the
following strategies to achieve its objective:

     Focus on Cancer.  IMPATH believes that a significant opportunity exists for
a company focused on combining sophisticated technologies with an expanding
knowledge base to provide information critical to the optimal evaluation and
treatment of cancer.  IMPATH is providing advanced information for virtually all
forms of cancer, and has developed a special expertise in breast cancer.

     Incorporate Evolving Technologies into Cancer Management.  The Company
intends to continue to identify and incorporate new technologies that provide
better information about cancer.  IMPATH's medical staff and scientific
consultants are leaders in the development and validation of technologies that
are, and will be, important in the evaluation of various cancers.  The Company
seeks to consolidate its leadership in cancer information and management by
matching the changing therapeutic choices of the medical community with the
latest diagnostic tools of the research community.  IMPATH has a well developed
relationship with the biotechnology industry which has resulted from its
extensive and continuing work to evaluate new technologies as they are being
developed.  Although this area of business represents a very small portion of
the Company's revenues, it allows IMPATH to expand continuously its expertise in
emerging technologies.

     Expand and Enhance Database.  IMPATH has one of the most significant
knowledge bases related to the diagnosis, prognosis and treatment of cancer.  In
addition, the significant volume of cases the Company reviews is also enabling
IMPATH to rapidly grow its diagnostic and prognostic database into one of the
largest and most comprehensive cancer databases and tissue libraries in the
world, with a specific emphasis on patient outcomes and optimal treatment
protocols.  IMPATH expects to continue to link the data obtained from diagnostic
and prognostic
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                                                                               5
 
analyses with therapy choice and patient outcomes.  The management of cancer
information at all stages from predisposition to monitoring of disease following
therapy is expected to position the Company to develop data regarding the
medical value and cost-effectiveness of various diagnostic and prognostic
analyses, as well as the efficacy of currently used and newly developed
therapeutic regimens.  Management believes that this constantly expanding and
evolving database will result in the development of optimal protocols and will
have a significant impact on the management of cancer.

     Establish Strategic Partnerships and Joint Ventures.  The Company believes
that the most comprehensive and therefore the most valuable database will be
established through the coordinated efforts of groups that are key components in
the cancer care network.  During 1997, the Company plans to continue to pursue
strategic partnerships and joint ventures with oncology networks, hospital
groups, managed care companies and pharmaceutical companies.  Oncology networks,
hospital groups and managed care companies can provide the Company access to
additional comprehensive patient data for inclusion in IMPATH's database.  A
potential area of great synergy is between IMPATH and groups developing new
cancer therapies, including biotech companies, pharmaceutical companies and
research centers.  As therapies evolve to take advantage of new advances in the
cellular and molecular basis of cancer, a more detailed knowledge of an
individual's cancer will be essential in order to select those individuals that
will benefit most from particular approaches.  IMPATH is well positioned with
these groups to become an integral part of the therapy development process.  For
example, IMPATH's prognostic expertise can identify patient groups that are most
likely to respond to a new cancer treatment so that clinical trials of the
treatment's efficacy can be targeted to these patient groups.  Also, IMPATH can
assist physicians in determining whether a new cancer treatment would be
effective for a specific patient's cancer.  This will have the added advantage
of demonstrating the importance of the services provided by IMPATH.

     In 1996, the Company entered into two such strategic partnerships.  Dr.
Clive R. Taylor, Professor of Pathology and Chairman of the Pathology Department
at the University of Southern California, became affiliated with the Company.
The Company purchased certain assets of Dr. Taylor's cancer testing facility and
appointed Dr. Taylor to the Company's medical advisory committee.  IMPATH also
entered into a joint venture, IMPATH Registry L.L.C., with Medical Registry
Services, Inc., a leading developer of cancer registry software, to develop a
new software product which will incorporate evolving technologies on a real time
basis and enable oncologists and pathologists to select optimal patient specific
treatment pathways.

     Develop Managed Care Relationships.  The organization of health care
providers into managed care networks represents 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
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                                                                               6
 
provided by IMPATH.  A typical IMPATH case analysis costs approximately $400 and
provides the physician with the information to potentially avoid ineffective
courses of therapy costing many thousands of dollars.  The Company has targeted
the managed care market by establishing managed care provider contracts with
organizations that are active within current IMPATH accounts.  The Company also
intends to expand its presence in managed care by aggressively marketing the
cost effectiveness and patient benefits of IMPATH's services, highlighting the
savings that would result from the information provided by the Company and
assisting managed care companies in developing cancer treatment protocols.

     In order to achieve its goal, the Company has established a managed care
group within its sales organization including the Vice President of Sales and
the Director of Corporate Marketing.  Management believes that the combined
efforts of the existing sales force and the managed care group will allow the
Company to expand significantly its presence in managed care.

     Geographic Expansion.  In December 1995, IMPATH established a facility in
Southern California, thereby expanding the Company's national presence.
California currently represents IMPATH's second largest market (after the New
York metropolitan area) and has the highest concentration of patients enrolled
in managed care.  The California facility provides the Company with additional
operating capacity.  Furthermore, the California facility broadens the Company's
technical capabilities by providing an added focus on molecular analysis and
cytogenetics.  The Company incurred $785,000 in operating expenses during 1995
and $355,000 in operating expenses during the first quarter of 1996 in
connection with this facility, reducing earnings for such periods.  During the
second quarter of 1996, this facility began to generate sufficient incremental
volume and revenues to cover the facility's operating expenses.  In January
1997, IMPATH-HDC, Inc., a wholly owned subsidiary of the Company, acquired a
cancer testing facility based in Phoenix, Arizona specializing in the
cytogenetic analysis of cancer from Oncogenetics, Inc. The Arizona facility has
provided the Company with the technical resources required to expand its
existing molecular and cytogenetics product line. The Company expects the
facility to generate sufficient revenues by the second quarter of 1997 to cover
its operating expenses. In general, geographic expansion involves expansion of
the Company's sales force, with focus on regions where the number of cancer
cases and the market potential warrant the presence of full-time sales
representatives.

     IMPATH believes that foreign markets in cancer information represent a
significant opportunity for the Company.  IMPATH intends to pursue this
opportunity by partnering with foreign oncology networks or hospital groups.
These efforts will focus primarily on Europe, Southeast Asia, Japan, Canada and
Australia, as these regions represent areas where sophisticated treatment
technologies currently exist and therefore the demand for IMPATH's services will
be greatest.  These areas also represent regions with the economic ability to
provide for the advanced types of cancer management that can best utilize the
Company's services.
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     Acquisitions.  The Company intends to pursue selective acquisitions of
companies that will enhance its cancer management information base.  These
acquisitions may be in three different areas: companies that have expertise that
is complementary to, and synergistic with, the Company's current technologies;
companies that are establishing tumor registries in hospitals; and companies
that have expertise in the evaluation of medical data and cost analysis.

     In 1996, the Company purchased certain assets of Cytoprobe, a Southern
California based cancer testing facility owned by Dr. Clive R. Taylor, professor
of Pathology and Chairman of the Pathology Department at the University of
Southern California.  The Company also purchased certain assets of Oncogenetics,
Inc., a leader in the cytogenetic analysis of cancer.  In January 1997, IMPATH-
HDC, Inc., a wholly owned subsidiary of the Company, acquired a cancer testing
facility from Oncogenetics, Inc., which expanded IMPATH's business into new
growth areas in oncology, such as molecular and cytogenetics testing for cancer.
The Company also recently purchased certain assets of Immmunodiagnostic
Laboratories, Inc., 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.

COMPANY DIAGNOSTIC AND PROGNOSTIC SERVICES

     IMPATH provides individualized diagnostic and prognostic information to
pathologists, oncologists and others specializing in the disease of cancer
through the use of sophisticated technologies.  At present, approximately 60% of
the Company's revenues are derived from the provision of prognostic analyses and
40% are derived from the provision of diagnostic analyses.

     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 group of individuals, almost
all of whom are located at academic institutions and major medical centers.  The
average community hospital pathologist does not see a substantial volume or
range of cases and, therefore, very rarely has the experience in choosing the
correct tests and in evaluating the data, or the technical support for achieving
high quality results.  IMPATH addresses these issues by virtue of extensive
experience in developing and carrying out these tests and by the background and
expertise of its medical staff.  IMPATH currently receives an average of over
295 cases a day.  Because IMPATH sees a great many of these cases each day, its
professionals have been able to expand on their considerable experience, and
have been able to develop individual areas of expertise.  In contrast, a
community hospital pathology department may only see a few cases a day requiring
advanced
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analysis; on an individual basis, a pathologist may see particular types of
cases very rarely.  Furthermore, the technical staff in a community hospital
will only occasionally perform the actual tests; the technicians will not have
full time responsibility for the assays, and will most likely work with
prefabricated kits.  When assays do not work or are suboptimal, the technical
and professional personnel may not have the experience to recognize this.
IMPATH's in-house staff and consultants include internationally known experts in
immuno- and molecular pathology and highly experienced technologists.

     Some of the diagnostic and prognostic analyses provided by the Company are
described below:

     Pathology/Oncology Core Diagnostic Analyses.  IMPATH's core diagnostic
analyses provide information regarding tumors that are difficult to diagnose
using conventional pathology procedures.  Certain biopsy specimens cannot be
easily classified as a specific tumor type since many tumors are morphologically
very similar.  This limitation is amplified when the specimen is small.
Furthermore, morphological examination alone is often insufficient to establish
the origin of a metastasized tumor.  IMPATH's analyses are able to provide
information leading to a specific diagnosis in the vast majority of these cases.

     Pathology/Oncology Prognostic Analyses.  IMPATH's prognostic tests provide
information to pathologists and oncologists regarding the aggressiveness of the
tumor.  Although the tests described below are currently most commonly used for
breast cancer, they can also be applied to prostate, bladder and colon cancer.
These tests include hormone receptors, cell proliferation and/or DNA ploidy
analysis, tumor suppressor gene products, oncogene expression and examination of
micrometastases in the lymph nodes and bone marrow.

     --Hormone Receptors.  The presence of estrogen and progesterone receptors
in breast cancer identifies women who are more likely to respond to a commonly
used therapy, i.e., hormonal manipulation of the tumor.  This important test is
now required by the American College of Surgeons.  The hormonal receptor status,
as examined by immunohistochemistry (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 less
invasive, less painful and less costly, can only be effectively examined by IHC.

     --Cell Proliferation and/or DNA Ploidy Analysis.  Proliferative rate and
ploidy have been well documented as important prognostic indicators in many
cancers, including breast cancer.  The ploidy compares the DNA content of a
tumor cell with that of a normal (diploid) 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 on
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tissue specimens, FNAs and other cytological specimens.  IHC can also be used
visually to evaluate cell proliferation.

