<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                         COMMISSION FILE NUMBER 1-13768

                                 ONCORMED, INC.
             ------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  DELAWARE                         52-1842781
         ------------------------ ------------------------------------
         (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

                               205 PERRY PARKWAY
                          GAITHERSBURG, MARYLAND  20877
                    ----------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   (ZIP CODE)

                                 (301) 208-1888
              ----------------------------------------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

         TITLE OF EACH CLASS       NAME OF EXCHANGE ON WHICH REGISTERED
         -------------------       ------------------------------------
                  NONE                             NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                              TITLE OF EACH CLASS
                              --------------------
                          COMMON STOCK, PAR VALUE $.01

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.   YES  X    NO
                                               -----     -----

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K.    X
                ------

AT MARCH 3, 1998, ONCORMED, INC. HAD 7,882,833 SHARES OF COMMON STOCK, PAR
VALUE $.01, OUTSTANDING.

WHILE IT IS DIFFICULT TO DETERMINE THE NUMBER OF SHARES OWNED BY
NON-AFFILIATES, THE REGISTRANT ESTIMATES THAT THE AGGREGATE MARKET VALUE OF ITS
COMMON STOCK ON MARCH 3, 1998 (BASED UPON THE CLOSING PRICE OF THESE SHARES ON
THE AMERICAN STOCK EXCHANGE) HELD BY NON-AFFILIATES WAS APPROXIMATELY
$38,224,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

ITEMS 10, 11, 12 AND 13 OF PART III ARE INCORPORATED BY REFERENCE FROM A
PORTION OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FURNISHED TO
STOCKHOLDERS IN CONNECTION WITH THE 1998 ANNUAL MEETING OF STOCKHOLDERS.
<PAGE>   2

                                     PART I

Item 1   Business

This report contains certain statements of a forward-looking nature relating to
future events or the future financial results of the Company.  Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially.  In evaluating such statements, investors should
specifically consider the various factors identified in this report which could
cause actual events or results to differ materially from those indicated by
such forward-looking statements, including the matters set forth in "Business -
Risk Factors".

BUSINESS OVERVIEW

Oncormed, Inc. (the "Company") was incorporated on July 12, 1993 in the State
of Delaware.  Oncormed is a genomics services company that characterizes newly
discovered genes to establish their medical relevance and provides molecular
profiling of patients for pharmacogenomic and therapeutic purposes.  The
Company's mission is to accelerate the translation of cancer-related genetic
discoveries into clinically-useful products and services through strategic
collaborations with pharmaceutical, genomic and biotechnology companies.

The Company believes that components of its gene characterization and
molecular profiling platforms may be integrated into the continuum of products
and services that are part of the diagnosis, management, and therapeutic
treatment of cancer.  Over the past year, the Company has entered into
collaborations with leading pharmaceutical, biotechnology, and genomics
companies to facilitate the commercialization of such partners' products and
services.

GENE CHARACTERIZATION

In recent years, the advent of sophisticated genomics technologies has led to
an acceleration in the discovery of new gene targets.  A gene target can be
identified by traditional positional cloning, by assembly of expressed sequence
tag ("EST") fragments into full length genes, or by identification of novel
genes from expression technologies including microarrays.  Today there are
tens of thousands of  new gene targets identified for which genomics companies,
biotechnology companies and pharmaceutical companies are trying to determine
the medical relevance and commercial significance.  Prior to the
commercialization of any gene discovery into a new diagnostic or therapeutic,
however, the gene must by fully characterized.

Oncormed is developing a gene characterization program that combines its
proprietary tools and methodologies with its clinical expertise in order to
fully characterize newly discovered genes.  Gene characterization consists of
the following steps:  (i) determining which gene targets to characterize; (ii)
determining a frequently-occurring sequence ("consensus sequence"); (iii)
identifying disease-causing mutations and modifiers of gene function; and (iv)
identifying disease-related genetic pathways.

Determine which Gene Targets to Characterize.   The gene characterization
process begins with tissue-specific expression analysis of gene targets, that
is, the identification of the tissues in the body that express





                                       2
<PAGE>   3
a targeted gene under different clinical and therapeutic conditions.  These
targets may be gene fragments, such as from an EST database, or they may be
partial or full length genes whose sequence, size, and function is not known.
The specificity of the gene's expression determines the gene's viability as a
target for diagnostic or therapeutic development. Only after a gene is
determined to cause a particular disease or modify a therapeutic effect does it
become a target for pharmaceutical and diagnostic development.