     --Lymph Node Micrometastases.  The single most reliable prognostic
indicator in breast and most other cancers is regional lymph node status.  For
breast cancer, numerous studies have shown that survival rates are significantly
lower when metastases are found in the axillary lymph nodes after surgery.
However, according to the American Cancer Society, 25% to 30% of breast cancer
patients for whom routine pathological analysis indicates no lymph node
involvement will eventually experience a recurrence of their cancer.  The basis
for breast cancer recurrences is the presence of undetected spread of tumor.
Technology developed by IMPATH's founders allows for the detection of
microscopic spread of cancer prior to detection by any other method.  Studies
conducted by IMPATH's founders as well as others, have shown that as many as 25%
of women with breast cancer initially thought to be localized to the breast
using traditional, standard methods have microscopic deposits of tumors in their
regional lymph nodes (lymph node micrometastases) not detectable by any other
method.  There is evidence that the presence of occult micrometastases
identifies a group of patients with axillary node negative breast cancer who are
at a significantly increased risk for developing distant metastases.  The use of
IHC significantly increases the ability to detect tumor cells and allows for the
accurate evaluation of occult metastases, i.e., small numbers of tumor cells
previously undetected by conventional hematoxylin and eosin (H&E) analysis in
lymph nodes.  The detection of lymph node micrometastases identifies patients
who will most benefit from aggressive adjuvant chemotherapy.  Furthermore,
identifying those patients who do not have lymph node (or bone marrow)
micrometastases may indicate the patients who will not require such therapy, and
who thus can be spared the pain, side effects and substantial costs of
chemotherapy.

     --Bone Marrow Micrometastases.  IMPATH believes that it is one of the very
few companies currently offering tests for the detection of micrometastases in
lymph nodes and bone marrow.  The presence of bone marrow micrometastases in
patients with cancer, particularly breast, lung, colon and prostate cancers,
appears to be a clinically important variable that is predictive of early
recurrence and may be useful in identifying patients who are most likely to
benefit from more aggressive therapy.  Furthermore, in patients undergoing high-
dose chemotherapy followed by autologous stem cell transplants, accurate
assessment of tumor cells in bone marrow harvests may be important for
accurately evaluating the response to therapy and in order to avoid reinfusing
the patient with cancerous cells.  Examining the bone marrow tumor burden in
these patients following high dose chemotherapy may also be useful in tracking
the effectiveness of the treatment regimens.  Evolving data strongly suggest
that IHC can be used to detect as few as two to five tumor cells in a population
of 1,000,000 normal bone marrow cells.  This technique is significantly superior
to standard cytology in reliably evaluating the presence of tumor cells in bone
marrow.
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     IMPATH's diagnostic and prognostic analyses are performed using four
principal technologies: immunohistochemistry, flow cytometry and image analysis,
molecular pathology and cytogenetics.

     Immunohistochemistry.  IHC is a technique in which an antibody (often a
monoclonal antibody) is used to seek out and identify antigens characteristic of
specific diseases in cells.  A skilled pathologist can then microscopically
examine the stained cells, and draw conclusions about the disease state,
aggressiveness and its metastatic potential, and the likely outcome of therapy.

     An example of the changes brought about by IHC is the analysis of steroid
hormone receptors in breast cancer.  Analysis of steroid hormone receptors is
the most important test of breast cancer; it provides prognostic information and
also serves specifically to direct treatment by predicting the type of therapy
to which the tumor will respond.  The analysis of hormone receptor status in
breast cancer has been traditionally performed using a biochemical assay.  In
this assay, a piece of tissue is frozen, ground up and mixed with radioactively
labeled hormones; the degree of radioactive uptake by the tissue is then
assessed.  This assay has several problems: tissue must be rapidly frozen, it is
not possible to determine if the ground-up tissue actually contained cancer, and
there is no good possibility of storing the samples for future analysis.
Despite such shortcomings, this is the test that virtually all facilities
currently use.  IHC has now been shown to be superior to standard biochemical
assays for the determination of hormone receptor content in breast cancer.  IHC
tests are more rapid, can be used on smaller tissue samples and have less
stringent requirements for specimen storage and transport.  Furthermore, the
results of IHC tests have now been shown more accurately to determine outcome.
It should be noted that there are approximately 180,000 breast cancers diagnosed
annually; only a fraction are currently tested by IHC.  However, because tumors
are being diagnosed earlier, i.e., from smaller specimens, and because IHC is a
superior technology, the Company expects that there will be a gradual but
significant conversion to breast cancer receptor analysis being performed by
IHC.  The IHC test is more technically and professionally demanding, requiring
greater experience and professional interpretation.  This is the method used by
IMPATH to determine hormone receptor content.  Pathologists are not required to
change the way they process tissue specimens in order to take advantage of
IMPATH's IHC analyses.  Furthermore, tissue analyzed using IHC can be stored for
future use.

     Flow Cytometry and Image Analysis.  Various components of tumor cells can
be quantified by one of two methods: image analysis and flow cytometry.  In
image analysis, a pathologist selects the area to be examined.  Then a
computerized image analyzer measures the component based on staining intensity.
Flow cytometry is an alternative technique which requires a large number of
cells to be examined.  The tumor specimen is disaggregated into single cells,
stained with the appropriate marker(s), passed through a funnel-like device and
analyzed by an optical reader.
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                                                                              11
 
     Molecular Pathology.  The next generation of diagnostic and prognostic
testing is generally expected to be based on molecular biology.  The premise in
this application is that 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, molecular pathology is primarily used at major academic centers.
In situ-hybridization (ISH), which IMPATH employs on a limited basis, represents
one of the first commercial applications of the technology.  In terms of
technique, ISH is similar to IHC except that a DNA probe is used rather than a
monoclonal antibody.  This technology has proved extremely useful in the
sensitive diagnosis of infectious disease.  Another technique of molecular
pathology is the amplification of specific DNA sequences by polymerase chain
reaction (PCR).  PCR is the most sensitive method for detecting alterations in
DNA.  Another extremely useful way of examining chromosomes is through the
examination of their architecture, using cytogenetics.

     Cytogenetics Analysis.  Cytogenetics analysis is a test that is performed
to evaluate the genetic changes that occur at the chromosome level.
Identification of chromosome changes has become extremely useful in the
diagnosis and prognostic assessment of lymphomas, leukemias, soft tissue cancers
(sarcomas) and pediatric cancers.  IMPATH expects this technology will become
useful in carcinomas (such as colon, lung and prostate cancer) in the near
future.  The analysis involves 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 can be seen through a microscope.  Each chromosome has a
distinct and unique pattern which can be analyzed.  Any alteration of this
pattern or abnormality of a chromosome or chromosomes can be detected by a
trained cytogenetics technologist.  This technique helps provide a diagnosis and
in many cases a prognosis.  Therefore, cytogenetics can become invaluable in the
clinical management of a patient.

     All of these molecular pathology and cytogenetics techniques are being used
at IMPATH, consistent with IMPATH's strategy of facilitating the transfer of new
technologies from the academic environment to the commercial marketplace.
IMPATH's strategy is to integrate all of these technologies in order to provide
comprehensive cancer information.  Currently, even when these technologies exist
at academic medical centers, they exist in different departments; and management
believes that there is no real integration of information, except what the
clinician and pathologist are able to piece together.  IMPATH believes it is in
a unique position to provide all of these advanced technologies in the
integrated way that will be necessary to address the overall management of
cancer.
<PAGE>
 
                                                                              12
 
FOCUS ON CANCER MANAGEMENT

     IMPATH's core business has been focused on the central role of pathology in
cancer management and IMPATH believes it is the only company with this focus.
IMPATH's strategy is to concentrate on the use of evolving technologies to
address virtually all of the shortcomings of traditional cancer assessment.  The
Company believes that this role will be critical to the efficient coordination
and optimal implementation of the integrated management of cancer.  As it
implements this strategy, IMPATH's business will affect all phases and
specialties of cancer as described below:

     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.  It is believed that as many as 5% of certain types of cancers
are based at least in part on this inheritable predisposition.  IMPATH currently
possesses the technology capable of detecting the genetic defects associated
with predisposition to certain cancers.  While very few of these genes have been
identified to date (for example, genes responsible for the inherited form of
colon cancer, breast cancer, ovarian cancer and retinoblastoma), this is a very
active area of research at academic medical centers.  As these genes are
identified, IMPATH will be in the position to screen for these types of
inheritable cancers.

     Diagnosis.  Although most tumors can be characterized based on visual
examination by the pathologist, as many as 15% (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 repeated treatment, complications and increased cost. 
Traditionally, this information has been based on a purely morphological
assessment of the origin of the cancer and the extent of spread, i.e., what does
the tumor look like under the microscope (for example, does it look like breast
cancer?) and can the pathologist see it in various metastatic sites (such as,
regional lymph nodes and bone marrow).  While this type of morphological
assessment is well accepted, it has important and critical limitations.  For
example, as described above, up to 15% of all cancers defy traditional
morphological assessment.  More importantly, morphological assessment is able to
provide very little information about the biological aggressiveness of an
individual cancer and can provide virtually no meaningful information regarding
the specific type of treatment to which the individual will respond.

     IMPATH has shown that in a majority of these cases the use of advanced
technologies and the medical expertise provided by IMPATH leads to the accurate
diagnosis, thus ensuring optimization of therapy, greater predictability of
outcome, increased survival and decreased overall costs.  Furthermore, this
eliminates the need
<PAGE>
 
                                                                              13
 
for other costly and nonspecific detection procedures (i.e., MRI, CT scans),
decreases the length of hospital stays, and leads to the most effective
treatment program.

     Prognosis.  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 more rationally to treat that
cancer.  For example, one breast cancer may have a "low" biological
aggressiveness, and may therefore have a very low propensity to recur, while
another breast cancer (which looks 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.  IMPATH provides the prognostic expertise
to differentiate such difficult cases, providing the oncologist with the
critical information necessary to treat appropriately patients with maximum
effectiveness as well as minimal pain and cost.

     Treatment Determination.  In an increasing number of cancer cases, IMPATH
also provides information that can help to predict the specific types of therapy
to which a tumor will, or will not, respond.  For example, in the case of breast
cancer, IMPATH's expertise allows for the determination of whether or not the
patient is likely to respond to specific types of hormonal treatment and
chemotherapy before they are tried.  This type of information is becoming
increasingly available for other types of tumors as well.  The Company believes
that these technologies will become essential for optimal cancer management.

     Treatment Follow-up.  Once a cancer has been diagnosed, assessed and
treated, the patient must undergo many years of follow-up care.  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's expertise is capable of providing
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 other method, including
serum testing.  The identification of tumor recurrence at the earliest possible
time increases the likelihood of a beneficial therapeutic response.  From a
strategic perspective, cancer treatment follow-up requires multiple patient
contacts and repeat analysis, which will be increasingly beneficial to the
Company's revenue stream.

     Breast Cancer Management--A Model

     IMPATH believes that it is the leader in providing the most comprehensive
prognostic information essential to the management of breast cancer.  The
Company provided patient-specific prognostic information on 15% of all such
cases in the U.S. last year and over 25% of cases diagnosed in the New York
metropolitan area, the Company's largest market.  The Company's special
expertise in breast cancer has not only allowed it to play a significant role in
optimizing patient specific breast cancer
<PAGE>
 
                                                                             14

treatment nationwide but has also allowed it to be well positioned to develop
the most comprehensive outcomes-focused database in breast cancer.

     Breast cancer is the most common cancer in women in the United States.
Annually, more than 180,000 cases are diagnosed and over 46,000 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; this is despite the fact that there have been few advancements in
treatment options.  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.

     Although breast cancer management is more advanced than that of any other
cancer, there are still significant issues that remain unanswered.  It has been
shown that as many as 25% to 30% of the women who are diagnosed with localized
disease (confined to the breast) actually have tumors that have already
metastasized.  Traditional methods of breast cancer analysis cannot identify who
these individuals are.  Confronted with this possibility, oncologists are faced
with the dilemma of having to treat everybody with chemotherapy, whether or not
they will benefit from such therapy.

     Research focused on determining the biological aggressiveness of breast
cancer (prognostic analysis) has been and continues to be extremely active and
has led to major discoveries.  These discoveries have fundamentally impacted on
the way that breast cancer must be assessed.  For example, 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.

     The basis of breast cancer recurrence is the presence of undetected spread
of tumor.  Technology developed by IMPATH's founders allows for the detection of
microscopic spread of tumor prior to detection by any other method.  Studies
conducted by IMPATH's founders and others have shown that as many as 25% of
women with breast cancer initially thought to be localized to the breast have
microscopic deposits of tumor in their regional lymph nodes (lymph node
micrometastases) not detectable by any other method.  These women have twice the
risk of developing overt breast cancer metastases.  In addition, about 30% of
women with breast cancer who have no evidence of spread to the body (systemic
metastasis) have microscopic deposits of tumor in their bone marrow (bone marrow
micrometastases); these women have recurrences at much higher rates.  The
detection of lymph node and bone marrow micrometastases identifies women at
greatly increased risk for breast cancer recurrence; these are the individuals
who may benefit from aggressive adjuvant chemotherapy.  The detection of
micrometastases allows for
<PAGE>
 
                                                                              15

a substantially modified treatment in these individuals.  It also allows for the
identification of patients who do not need such therapy, and who do not need to
suffer the pain and side effects of chemotherapy.  These and other discoveries
regarding the aggressiveness of cancer have greatly affected the management of
this disease.

     It is now possible to identify the specific type of treatment to which the
breast cancer might respond.  The model for treatment selection is the
evaluation of a breast cancer's response to hormonal manipulation through the
identification of specific hormone receptors (i.e., estrogen and progesterone).
IMPATH is the leader in the tissue based analysis of estrogen and progesterone
receptors.  IMPATH provides oncologists with the ability to identify the
response of an individual's breast cancer to a specific form of therapy before
therapy commences, reducing the trial and error historically prevalent in cancer
treatment.

     The identification of these prognostic and treatment determinants is
essential to improved patient specific management of breast cancer.  Among the
important results of these advances is the ability to identify patients who have
more aggressive cancers and who therefore require more intensive therapy.  Just
as important, these advances allow for the identification of women who have less
aggressive cancers that do not require additional treatment, thus sparing these
women from the harmful short- and long-term consequences of treatments designed
for aggressive cancers and resulting in a significant decrease in pain, risk and
total treatment cost.  This is increasingly true for other cancers as well.

     Management of Other Cancers

     The integration of prognostic information into the management of cancer is
happening for other cancers as well.  As medical research progresses and as
increasing numbers of treatment options evolve, IMPATH believes that its
expertise will play an ever 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 clearly critical, e.g., a 50 year old man with a rapidly
growing disease 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
(such as p53 and Rb) and oncogenes (such as Her-2/neu).  The presence of these
mutations in a patient
<PAGE>
 
                                                                              16

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, e.g., if a patient's cancer has
the multi drug resistance (MDR) receptor, his/her tumor will be unresponsive to
many forms of therapy including taxol.

     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 at times earlier than that detected by any other method.
This analysis is now useful in 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's expertise and
growing importance in this area, as well as IMPATH's access to increasing
numbers of patient specimens, will allow it to continue to expand its
comprehensive database for predicting outcomes in various types of cancer.  This
database will be increasingly valuable in the medically optimal and cost-
effective management of the cancer patient.

     Integration of Cancer Management Information

     The consolidation of oncology practices into comprehensive coordinated
cancer treatment groups and the increasing presence of other types of managed
care organizations in the oncology marketplace are based on the ability of these
groups to provide high quality and cost-effective cancer care.  IMPATH believes
that it can provide these groups with information that is critical for
optimizing cancer management.  This information will become even more important
to these groups as a result of IMPATH's outcomes-oriented database, which will
provide for optimal utilization of resources in a cost-effective manner.

     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 both the perception,
as well as the reality, of quality for these cancer management groups.  IMPATH
believes it is well positioned as a vital and central component in the
integrated management of cancer.

     In addition to providing important information regarding cancer diagnosis,
prognosis, treatment determinants and patient follow-up, IMPATH also expects to
be a major resource in providing information regarding cancer predisposition.
As a result, IMPATH's expertise can direct and optimize all of the complex and
<PAGE>
 
                                                                              17

multidisciplined decisions that must be made in the comprehensive management of
a patient with cancer.

SALES AND MARKETING

     Sales Force.  As of December 31, 1996, the Company's sales force consisted
of 26 employees, including a Vice President of Sales, a Director of Sales, 3
full time Regional Managers and 21 sales representatives.  The IMPATH sales
force consists of highly trained individuals with extensive scientific
backgrounds and successful sales records with health care companies.  IMPATH
believes that the technical and clinical knowledge of its sales force
distinguishes it from other companies.

     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,
therefore, emphasizes educating physicians regarding the development of new
technologies and the value of the information provided by IMPATH.

EMPLOYEES

     As of December 31, 1996, the Company had 159 full-time and 11 permanent
part-time employees, of which 30 were management, administrative and clerical
personnel, 31 were engaged primarily in marketing and sales activities and 109
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.

OPERATIONS

     The Company's operations emphasize (i) customer service, including
comprehensive detailed reports, and (ii) quality assurance procedures.

     Customer Service; Reports

     The Company emphasizes customer service, including the provision of a
comprehensive detailed report to the referring physician after each analysis is
completed. 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 14 days or more for academic institutions. 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.
<PAGE>
 
                                                                              18


 
     The Company's reports summarize the qualitative and quantitative result of
each analysis, with each result being categorized as favorable, borderline or
unfavorable.  Supporting data for any DNA analyses are provided in a histogram.
When appropriate, the report will include a brief interpretation by the
Company's medical staff.  On the back of each report, IMPATH provides
information regarding the analyses performed and the basis for the medical
staff's interpretation, including a description of each analysis, the range of
results and selected references to the analyses in medical publications.  These
references 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.  IMPATH's
management believes that the Company's report format is superior to others in
the industry.

     Quality Assurance

     IMPATH engages in quality control procedures, many of which are not in
common practice.  For instance, its facilities do 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 unmatched in industry and 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 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 licensed 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, California, Arizona State
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.  Their primary role is to ensure the accuracy and
quality of the Company's analyses.  As a further quality assurance procedure,
the Company occasionally undergoes peer review with third-party facilities,
including Norris Cancer Center and Memorial Sloan-Kettering Cancer Center.  The
Company's most recent peer review occurred in January 1996, and the results of
such peer review were satisfactory to the Company.
<PAGE>
 
                                                                              19

     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.  The CAP is an
independent nongovernmental 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.

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,
logistical and laboratory 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.  According to the Health Care Financing Administration
("HCFA"), there are over 12,000 federally regulated clinical laboratories,
including the 4,000 independent clinical laboratories, which might be deemed
actual or potential competitors for the testing business of a cancer-treating
physician.  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.  These
companies typically offer hundreds of different tests.  Management believes that
these companies compete in general on quality, price and the time required to
report results.  They are in general not prepared to provide the type of
intensive, highly technical, patient-specific service that IMPATH believes the
market requires.  In addition, management has identified a number of specialized
clinical laboratories in the U.S. established since 1987 which have limited test
offerings and a highly focused product and marketing strategy.

     Competitive factors aiding the Company's business include a highly skilled
medical staff and a close relationship with founders and consultants who
continue to provide new technologies, expertise and direction.  IMPATH also has
a highly trained and knowledgeable sales force and markets its services based on
the quality of service to physicians, accuracy of test results and speed of
turnaround (i.e., 48 hours for IMPATH's standard tests compared with 14 days or
more for academic centers).  Unlike IMPATH, sales forces of most clinical
laboratories market hundreds of test
<PAGE>
 
                                                                              20

services, making it more difficult for them to be thoroughly familiar with the
clinical applications of the individual tests that they offer, particularly new
clinical tests.  In addition, academic institutions, which perform some of the
same tests as the Company, typically do not have substantial financial and
marketing resources and the pathology laboratories at large regional hospitals
are generally dedicated to servicing their resident and affiliated physicians.

REIMBURSEMENT

     During 1994, 1995 and 1996, the Company received the following estimated
percentages of its total revenues for diagnostic and prognostic services from
the respective payors identified below:

<TABLE>
<CAPTION>
 
             Payor                 Year Ended December 31,
          ----------               -----------------------
                                    1994     1995     1996
                                   ------   ------   ------
<S>                               <C>       <C>      <C>
Hospitals                              45%      43%      37%
Private Insurance/Managed Care         29       29       35
Medicare                               22       24       25
Individual Patients                     4        4        3
                                     ----     ----     ----
     Total                            100%     100%     100%
                                     ====     ====     ====
</TABLE>

     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.  During the years ended December 31, 1994, 1995 and 1996, the
Company recorded net revenues of approximately $2,207,000, $3,576,022 and
$5,443,176, respectively, from Medicare and at the end of such periods accounts
receivable from Medicare, net of allowance for doubtful accounts, were
approximately $320,000, $578,000 and $1,687,192, respectively.  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
copayments and deductibles.