To determine which gene targets to characterize and to determine the full gene
sequence of those gene targets of interest, the Company utilizes its
proprietary pattern recognition methodology ("Recognizer"), its biorepository
of tissue samples and associated clinical database, and a sophisticated
high-fidelity, high-throughput sequencing facility.  In addition, Company
scientists have extensive experience using proprietary EST databases including
both Human Genome Science's database and Incyte's LifeSeq database as well as
public EST databases.

Consensus Sequence Discovery.  The next step in the gene characterization
process is the determination of the normal sequence(s) of the disease-causing
gene.  A normal sequence that occurs frequently within a population is referred
to as a "consensus sequence".  This is similar to the recognized variations of
"normal" that lead to the common ABO blood groups in human populations.
Determining the consensus sequence(s) for a given population is essential to
successful therapeutic and diagnostic development.  For example, in order to
develop an effective gene therapy in which a defective protein is either
replaced with, or restored to, the normal protein, a consensus sequence that
produces the normal protein is a potential starting point.  For diagnostics, a
consensus sequence provides a benchmark for comparison when testing patient
samples.  The Company has developed a proprietary methodology to determine the
consensus sequence(s) of a disease-causing gene.  The application of this
methodology led to the determination of a consensus sequence of the BRCA1 gene,
for which the Company was issued a patent in August 1997.

Genetic Mutation Determination.  After determining the consensus sequence for a
gene, the next step is to determine the mutations within the gene that are
associated with disease and modification of therapeutic response.  Utilizing a
proprietary mutation methodology, the Company is able to identify the entire
range of mutations of the disease-causing gene that could lead to the
development of a disease.  Upon identifying the range of mutations, the Company
utilizes high fidelity sequencing and mutation detection technologies to single
out those mutations that result in disease or modified therapeutic response.
Mutations identified in diseased tissues are then compared against non-diseased
tissues to further validate disease-causing mutations. The Company intends to
commence development of functional assays with associated chemistries to scan
large numbers of mutations in areas of the protein to quickly identify
disease-causing mutations.  The Company has filed several patent applications
relating to its genetic mutation discoveries and methodologies.

Gene Pathway Identification.  Although single gene targets are important, to
fully understand a specific disease it is essential to identify patterns of
expression for the interaction of multiple genes, otherwise known as "genetic
pathways."  Understanding the genetic pathways as they relate to a disease
state allows for the development of multiple therapeutic interventions.  The
Company is developing an expertise to determine patterns of interrelated gene
expression using its patented Recognizer methodology.  In addition,
methodologies and technologies such as those available to the Company through
its collaboration with Affymetrix for gene expression chips, combined with the
Company's tissue sample biorepository, provide the Company with the ability to
further perform pathway analysis.





                                       3
<PAGE>   4
MOLECULAR PROFILING

Patients diagnosed with seemingly identical types of cancer using conventional
methods often have different outcomes and experience varying side effects with
respect to the same therapeutic intervention.  One important source of this
variation is the individual patient's genetic makeup, or genotype.  Molecular
profiling refers to the study and prediction of how patients are likely to
respond to a drug based on their genotype.  The Company provides its molecular
profiling services (i) to help therapeutic companies successfully identify
appropriate clinical trial candidates (e.g., those who are chemosensitive or
who have a particular genetic defect), (ii) to stratify clinical trial
participants to ascertain the molecular basis of varying treatment
responsiveness, and (iii) to conduct post-therapy monitoring.  The Company
believes that its molecular profiling services may help pharmaceutical and
biotechnology companies accelerate the time required for drug evaluation and
registration, thereby reducing development costs and improve the likelihood of
success of new drugs in clinical trials.  The Company also believes that
genetic information will become increasingly important to the United States
Food and Drug Administration in reviewing and approving new drugs, and to
physicians in treating patients.

The Company believes that eventually a substantial portion of all cancer
patients may be diagnosed and treated based on genetic information provided by
molecular profiles.  The information provided by these profiles should help
physicians better manage cancer patients and their family members by more
accurately diagnosing cancer, selecting appropriate therapies, monitoring drug
responsiveness, identifying early recurrence and determining if other family
members are at risk.  The Company also believes that incorporating molecular
profiles into therapeutic development will lead to the identification of new
selective drugs of proven efficacy, more effective and less expensive
treatments, and improved outcomes.

The Company has a proven track record in rapidly translating genomic
discoveries into molecular profiles for use in patient management and
therapeutic development.  By leveraging its expertise and its proprietary
technology platform, the Company believes that it can become a provider of
molecular profiling services for use in clinical diagnostics and therapeutic
development.