     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
<PAGE>
 
                                                                              21

hospitals, management negotiates the terms of the transaction applicable to each
arrangement.

     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.  The Company
currently receives Medicare reimbursement through three Medicare carriers.
Medicare may retroactively audit and review its payments to the Company, and may
determine that certain payments for services must be repaid.  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.

     Medicare Payment for Physician Pathology Services.  The 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.  There have been proposals to reform the RBRVS system by using a single
conversion factor rather than the current three and by making changes to the way
in which fees are updated.  The Company cannot predict whether any of the
proposals will be enacted or what the potential impact of any of the proposed
changes to the RBRVS will be on the Company's future Medicare reimbursement.

REGULATORY MATTERS

     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, purchase of existing businesses, cost containment, direct
employment of licensed professionals by business corporations and other aspects
of the Company's business relationships.  The
<PAGE>
 
                                                                              22

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 and California, where
the Company's facilities are located.  The Company believes it has obtained all
material laboratory licenses required for its operations.  In addition, the
California facility is licensed by the federal Nuclear Regulatory Commission and
both 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.  As of March 1996, clinical facilities with exceptional performance,
i.e., no deficiencies and satisfactory proficiency testing, are eligible to
participate in the Alternate Quality Assessment Survey, which is a self-survey
for recertification instead of an on-site survey every two years.  HCFA will
continue to survey participating laboratories at least every four years, instead
of every two, and will perform random on-site surveys every two years of a
sample of laboratories using the new system, in order to verify the new system's
effectiveness.  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 licensure 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 facility.  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 exclusion from the Medicare program upon persons who make
<PAGE>
 
                                                                              23

or receive kickbacks, bribes or rebates in connection with the Medicare program.
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 Medicare-covered service or item 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.  In February 1997, the OIG issued an interim rule 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, 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, without the payments meeting any particular pricing standards.  On
August 14, 1995, HHS published the Final Rule, with comment, implementing the
Stark law.  Under the Final Rule, HCFA declined to interpret the OBRA '93 rule
with respect to pricing standards.  The Final Rule does make clear however, that
supplies or services, other than clinical laboratory services, purchased by a
physician from a clinical laboratory must be at fair market value.

     A number of states, including New York, California and Arizona 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 unable to
predict how these laws may
<PAGE>
 
                                                                              24

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.
<PAGE>
 
                                                                              25

INSURANCE

     The Company is presently covered by general liability insurance in the
amount of $6,000,000 per occurrence and $7,000,000 in the aggregate and has
obtained professional liability insurance in the amount of $1,000,000 per
occurrence and $3,000,000 in the aggregate for the Company's Medical Directors
and other individuals who practice medicine in the course of their duties.  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.

                                    GLOSSARY

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.

BIOPSY:  Removal of tissue from the body for diagnostic reasons.

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

CLINICAL:  Pertaining to the symptoms and course of a disease.

CYTOGENETICS:  An analysis which evaluates genetic changes that occur at the
chromosome level.

CYTOLOGY:  The study of cells.

DIAGNOSIS:  The process for deciding what disease is present.

DIPLOID:  Having two sets of chromosomes (one set from each parent) as normally
found in the somatic cells of higher organisms.

DNA:  Deoxyribonucleic acid.  The biochemical constituents of chromosomes.

EOSIN:  A pink/red cytoplasmic dye.

ESTROGEN RECEPTOR:  A protein which specifically binds to estrogen and mediates
its biological activity.  When present in breast and other cancers, predicts
response to hormonal therapy.
<PAGE>
 
                                                                              26

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.

HEMATOXYLIN:  A blue dye for staining cell nucleii.

HER-2/NEU:  Oncoprotein (product of an oncogene); overexpression is a negative
prognostic indicator in many cancers, including breast and ovarian carcinoma.

HISTOGRAM:  Two dimensional graph of data (i.e., content vs. cell number).

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

IMAGE ANALYZER:  Instrument consisting of a microscope, camera and computer,
used to quantify cellular components that have been marked or stained.

IMMUNOHISTOCHEMISTRY (IHC):  Technique that uses antibodies to identify and mark
antigens expressed by cells in tissues.

IN SITU-HYBRIDIZATION:  Use of labeled fragments of DNA (probes) that can bind
(hybridize) to specific, complementary sequences.

LYMPH NODES:  Small nodular bodies 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.

MICROMETASTASES:  Presence of a small number of tumor cells, particularly in the
lymph nodes and bone marrow, not readily detected by standard methods.

LYMPHOMA:  Any neoplasm of lymphoid tissue.

MONOCLONAL ANTIBODY:  An antibody produced by a single clone of cells comprising
a single species of antibody molecules.  Reacts with only one antigen.

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.
<PAGE>
 
                                                                              27

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

ONCOLOGY:  The study of cancer.

P53:  A tumor suppressor gene.  Mutations in the p53 gene are associated with
many different cancers, and are related to cancer progression.

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, e.g., diploid.

PROGNOSTIC:  Referring to potential future behavior of a disease.

PROGESTERONE RECEPTOR:  A protein which specifically binds to progesterone and
mediates its biological activity.  When present in breast and other cancers,
predicts response to hormonal therapy.

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

RB:  The first tumor suppressor gene described; associated with the childhood
tumor retinoblastoma, as well as many other types of cancers.

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.

SENSITIVITY:  In IHC, the ability of an antibody to detect the presence of an
antigen, particularly at low antigen levels.

SERUM:  Fluid component of blood (noncellular).

SPECIMEN:  Material sent in for evaluation, biopsy (tissue) or cell suspensions
(body fluids).

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

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

TUMOR:  A swelling or enlargement; a growth or neoplasm, often referring to
cancer.
<PAGE>
 
                                                                              28

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.

ITEM 2.  PROPERTIES.

     The Company's main facility and executive offices are located at 1010 Third
Avenue, New York, New York, where the Company leases approximately 10,300 square
feet of space under four leases expiring in August 1999.  The leases provide for
minimum aggregate annual rental payments of approximately $278,000.  The Company
is also required to pay for repairs, property taxes and insurance relating to
this facility.  The Company believes that its facility is well maintained, in
good operating condition and is adequate for its current needs.  The Company
believes that it can renew its leases or enter into a new lease for equivalent
space on commercially reasonable terms.

     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 16,400 square feet of space.
This facility commenced operations in December 1995.  The lease provides for
minimum annual rental payments of approximately $281,000.  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 its acquisition
from Oncogenetics, Inc. The lease provides for minimum annual rental payments of
approximately $90,000.  The Company is also responsible for all maintenance,
property taxes and insurance relating to the facility.

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.
<PAGE>
 
                                                                              29

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

     Not applicable.
                                    PART II


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

          The Company's Common Stock trades on the Nasdaq Stock Market under the
symbol "IMPH".  The following table sets forth the range of high and low sales
prices per share for the Common Stock for the period from February 21, 1996 (the
first day the Company's Common Stock was publicly traded) through December 31,
1996.
<TABLE>
<CAPTION>
 
                                                High Sale  Low Sale
                                                ---------  --------
<S>                                             <C>        <C>
 
FISCAL 1996
 First Quarter (beginning February 21, 1996)..    $16 1/4   $12 3/4
 Second Quarter...............................     18 3/4    14
 Third Quarter................................     18 3/8    10 1/2
 Fourth Quarter...............................     19 1/4    10 1/2
 
</TABLE>

     On March 6, 1997, the last sale price of the Common Stock as reported on
the Nasdaq Stock Market was $19.00.

     As of March 17, 1997, there were approximately 66 record holders of the
Common Stock. No dividends have been declared on the Common Stock since the
Company was organized.

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 1992 through 1996 and
for each of the years in the five-year period ended December 31, 1996.  The
consolidated statement of operations and balance sheet data as of December 31 in
each of 1992 through 1996 and for each of the years in the five-year period
ended December 31, 1996 have been derived from the Company's audited
consolidated financial statements of which such financial statements as of
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996 and the notes thereto are included in Item 14(a) of this
Annual Report on Form 10-K.  The historical financial data should be read in
conjunction with and are qualified in their entirety by reference to the
<PAGE>
 
                                                                              30
consolidated financial statements of the Company and the related notes thereto
and Item 7 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
 
                                                                                     YEAR ENDED DECEMBER 31,
                                                                            1992     1993     1994      1995     1996
                                                                          --------  -------  -------  --------  -------
<S>                                                                       <C>       <C>      <C>      <C>       <C>
                                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Total revenues  .....................................................     $4,993    7,042   10,014    14,714   21,965
  Operating expenses:
    Salaries and related costs  .......................................      2,668    4,162    4,682     6,830    9,432
    Selling, general and administrative  ..............................      2,298    3,805    4,351     6,863    9,895
                                                                            ------   ------   ------   -------   ------
  Total operating expenses  ...........................................      4,966    7,967    9,033    13,693   19,327
                                                                            ------   ------   ------   -------   ------
  Income (loss) from operations  ......................................         27     (925)     981     1,021    2,638
  Other income (expense)  .............................................         29        2      (15)       22    1,030
                                                                            ------   ------   ------   -------   ------
  Income (loss) before income tax expense  ............................         56     (923)     966     1,043    3,668
  Income tax expense  .................................................         24       19       98         0    1,621
                                                                            ------   ------   ------   -------   ------
  Net income (loss)  ..................................................         32     (942)     868     1,043    2,047
  Accrued dividends on Preferred Stock(1)  ............................       (314)    (371)    (427)     (478)     (82)
                                                                            ------   ------   ------   -------   ------
  Net income (loss) available to common stockholders  .................     $ (282)  (1,313)     441       565    1,965
                                                                            ======   ======   ======   =======   ======
  Pro forma net income per common share(2)(3)  ........................                                   $.31      .38
                                                                                                       =======   ======
  Pro forma weighted average common and common equivalent shares
   outstanding(2)  ....................................................                                  3,371    5,404
                                                                                                       =======   ======
 
</TABLE>
(1) Reflects dividends accrued on the Preferred Stock.  Dividends earned 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) Pro forma 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.
(3) Does not reflect $560,000 in dividends accrued on the Preferred Stock from
    February 10, 1995, which dividends were paid and ceased to accrue upon
    conversion of the Preferred Stock on February 26, 1996.
<TABLE>
<CAPTION>
 
 
                                                         YEAR ENDED DECEMBER 31,
                                                  1992     1993    1994    1995    1996
                                                 -------  ------  ------  ------  ------
<S>                                              <C>      <C>     <C>     <C>     <C>
                                                         (DOLLARS IN THOUSANDS)
SELECTED CONSOLIDATED OPERATING
DATA:
  Revenues  ..................................   $ 4,993   7,042  10,014  14,714  21,965
  Number of cases reported  ..................    15,136  24,812  33,618  43,287  55,539
  Number of hospitals served  ................       817     959   1,021   1,118   1,360
  Cases per hospital served  .................        19      26      33      39      41
</TABLE>
<PAGE>
 
                                                                              31
<TABLE>
<CAPTION>
 
                                                                                      DECEMBER 31,
                                                                          1992     1993     1994    1995    1996
                                                                        --------  -------  -------  -----  ------
<S>                                                                     <C>       <C>      <C>      <C>    <C>
                                                                                     (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
  Working capital ..................................................    $ 1,429    1,736    2,500   3,622  30,768
  Total assets......................................................      2,221    3,152    4,144   9,261  37,581
  Long-term liabilities, net of current portion.....................         --      120      241   1,130   1,430
  Redeemable preferred stock........................................      4,352    5,979    6,407      --      --
  Total stockholders' equity (deficiency)...........................     (2,464)  (3,741)  (3,266)  5,655  33,638
</TABLE>

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

                   YEAR ENDED DECEMBER 31, 1996 COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1995

     The Company's total revenues in 1996 and 1995 were $21,965,000 and
$14,714,000, respectively, representing an increase of $7,251,000, or 49.3%, in
1996.  This growth was primarily attributable to a 28.3% increase in case volume
resulting from increased sales and marketing activities.  In addition, revenue
realization per case increased due to payor mix and product mix changes toward
cases that carry a higher reimbursement rate.

     Salaries and related costs in 1996 and 1995 were $9,432,000 and $6,830,000,
respectively, representing an increase of $2,602,000, or 38.1%, in 1996.  This
increase was primarily attributable to a 32.5% increase in personnel headcount
associated with case volume growth as well as personnel costs incurred in
connection with the Company's expansion.  As a percentage of total revenues,
salaries and related costs decreased to 42.9% in 1996 from 46.4% in 1995.

     Selling, general and administrative expenses in 1996 and 1995 were
$9,895,000 and $6,863,000, respectively, representing an increase of $3,032,000,
or 44.2%, in 1996.  The primary component of this increase was an increase in
bad debt expense of approximately $854,000 associated with increased revenues,
specifically generated from third-party billing.  Third-party revenues have
historically had a higher bad debt rate than institutional revenues.  Case
volume growth necessitated an increase of $387,000 in laboratory supplies and
consulting and a $268,000 increase in auto and courier expenses.

     In addition, rent expense and depreciation and amortization costs increased
$277,000 and $391,000, respectively, due to the establishment of the Company's
California facility and the development of new clinical and billing operating
systems.  Additional depreciation costs also resulted from the Company's
expansion and
<PAGE>
 
                                                                              32
 
database development activities.  The Company also incurred an additional
$283,000 in higher travel and marketing costs associated with its expanded
sales, marketing and investor relation activities.  As a percentage of total
revenues, selling, general and administrative costs decreased to 45.0% in 1996
from 46.6% in 1995.

     Income from operations in 1996 and 1995 was $2,638,000 and $1,021,000,
respectively, representing an increase of $1,617,000, or 158.4%, in 1996.  The
1996 figure reflects the effect on operating income of increased revenue growth
and a decrease in operating expenses as a percentage of revenue from 93.1% in
1995 to 88.0% in the 1996 period.

     Other income, net for 1996 and 1995 was $1,030,000 and $22,000,
respectively, representing an increase of $1,008,000 in 1996. The increase was
the result of income generated from trading gains on marketable securities using
the proceeds of the Company's initial public offering of common stock in
February 1996, partially offset by increased interest expense due to additional
capital lease obligations.

     The tax provision for 1996 of approximately $1,621,000 reflects federal,
state and local income tax expense.  For 1995, the Company utilized its 
remaining net operating losses and recorded deferred tax assets to the
extent of taxes that it had expected to pay on estimated 1995 taxable earnings.
Management believes that realization of such deferred assets was more likely
than not.  As such, it estimated its annual effective tax rate for 1995 to be
zero.

     As a result, net income in 1996 and 1995 was $2,047,000 and $1,043,000,
respectively, representing an increase of $1,004,000, or 96.3%, in 1996.  As a
percentage of total revenues, net income increased to 9.3% in 1996 from 7.1% in
1995.


                   YEAR ENDED DECEMBER 31, 1995 COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1994

     The Company's total revenues in 1995 and 1994 were $14,714,000 and
$10,014,000, respectively, representing an increase of $4,700,000, or 46.9%, in
1995.  This growth was primarily attributable to a 28.8% increase in case volume
resulting from increased sales and marketing activities.  In addition, revenue
realization per case increased due to product mix changes towards cases which
carry a higher reimbursement rate.

     Salaries and related costs in 1995 and 1994 were $6,830,000 and $4,682,000,
respectively, representing an increase of $2,148,000, or 45.9%, in 1995.  This
increase was the result of increased personnel, as well as personnel costs
incurred in connection with the establishment of the Company's California
facility.  As a
<PAGE>
 
                                                                              33
 
percentage of total revenues, salaries and related costs decreased to 46.4% in
1995 from 46.8% in 1994.

     Selling, general and administrative expenses in 1995 and 1994 were
$6,863,000 and $4,351,000, respectively, representing an increase of
$2,512,000, or 57.7%, in 1995.  The largest component of this increase was an
increase in bad debt expense of approximately $784,000 associated with higher
revenues and particularly revenue generated from third-party billing, which has
historically had a higher bad debt rate than institutional billing.  In
addition, depreciation expense and equipment related rental and service costs
increased by $241,000 and $156,000, respectively, due to planned laboratory and
office equipment additions.  The Company also incurred higher travel and
recruitment expenses associated with its expanded sales, marketing and database
development actives.

     Income from operations in 1995 and 1994 was $1,021,000 and $981,000,
respectively, representing an increase of $40,000, or 4.1%, in 1995.  The 1995
figure reflects approximately $785,000 of operating expenses incurred in
connection with the establishment of the Company's California facility.  As a
percentage of total revenues, income from operations decreased to 6.9% in 1995
from 9.8% in 1994 as a result of the previously noted increase in the provision
for bad debts and due to the increase in operating expenses associated with the
start-up of the California facility.

     In 1995, the Company's operating activities provided approximately $515,000
in cash and the Company used approximately $737,000 for capital expenditures.
IMPATH financed its deferred registration costs and capital expenditures through
its operating activities, proceeds of approximately $1,912,000 from the issuance
of preferred stock in February 1995 and bank loans in the principal amount of
$300,000.

     As a result, net income in 1995 and 1994 was $1,043,000 and $868,000,
respectively, representing an increase of $175,000, or 20.2%, in 1995.  As a
percentage of total revenues, net income decreased to 7.1% in 1995 from 8.7% in
1994.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations through its
February 1996 initial public offering, the private issuance of convertible
preferred stock, secured term loans and operating and capital equipment leases.
Since its inception, the Company has raised approximately $32,500,000 of capital
through the initial public offering of Common Stock and private placements of
Preferred Stock, all of which was converted into Common Stock at the closing of
the public offering.  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-Geographic Expansion."

<PAGE>
 
                                                                              34
 
     The Company's cash and cash equivalent balances at December 31, 1996 and
December 31, 1995 were $942,000 and $1,513,000, respectively, representing a
decrease of $571,000 in 1996. In addition, the Company has invested
approximately $23,395,000 in a portfolio of fixed income securities actively
managed by a Wall Street investment firm. The increase was primarily
attributable to approximately $26,000,000 of net proceeds from the initial
public offering of the Company's common stock, which was consummated on February
26, 1996.

     For the year ended December 31, 1996, the Company used net cash in
operating activities of approximately $24,553,000. This resulted from an
investment in marketable trading securities of approximately $23,395,000 and an
increase in accounts receivable net of allowance for bad debt of approximately
$3,252,000 due to rapid sales growth. In addition, the Company reduced its
accounts payable and accrued expenses by $382,000. These uses were partially 
offset by higher net income.

     In August 1996, the Company renewed its line of credit at an aggregate
amount of $2,500,000 with The Chase Manhattan Bank.  Borrowing under the line
will bear interest at The Chase Manhattan Bank's prime rate.  The availability
of the line of credit is subject to the execution of such additional
documentation as The Chase Manhattan Bank may request.  As of December 31, 1996,
the Company had not drawn on the line of credit.

     At December 31, 1996, the Company had working capital of approximately
$30,768,000.  The Company's capital expenditures through December 31, 1996 in
connection with the establishment of its California facility were approximately
$1,160,000, which were partially financed through capital equipment leases, a
$300,000 secured term loan, and a $145,200 leasehold improvement allowance from
the landlord.  The Company prepaid the balance of the $300,000 secured term loan
with the proceeds from the initial public offering.

     The Company's growth strategy is anticipated to be financed through the net
proceeds from the initial public offering, its current cash resources and
existing third-party credit facilities. The Company believes the combination of
these sources will be sufficient to fund its operations and 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
proceeds from the initial public offering. 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.
<PAGE>
 
                                                                              35
 
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.


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 caption "Election
of Directors" and "Executive Officers" in the 1997 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," "Compensation of Directors," "Compensation Committee
Interlocks and Insider Participation," "Performance Graph" and "Report of the
Compensation Committee" in the Proxy Statement, which information is
incorporated herein by reference.

<PAGE>
 
                                                                              36
 
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 Management"
in the Proxy Statement, which information is incorporated herein by reference.


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 filed as part of this Annual Report on Form 10-K are
listed in the attached Index to Exhibits.  Exhibits 10.2 and 10.3 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:

          None.
<PAGE>
 
                                                                              37

                                   SIGNATURES

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


Dated:  April 24, 1997

                              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:  April 24, 1997        By /s/ Anu D. Saad*
                                -------------------------------------
                                     Anu D. Saad, Ph.D.
                                     President, Chief Executive
                                     Officer and Director
<PAGE>
 
        /s/ John P. Gandolfo            Executive Vice          April 24, 1997
-------------------------------------    President, Chief
          JOHN P. GANDOLFO               Financial Officer
                                         and Principal
                                         Accounting Officer
 
         /s/ John L. Cassis*            Chairman of the         April 24, 1997
-------------------------------------    Board and Director
           JOHN L. CASSIS
 
        /s/ Richard J. Cote*            Director                April 24, 1997
-------------------------------------
        RICHARD J. COTE, M.D.
 