Molecular profiles can vary from analysis of a single gene to analysis of
thousands of genes to determine why some patients respond to one drug and not
another, why some patients die of their disease while others survive,
or to determine if a disease has been successfully treated or is going to
recur.  Molecular profiles can give information on prognosis, susceptibility,
and early detection, and may predict drug responsiveness.

p53 Profiling.  Recent clinical research has indicated that p53 gene mutations
can be predictive of both patient survival and response to therapy.  The
Company has established extensive expertise in pharmacogenomics through its
work on the p53 tumor suppressor gene.  Defective in over half of all major
cancers, p53 is the focus of several gene therapy trials.  Since studies have
demonstrated that p53 status causes differing responses by cancer patients to
traditional interventions, such as chemotherapy and radiation therapy, a
patient's p53 status is a differentiating variable in a growing number of
cancer-related clinical trials.

TumorCheck(TM). Ascertaining if a cancer has spread beyond its tumor margins
into the surrounding tissue and lymph nodes is also important in accurately
determining prognosis and selecting treatment.  Conventional techniques of
determining whether cancer surgery has been successful rely on microscopic
analysis of tissue by a pathologist using largely subjective criteria.  Recent
studies have found that in more than 20% of head





                                       4
<PAGE>   5
and neck and colon cancer patients in which conventional microscopic analysis
by a pathologist indicated that the surrounding tissue and lymph nodes were
normal and cancer free, molecular analysis correctly detected the presence of
cancer cells which proved highly predictive of relapse.

The Company has developed a molecular staging service, TumorCheck(TM), which
can detect one cancer cell in 10,000 normal cells and can help surgeons and
pathologists detect cancer cells present at the margins of resected tumors and
lymph nodes.  The initial TumorCheck(TM) application focuses on head and neck
cancer with additional targets to potentially include breast and colorectal
cancers.  The Company may initiate additional development work to enhance this
service and the underlying technology.  The Company believes that this service
will assist pharmaceutical companies in identifying populations of patients
that might benefit from earlier and more aggressive therapeutic intervention
and oncologists and other physicians in determining whether additional
treatment after surgery is warranted.

Susceptibility.  Up to 10% of all cancers result from the mutation of an
inherited gene that indicates a susceptibility or increased risk for developing
certain cancers.  The Company provides confirmation of inherited susceptibility
to the major cancer syndromes for which gene discoveries have been made:
breast/ovarian (BRCA1, BRCA2), colorectal (MSH2, MLH1), melanoma (p16) and
thyroid (RET).  Cancers that arise because of mutations in susceptibility genes
may be managed by different surgical and therapeutic methods than other cancers
and often have unique clinical behavior.  By assisting pharmaceutical companies
and physicians in determining which individuals have cancer or are at cancer
risk because of a mutation in a susceptibility gene, better therapeutic
management and targeting can occur.

Early Detection.  The identification of molecular changes in certain bodily
fluids and tissues may allow for the detection of cancer at a much earlier
stage than is possible using conventional methods, which are designed to detect
tumor masses or the presence of large numbers of cancer cells.  The five-year
survival rate for most major cancers is substantially higher when detected at
an early, localized stage, as compared to when the cancer has spread to the
lymph nodes or other organs.  For example, when detected early, the five-year
survival rate for bladder cancer is approximately 92%, compared with
approximately 48% when there is regional lymph node involvement, and
approximately 8% when the cancer has spread to other organs.  The Company
believes that the use of molecular profiling in the early detection of cancer
will reduce the need for invasive and costly treatments, improve the efficacy
of available therapies and increase the likelihood of early therapeutic
treatment and survival.

According to the American Cancer Society, approximately 54,000 new cases of
bladder cancer were diagnosed in 1997 in the United States.  The Company is
developing a molecular profile service designed to detect bladder cancer at a
stage where there are no physical symptoms detectable using currently available
conventional methods.  The Company believes that the underlying methods and
technologies for its bladder cancer service can be applied to the early
detection of other cancers, including cervical, colorectal and lung.

TECHNOLOGY PLATFORM

Oncormed has developed, and is commercializing, a set of proprietary tools and
methodologies designed to characterize genes.  The following describes the
Company's existing proprietary technologies and methodologies and additional
technologies under development.