        /s/ Richard Kessler*            Director                April 24, 1997
-------------------------------------
           RICHARD KESSLER
 
       /s/ Joseph A. Mollica*           Director                April 24, 1997
-------------------------------------
      JOSEPH A. MOLLICA, PH.D.
 
       /s/ David B. Snow, Jr.*          Director                April 24, 1997
-------------------------------------
         DAVID B. SNOW, JR.
 
*By:     /s/ John P. Gandolfo
  ----------------------------------
           JOHN P. GANDOLFO
           ATTORNEY-IN-FACT
 
                                       40
<PAGE>
 
                   Index to Consolidated Financial Statements
                   ------------------------------------------
 
                                                                       
                                                                       
                                                                       
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended December 31,
 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
 December 31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity (Deficiency) for the
 years ended December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES

                       Consolidated Financial Statements

                           December 31, 1995 and 1996


                  (With Independent Auditors' Report Thereon)
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Impath Inc.:


We have audited the accompanying consolidated balance sheets of Impath Inc. and
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the years in the three-year period ended December 31, 1996.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.


                                                   KPMG Peat Marwick LLP


February 14, 1997
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES 
                          Consolidated Balance Sheets
                           December 31, 1995 and 1996
<TABLE>
<CAPTION>
 
                         ASSETS                                                            1995         1996
                                                                                       ------------  -----------
<S>                                                                                    <C>           <C>
Current assets:                                         
  Cash and cash equivalents                                                             $1,512,695      941,903
  Marketable trading securities                                                                 --   23,395,398
  Accounts receivable, net of allowance for doubtful      
    accounts of $1,485,375 in 1995 and $2,732,041 in 1996                                3,807,376    7,059,812
  Prepaid expenses                                                                         214,245      152,846
  Deferred tax assets, net                                                                 505,000    1,359,285
  Other current assets                                                                      59,116      371,753
                                                                                        ----------   ----------
      Total current assets                                                               6,098,432   33,280,997
 
Fixed assets, less accumulated depreciation and amortization                             2,305,739    3,391,965
Deposits and other assets                                                                   79,961       98,878
Deferred registration costs                                                                746,462           --
Intangible assets, net of accumulated amortization of $1,246 in 1995 and
  $22,431 in 1996                                                                           30,727      809,542
                                                                                        ----------   ----------
 
      Total assets                                                                      $9,261,321   37,581,382
                                                                                        ==========   ==========
 
                             LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities
  Current portion of loan payable-bank                                                  $  100,000           --
  Current portion of capital lease obligations                                             321,125      704,399
  Accounts payable                                                                       1,013,537      742,020
  Income taxes payable                                                                      78,415      692,193
  Accrued expenses                                                                         485,195      374,761
  Accrued dividends payable                                                                478,000           --
                                                                                        ----------   ----------
 
      Total current liabilities                                                          2,476,272    2,513,373
                                                                                        ----------   ----------
 
Capital lease obligations, net of current portion                                          946,723    1,430,104
Loan payable - bank, net of current portion                                                183,333           --
Stockholders' equity:
  Convertible preferred stock:                                                         
    Series D 8% Convertible Participating Preferred Stock, $.01 par value.               
                Authorized, issued and outstanding 1,612,904 shares in 1995                        
                (aggregate involuntary liquidation value $2,142,000)                     1,911,879           --
    Series C 8% Convertible Preferred Stock, $.01 par value.  Authorized,              
                issued and outstanding 3,035,320 shares in 1995 (aggregate               
                involuntary liquidation value $2,925,000)                                2,702,546           --
    Series B 8% Convertible Preferred Stock, $.01 par value.  Authorized,              
                issued and outstanding 668,182 shares in 1995 (aggregate                 
                involuntary liquidation value $630,000)                                    562,952           --
    Series A 8% Convertible Preferred Stock, $.01 par value.  Authorized,              
                issued and outstanding 1,876,318 shares in 1995 (aggregate               
                involuntary liquidation value $1,527,000)                                1,387,908           --
  Common stock, $.005 par value.  Authorized 20,000,000 shares;              
    455,007 and 5,322,286 shares issued in 1995 and 1996,                        
    respectively; 447,919 and 5,315,198 shares outstanding                       
    in 1995 and 1996, respectively                                                           2,275       26,611
  Additional paid-in capital                                                                11,447   32,357,260
    (Accumulated deficit) retained earnings                                               (548,672)   1,498,878
                                                                                        ----------  -----------
                                                                                         6,030,335   33,882,749
  Less:
    Cost of 7,088 shares of common stock held in treasury                                     (100)        (100)
    Notes receivable from stockholders                                                     (31,335)     (28,421)
    Deferred compensation                                                                 (343,907)    (216,323)
                                                                                         ----------  ---------- 
Commitments

      Total stockholders' equity                                                         5,654,993    33,637,90
                                                                                        ----------   ----------
      Total liabilities and stockholders' equity                                        $9,261,321   37,581,382
                                                                                        ==========   ==========
See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                  Years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                                                       1994          1995         1996
                                                                   -----------  ------------  ------------
<S>                                                                 <C>         <C>           <C> 
Revenues:
  Net diagnostic and prognostic services                            $ 9,888,084   14,578,326     21,755,193      
  Contract laboratory services                                          126,258      135,238        210,270      
                                                                    -----------   ----------    -----------       
 
      Total revenues                                                 10,014,342   14,713,564     21,965,463
                                                                    -----------   ----------    -----------
 
Operating expenses:
 Salaries and related costs                                           4,681,992    6,830,210      9,432,397   
 Selling, general and administrative                                  4,351,038    6,862,503      9,895,084   
                                                                     ----------   ----------     ----------   
                                                                                                             
      Total operating expenses                                        9,033,030   13,692,713     19,327,481   
                                                                     ----------   ----------    -----------   
      Income from operations                                            981,312    1,020,851      2,637,982   
                                                                                                             
Interest income                                                          16,466      102,711        506,086   
Interest expense                                                        (31,427)     (80,373)      (224,112)  
Gains on trading marketable securities (including                                                            
 unrealized gains of $80,720)                                               --           --         747,903   
                                                                     ----------   ----------     ----------   
                                                                                                             
      Income before income tax expense                                  966,351    1,043,189      3,667,859   
                                                                                                             
  Income tax expense                                                     97,921          --       1,620,309   
                                                                     ----------   ----------     ----------   
      Net income                                                        868,430    1,043,189      2,047,550   
                                                                                                             
Accrued dividends on preferred stock                                  (427,121)     (478,000)       (82,346)  
                                                                    ----------    ----------     ----------   
                                                                                                             
Net income available to common stockholders                          $ 441,309       565,189      1,965,204   
                                                                    ==========    ==========     ==========                
Pro forma net income per share                                                         $0.31           0.38   
                                                                                  ==========     ==========   
                                                                                                             
Pro forma weighted average common and                                                                        
 common equivalent shares outstanding                                              3,371,000      5,404,000   
                                                                                  ==========     ==========    
 
</TABLE>
          See accompanying notes to consolidated financial statements.
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                 Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
 
 
                                                                          NONREDEEMABLE               
                                                                           CONVERTIBLE             ADDITIONAL   
                                                 COMMON STOCK            PREFERRED  STOCK            PAID-IN          
                                              -------------------     ---------------------          CAPITAL 
                                             SHARES        AMOUNT      SHARES        AMOUNT        (DEFICIENCY)  
                                             -------       ------      ------        ------        ------------  
<S>                                        <C>         <C>          <C>           <C>          <C>               
                                                                                                                 
Balance at December 31, 1993                 425,824      $  2,129           -     $       -          (1,282,673)
                                                                                                                 
Common shares issued as                                                                                          
 compensation                                                                                                    
 for services rendered                        13,289            66           -             -              33,683 
Accrual of preferred stock                                                                                       
 dividends on redeemable                                                                                         
 preferred stock                                   -             -           -             -            (427,121)
                                                                                                                 
Net income for the year                                                                                   
 ended December 31, 1994                           -             -           -             -                   -      
                                            --------     ---------   ----------  -----------          ----------     
                                                                                                                 
Balance at December 31, 1994                 439,113         2,195           -             -          (1,676,111)  
                                                                                                                 
Common shares issued upon                                                                                        
 exercise of stock options                     6,443            33           -             -               6,122     
Common shares issued as                                                                                          
 compensation for services rendered            9,451            47           -             -              23,959     
Preferred stock issuance                           -             -   1,612,904     1,911,879                   -     
Accrual of preferred stock                                                                                       
 dividends on redeemable                                                                                         
 preferred stock                                   -             -           -             -             (46,808)    
Restructuring of redeemable preferred                                                                            
 stock in conjunction with                                                                                       
 Series D preferred stock issuance                 -             -   5,579,820     4,653,406           1,799,909     
Accrual of preferred stock dividends               -             -           -             -            (478,000)    
Compensation associated                                                                                            
 with issuance of options                          -             -           -             -             382,376     
Amortization of deferred compensation              -             -           -             -                   -     
Repayments of loans to stockholders                -             -           -             -                   -     
Net income for the year                                                                                            
 ended December 31, 1995                           -             -           -             -                   -  
                                             -------      --------   ---------    ----------           ---------  
                                                                                                                 
Balance at December 31, 1995                 455,007         2,275   7,192,724     6,565,285              11,447   
                                                                                                                 
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 nonemployees                                                                                         25,263    
Amortization of deferred                                                                                         
 compensation                                                                                                    
Repayment of loans to                                                                                            
 stockholders                                                                                                    
Net income for the year                                                                                          
 ended December 31,1996                                                      -             -                    
                                           ---------     ----------  ---------     ---------        ------------    
Balance at December 31,                                                                                          
 1996                                      5,322,286     $  26,611           -    $        -          32,357,260    
                                           =========     ==========  =========     =========        ============   
 
</TABLE>


<TABLE>
<CAPTION>
 
                                          (ACCUMULATED                  NOTES                                  
                                            DEFICIT)                  RECEIVABLE                   
                                            RETAINED      TREASURY      FROM           DEFERRED
                                            EARNINGS       STOCK     STOCKHOLDERS    COMPENSATION        TOTAL
                                            --------     ---------   ------------    ------------      -----------
<S>                                        <C>           <C>          <C>           <C>                <C>                
 
Balance at December 31, 1993                (1,282,673)       (100)              -             -         (3,740,935)   
 
Common shares issued as
 compensation
 for services rendered                               -             -             -             -             33,749       
Accrual of preferred stock
 dividends on redeemable 
 preferred stock                                     -             -             -             -           (427,121)    
                                                                                                                               
Net income for the year                                                                                                 
 ended December 31, 1994                       868,430             -             -             -            868,430    
                                              ---------     --------     ---------    ----------         ----------   

 Balance at December 31, 1994               (1,591,861)         (100)            -             -         (3,265,877)       
                                                                                                                              
Common shares issued upon                                                                                                     
 exercise of stock options                           -             -             -             -              6,155            
Common shares issued as                                                                                                       
 compensation for services rendered                  -             -             -             -             24,006          
Preferred stock issuance                             -             -       (33,085)            -          1,878,794
Accrual of preferred stock
 dividends on redeemable 
 preferred stock                                     -             -             -             -            (46,808)       
Restructuring of redeemable preferred                                                                                         
 stock in conjunction with                                                                                                    
 Series D preferred stock issuance                   -             -             -             -          6,453,315    
Accrual of preferred stock dividends                 -             -             -             -           (478,000)         
Compensation associated                                                                                                           
 with issuance of options                            -             -             -      (382,376)                -  
Amortization of deferred compensation                -             -             -        38,469             38,469           
Repayments of loans to stockholders                  -             -             -             -              1,750
Net income for the year                                                                                                           
 ended December 31, 1995                     1,043,189             -             -                        1,043,189
                                             ---------     ---------    ---------     ----------        -----------  
                                                                                                                               
Balance at December 31, 1995                  (548,672)         (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 nonemployees                                                                                            25,263               
Amortization of deferred                                                                                                     
 compensation                                                                                               127,584                 

Repayment of loans to                                                                                                    
 stockholders                                                               2,914                             2,914              
Net income for the year                                                                                                      
 ended December 31,1996                      2,047,550                                                    2,047,550
                                             ---------     ---------   ---------       ----------       -----------     
Balance at December 31,                                                                                                      
 1996                                        1,498,878          (100)     (28,421)      (216,323)        33,637,905
                                             =========     =========   ==========      =========       ============  
 
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows
                  Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
                                                                           1994              1995               1996
                                                                       --------------     -----------      -------------  
<S>                                                                  <C>                <C>                <C>               
 Cash flows from operating activities:
  Net income                                                         $   868,430          1,043,189          2,047,550  
  Adjustments to reconcile net income to net cash                                                                        
  (used in) provided by operating activities:                                                                            
   Depreciation and amortization                                         154,992            395,901            786,852   
   Provision for uncollectible accounts receivable                       797,126          1,580,733          2,434,511   
   Non-cash compensation                                                      --             38,469            152,847   
  Deferred tax benefit                                                        --           (505,000)          (854,285)  
  Changes in assets and liabilities (net of the effects                                                                  
  of the acquisition of OncoCare in 1995):                                                                               
   Increase in accounts receivable                                    (1,688,692)        (2,812,333)        (5,686,947)  
   (Increase) decrease in prepaid expenses                                                                                          
    and other current assets                                               2,759           (150,254)          (251,238)  
   Increase (decrease) in deposits and other assets                        9,276            (30,833)           (18,917)  
   Net purchase of marketable trading securities                              --                 --        (23,395,398)  
   (Decrease) increase  in accounts payable/accrued expenses            (175,270)           891,634           (381,951)  
   Increase in income taxes payable                                           --             63,401            613,778   
                                                                     -----------        -----------        -----------   
                                                                                                                         
     Total adjustments                                                  (899,809)          (528,282)       (26,600,748)  
                                                                     -----------        -----------        -----------   
                                                                                                                         
Net cash provided by (used in) operating activities                      (31,379)           514,907        (24,553,198) 
                                                                     -----------        -----------        -----------  
                                                                                                                         
Cash flow from investing activities:                                                                                     
  Acquisition of OncoCare, net of cash acquired                               --            (19,955)               --   
  Acquisition of other intangibles                                            --                 --           (800,000)  
  Capital expenditures                                                  (217,028)          (737,239)          (434,324)  
                                                                     -----------        -----------        -----------   
                                                                                                                         
Net cash used in investing activities                                   (217,028)          (757,194)        (1,234,324)  
                                                                     -----------        -----------        -----------    
Cash flows from financing activities:
  Issuance of common stock                                                33,749             30,161         25,861,947
  Decrease (increase) of registration costs                                   --           (746,462)           746,462
  Issuance of preferred stock                                                 --          1,911,879                 --
  Payment of dividends on preferred stock                                     --                 --           (560,346)
  Proceeds from bank loan                                                100,000            300,000                 --
  Repayments of bank loan                                                     --           (164,667)          (283,333)
  Payments of capital lease obligations                                  (40,992)          (159,911)          (550,914)
  Issuance of loans to stockholders                                           --            (33,085)                --
  Repayments of loans to stockholders                                         --              1,750              2,914
                                                                     -----------        -----------        -----------
Net cash provided by financing activities                                 92,757          1,139,665         25,216,730
                                                                     -----------        -----------        -----------
 
Net (decrease) increase in cash and cash equivalents                    (155,650)           897,378           (570,792)
 
Cash and cash equivalents at beginning of year                           770,967            615,317          1,512,695
                                                                     -----------        -----------        -----------
Cash and cash equivalents at end of year                             $   615,317          1,512,695            941,903
                                                                     ===========        ===========        ===========
Supplemental disclosures of cash flow information:
  Cash paid during the period for income taxes                       $    44,989            441,599          1,941,013
                                                                     ===========        ===========        ===========
  Cash paid during the period for interest                           $    31,427             80,373            224,112
                                                                     ===========        ===========        ===========
  Fixed assets acquired pursuant to capital leases                   $   206,000          1,121,979          1,417,569
                                                                     ===========        ===========        ===========
  Accrual of dividends on preferred stock                            $   427,121            524,808             82,346
                                                                     ===========        ===========        ===========
  Forgiveness of dividends on preferred stock                        $        --          1,799,909               --
                                                                     ===========        ===========        =========== 

</TABLE>
   See accompanying notes to consolidated financial statements.
<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 and image
       cytometry and molecular pathology technologies. The Company's affiliates
       include IMPATH-HDC, Inc., a wholly owned subsidiary which comprises the
       Company's cytogenetics testing facility; IMPATH Information Services,
       Inc., a wholly owned subsidiary, and a 50% owned limited liability
       company, IMPATH Registry L.L.C. IMPATH Information Services, Inc. and
       IMPATH Registry L.L.C. will facilitate the Company's ongoing effort to
       link its diagnostic and prognostic information to patient outcomes data
       and provide referring physicians with specific treatment pathways. 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.

       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 of US Treasury bills at December 31,
               1995 in the amount of $1,481,935 and money market funds at
               December 31, 1996 in the amount of $565,102.  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.

   (B)  MARKETABLE SECURITIES

               The Company invested approximately $20,000,000 of the net
               proceeds from its initial public offering in a portfolio of
               short-term fixed income securities that are actively traded by an
               investment manager.  In accordance with Statement of Financial
               Accounting Standards ("SFAS") No. 115, the Company's investments
               have been classified as trading securities and are stated at fair
               market value at each balance sheet date, with unrealized gains in
               the amount of $80,720 as of December 31, 1996 reported in the
               accompanying consolidated statement of operations.  Realized
               gains and losses are determined on the specific identification
               method.

   (C)  FIXED ASSETS

               Leasehold improvements and furniture, fixtures, laboratory
               equipment and personal computers 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.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(2)  CONTINUED

       Software development costs 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.

   (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.

   (E)  INTANGIBLE ASSETS

               The excess of cost over net assets acquired (goodwill) is being
               amortized on a straight line basis over a period of 15 years.
               Other acquired intangibles are being amortized over their
               estimated useful lives of approximately seven years.

   (F)  INCOME TAXES

               Income taxes are provided pursuant to the asset and liability
               method as described in SFAS No.109 ("SFAS 109").  SFAS 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 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.

   (G)  CONCENTRATION OF CREDIT RISKS

               The Company invests its cash and investments in deposits with
               major U.S. financial institution's money market funds, 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 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.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(2)  CONTINUED

   (I)  STOCK-BASED COMPENSATION

               Statement of Financial Accounting Standards No. 123, "Accounting
               for Stock-Based Compensation," encourages but does not require
               companies to record compensation cost for stock-based employee
               compensation plans at fair value.  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)  PRO FORMA NET INCOME PER SHARE

               For periods subsequent to the Company's IPO, pro-forma net income
               per share is calculated by dividing the net income by the
               weighted average number of common shares outstanding for the
               respective periods adjusted for the dilutive effect of common
               stock equivalents, which consist of stock options and warrants,
               using the treasury stock method.  Common stock equivalents that
               are anti-dilutive are excluded from net income per share.

               For periods prior to the Company's IPO, pro forma net income per
               share is based on the weighted average number of shares of common
               stock outstanding including common equivalent shares from stock
               options and warrants, using the treasury stock method to the
               extent that their effect is dilutive. 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 pro forma net income per share as if they were
               outstanding for all periods presented. The calculation of shares
               used in computing pro forma net income per share also included
               all series of mandatorily redeemable preferred stock, assuming
               conversion into shares of common stock (using the if-converted
               method) from their respective original dates of issuance.

   (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

               In 1996, the Company adopted Statement of Financial Accounting
               Standards No. 121, "Accounting for the Impairment of Long-Lived
               Assets and for Long-Lived Assets to Be Disposed of."  The
               Statement establishes accounting standards for the impairment of
               long-lived assets, certain identifiable intangibles, and goodwill
               related to those assets.  There was no material effect on the
               financial statements from the adoption because the Company's
               prior impairment recognition practice was consistent with the
               major provisions of the Statement.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(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 cash and cash equivalents, accounts receivable,
       accounts payable income taxes payable, dividends payable and accrued
       expenses approximate fair value because of the short maturity of those
       instruments. Fair values of investments in marketable trading securities
       are based on quoted market prices.
       
       The fair value of the loan payable in 1995 approximated the carrying
       value as its stated interest rate was consistent with rates then
       available to the Company for similar debt instruments of comparable
       maturities.
   
(4)    BUSINESS AND CREDIT CONCENTRATIONS

       Accounts receivable, by payor class, as a percentage of total net
       receivables at December 31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
 
                                                   1995   1996
                                                   -----  -----
<S>                                                <C>    <C>
 
      Medicare                                       15%    24%
      Commercial insurance                           33%    37%
      Hospitals, clinics and other institutions      37%    31%
      Patients                                       15%     8%
                                                   ----   ----
                                                    100%   100%
                                                   ====   ====
</TABLE>


(5)  FIXED ASSETS

       At December 31, 1995 and 1996, fixed assets consisted of the following:

<TABLE>
<CAPTION>
 
                                                           1995       1996
                                                        ----------  ---------
<S>                                                     <C>         <C>
 
      Personal computers                                $  283,096    775,895
      Software development costs                           629,361  1,106,653
      Furniture, fixtures and laboratory equipment       1,442,646  2,361,093
      Leasehold improvements                               757,560    720,915
                                                        ----------  ---------
                                                         3,112,663  4,964,556
 
      Less accumulated depreciation and amortization       806,924  1,572,591
                                                        ----------  ---------
 
                                                        $2,305,739  3,391,965
                                                       =========== ==========
 
</TABLE>

       Included in the above at December 31, 1995 and 1996 are gross assets
       under capital leases of approximately $1,505,000 and $2,894,477,
       respectively, and the related accumulated amortization at such dates was
       approximately $390,000 and $921,200, respectively.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(6)  INTANGIBLE ASSETS

       In May 1995, The Company acquired the assets and assumed certain
       liabilities of Oncocare, a serum analysis facility located in California,
       for a total purchase price of $20,000 plus assumed liabilities of
       $73,000.  The acquisition was accounted for as a purchase and resulted in
       goodwill of $31,973.  The results of operations of Oncocare are included
       in the accompanying consolidated financial statements from the date of
       acquisition.

       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 certain
       liabilities.  This option was exercised in January 1997.


(7)    ACCRUED EXPENSES


       Accrued expenses are comprised of the following as of December 31, 1995
       and 1996:

<TABLE>
<CAPTION>
 
                                  1995     1996
                                --------  -------
<S>                             <C>       <C>
 
 Deferred registration costs..   $236,373      --
 Salaries and related costs....   129,409  230,099
 Other accrued expenses........   119,413  144,662
                                 --------  -------
                                 $485,195  374,761
                                 ========  =======
 
</TABLE>

(8)    INDEBTEDNESS AND FINANCING COMMITMENTS

       On September 21, 1995, The Company entered into a $300,000 term loan.
       This loan was repaid in 1996.  The Company maintains a line of credit
       with thE Chase Manhattan Bank in the aggregate amount of $2,500,000,
       which expires on June 30, 1997.  Borrowings bear interest at the bank's
       prime rate.  As of December 31, 1996, there were no amounts outstanding
       under this line of credit.
<PAGE>
 
                         IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(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.


   (B)  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. No value was ascribed to these
       warrants for financial reporting as the Company believes such amount
       would not be material to the accompanying consolidated financial
       statements. 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.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)  CONTINUED

       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.

   (C)  STOCK OPTION PLAN

       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 of 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 of 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 October of 1995, the Financial Accounting Standards Board issued SFAS
       No.123, "Accounting for Stock-Based Compensation," which was adopted by
       the Company in 1996.  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 the Statement.

       At December 31, 1996, there were 28,730 additional shares available for
       grant under the Plan. The per share weighted-average fair value of stock
       options granted during 1996 and 1995 was $8.10 and $5.28 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 6.5%, expected volatility of 60% and an expected
       life of 7 years; 1995 - 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 Plan 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 to nonemployees resulting in compensation cost of $25,263.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)  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>
 
                                                 1995       1996
                                              ----------  ---------
<S>                              <C>          <C>         <C>
 
         Net income              As reported  $1,043,189  2,099,550
                                 Pro forma    $1,024,048  1,955,858
 
         Net income per share    As reported  $     0.31       0.38
                                 Pro forma    $     0.30       0.36
</TABLE>

       Pro forma net income reflects only options granted in 1996 and 1995.
       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, 1994, 1995 and 1996:

<TABLE>
<CAPTION>
                                                                  
                                                       Weighted-  
                            Shares                     average    
                            under        Price         exercise   
                           options      range ($)      price ($)  
                          ----------  -----------     ----------- 
<S>                       <C>         <C>             <C>          
 
Options outstanding at
 December 31, 1993          261,204      .28-2.54        1.41
Granted                     204,297     2.54-3.50        2.81
Canceled                    (35,615)         2.54        2.54
                            -------  
                                                             
Options outstanding at                                       
 December 31, 1994          429,886      .28-3.50        1.98
Granted                     126,692     3.50-8.00        4.21
Exercised                    (6,444)     .56-3.50         .96
Canceled                    (16,777)     .56-3.50         .56 
                            -------  
Options outstanding at
 December 31, 1995          533,357      .28-8.00        2.57
Granted                     247,077   11.13-18.38       14.05
Exercised                   (75,846)    .28-13.00        1.66
Canceled                    (14,962)   2.15-13.00        5.62
                            -------  
Options outstanding at
 December 31, 1996          689,626     .28-18.38        6.72
                            =======     =========        ====              
</TABLE>
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)  CONTINUED

       The following table summarizes information about stock options
       outstanding and exercisable as of December 31, 1996:

<TABLE>
<CAPTION>
 
                               Weighted
                    Number      average    Weighted  Number    Weighted
   Range of         out-       remaining   average   exercis-  average
   exercise      standing at  contractual  exercise  able at   exercise
     prices       12/31/96     life          price   12/31/96  price
---------------   --------    -----------  --------  --------  --------
<S>              <C>          <C>          <C>       <C>       <C> 
$0.28-0.34            55,582  3.1 YEARS      $ 0.29    55,582    $ 0.29
   0.56               11,699  4.3 YEARS        0.56    11,699      0.56
 2.12-3.50           367,549  7.4 YEARS        2.91   214,552      2.77
 8.00-12.63           55,063  9.4 YEARS       10.54     5,861     10.92
13.00-13.75          118,433  9.1 YEARS       13.06    20,189     13.02
16.75-18.38           81,300  9.8 YEARS       16.93     2,680     17.35
                    --------                         --------
 0.28-18.38          689,626                          310,563      3.19
===============     ========                         ========    ======
 
</TABLE>

       The Company currently has 763,187 shares reserved for options and
       warrants outstanding, as well as for 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 25% of the first 4% of employee
       contributions.  Plan participants who were employees as of june 1, 1995
       are 100% vested in all contributions.  Any employees hired subsequent to
       June 1, 1995 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, 1995 and 1996 were $22,129
       and $50,990, respectively.
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(11)    INCOME TAXES

       The components of the provision for income taxes for 1994, 1995 and 1996
       are as follows:

<TABLE>
<CAPTION>
 
                                       1994       1995        1996
                                    ----------  ---------  ----------
<S>                                 <C>         <C>        <C>
Current:
  Federal                           $ 336,000    463,000   1,566,987
 State and local                      337,921    321,000     907,607
 Benefit of operating loss carry
 forwards                            (576,000)  (279,000)        --
                                    ---------   --------   ---------
 
                                       97,921    505,000   2,474,594
Deferred:
 Federal                                  --    (298,000)   (541,047)
 State and local                          --    (207,000)   (313,238)
                                    ---------   --------   ---------
 
                                          --    (505,000)   (854,285)
                                    ---------   --------   ---------
 
                                    $  97,921        --    1,620,309
                                    =========   ========   =========
 
</TABLE>

       Net deferred tax assets at December 31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
 
                                      1995        1996
                                   -----------  ---------
<S>                                <C>          <C>
 
Allowance for doubtful accounts    $  667,000   1,229,418
All other                             (77,000)    129,867
                                   ----------   ---------
                                      590,000   1,359,285
 
Less: Valuation allowance             (85,000)        --
                                   ----------   ---------
 
Deferred tax assets, net           $  505,000   1,359,285
                                   ==========   =========
</TABLE>

       The Company has reduced its valuation allowance against net deferred tax
       assets in 1994, 1995 and 1996 by $470,000, $529,000 and $85,000,
       respectively, to increase the carrying value of such assets to the extent
       of taxes that it has paid on estimated current year taxable earnings
       through December 31, 1994, 1995 and 1996, respectively. As a result,
       management of the Company believes that it is more likely than not that
       future tax benefits will be realized as a result of the reversal of its
       temporary differences.

       A reconciliation of the Federal statutory income tax rate to the
       effective tax rate for the years ended December 31, 1994, 1995 and 1996
       follows:
       
<TABLE>
<CAPTION>
 
                                                 1994    1995   1996
                                                ------  ------  -----
<S>                                             <C>     <C>     <C>
 
Federal statutory income tax rate                34.0%   34.0%  34.0%
State and local taxes, net of Federal income
 tax benefit                                     23.1    20.3   10.7
Change in valuation allowance                   (48.7)  (50.7)  (2.3)
Other                                             1.7    (3.6)   1.8
                                                -----   -----   ----
                                                 10.1%    0.0%  44.2%
                                                =====   =====   ====
</TABLE>
<PAGE>
 
                          IMPATH INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

         (12)  Leases

       The Company utilizes laboratory and office facilities and leases
       equipment pursuant to the terms of operating and capital leases, which
       expire in 1996 through 2002 (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 operating and
       capital leases are as follows:

<TABLE>
<CAPTION>
 
                                            Operating    Capital
         Year ending December 31             leases      leases
-----------------------------------------  -----------  ---------
<S>                                        <C>          <C>
 
1997                                       $  752,052     938,252
1998                                          722,514     906,860
1999                                          537,277     501,467
2000                                          283,569     233,320
2001                                           21,989       4,187
Thereafter                                      3,939         --  
                                           ----------   ---------
 
                                           $2,321,340   2,584,086
                                           ==========   =========    
Less amount representing interest                        (449,583)
                                                       ----------
Present value of minimum lease payments                 2,134,503
 
Less current portion                                      704,399
                                                       ----------
 
                                                       $1,430,104
                                                       ==========
 
</TABLE>

For the years 1994, 1995 and 1996, rent expense totaled $316,498, $472,499, and
$749,168 respectively.
<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   Registration 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 Impath         *
         Inc. and Bruce C. Horten, M.D.
  10.3   Employment letter dated March 7, 1994 between Impath            *
         Inc. and John P. Gandolfo
  10.4   Space Lease dated August 29, 1988, as amended, between          *
         166 East 61st Street Associates and BioPath, Inc.
         (predecessor corporation to Impath 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
         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 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                *


                                      E-1
<PAGE>
 
Exhibit
Number                      Description                                 Page
-------  -------------------------------------------------------        ----
 
  10.12  Lease Modification Agreement dated as of April 24, 1995         *
         between 166 East 61st Street Associates and Impath
         Laboratories Inc.
  11     Statement regarding Computation of Per Share Earnings          **
  23     Consent of KPMG Peat Marwick LLP                               **
  24     Power of Attorney                                              **
  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).
**  Previously filed.
                                      E-2