Pattern Recognition Methodology (the "Recognizer").  In July 1997, the Company
was issued a patent for a novel bioinformatics method which can be used as an
analytical tool in genomics discovery.  The





                                       5
<PAGE>   6
Recognizer uses artificial intelligence to identify patterns in large data sets
and is distinct from other approaches to pattern recognition, such as neural
networks and traditional data mining techniques.  Unlike the latter, which rely
on potentially subjective human opinion to determine which cases in a database
represent a particular pattern, the Recognizer is entirely data driven.  The
Company believes the Recognizer can be used in a variety of applications
including gene expression databases to identify genes and gene pathways that
will be of therapeutic and diagnostic importance.

High Throughput/High Fidelity Sequencing.  The Company utilizes automated,
gel-based DNA sequencing for several of its services, including the
determination of consensus sequence(s) of disease-causing genes.  The
application of this proprietary sequencing methodology led to the determination
of a consensus sequence of the BRCA1 gene, for which the Company was issued a
patent in August 1997. Under the Company's collaboration with Incyte, the
Company has licensed Incyte's gel-based sequencing technology improvements,
providing the Company with an enhancement of the efficiency and capacity of its
gene sequencing capabilities.  The Company's clinical services have been
further enhanced through additional refinements, including an increase of its
sequencing capacity, while maintaining high fidelity and accuracy.

Biorepository.  The Company's genomics biorepository, consisting of thousands
of well-characterized, high quality tissue samples and associated clinical data
(the "Biorepository"), is an important component of the Company's gene
characterization program.  As part of the Company's tissue-specific expression
analysis, disease correlation, and gene pathway identification efforts, the
Biorepository provides a database for comparison of newly-discovered genetic
information with known tissue samples and related clinical data.  These tissues
and clinical data are used to trace the genetic profile of diseased cells as
they progress from normal to atypical to malignant.  The Company believes that
the ability to identify the specific molecular changes that occur at different
points in the disease pathway will lead to a better understanding of the
disease process itself and will identify markers which potentially can be used
for the improved management of disease.

HCI Database and DNA Library.  Through an exclusive, worldwide license, the
Company has commercialization rights to Hereditary Cancer Institute's ("HCI")
extensive cancer family history database, which includes over 125,000
individuals.  The Company also has commercialization rights to HCI's DNA
library, which includes more than 2,000 immortalized blood cell lines.  The HCI
database and DNA library have been involved in many cancer gene discoveries.
The Company believes that the HCI database and DNA library may help to
facilitate additional new cancer gene discovery and support the correlation of
gene mutations with cancer expression, prognosis and treatment effectiveness.

DNA GeneChip Technology.  In September 1996, the Company entered into an
initial collaboration with Affymetrix, Inc. ("Affymetrix"), to co-develop and
validate diagnostic services using the Affymetrix GeneChip system for analysis
of genes associated with cancer, beginning with p53.  The GeneChip system is
designed to provide rapid genetic analysis using miniaturized, high-density
arrays of DNA probes, or "chips," and proprietary software to analyze and
manage genetic information.  The GeneChip is a glass chip onto which an array
of tens of thousands of short DNA fragments or probes has been simultaneously
synthesized.  If the DNA in a sample fragment finds its complement with the DNA
on the chip, it binds and a signal is detected and read by an automated reader.

In August 1997, Affymetrix began selling p53 GeneChip systems for research
purposes and the Company anticipates introducing a CLIA-certified
GeneChip-based p53 assay as part of its pharmacogenomics and clinical
diagnostic services in the first half of 1998.  In October 1997, the Company
and Affymetrix expanded their collaboration to include the co-development of a
BRCA1 and BRCA2 GeneChip system which the Company intends to use for its
molecular profiling services.





                                       6
<PAGE>   7
The Company utilizes the Affymetrix gene expression microarrays in its
tissue-specific expression analysis, disease correlation, and gene pathway
identification programs.  Affymetrix supplies the Company with GeneChip probe
arrays that will simultaneously monitor the expression of up to 250 genes
associated with cancer in patient tumor samples.  Using these probe arrays, the
Company expects to identify patterns of expression that correlate with
particular disease outcomes or suggest particular courses of treatment and
develop additional intellectual property.  The Company is working with
Affymetrix to further enhance its GeneChip technology to increase the utility
of the GeneChip technology for genomics gene characterization.

In March 1998, the Company and Affymetrix expanded the collaboration to include
the co-development of a gene expression database to be used by third parties as
a tool in drug development.

Additional Programs.  The Company has established and continues to expand its
comprehensive technology platform of high throughput/high fidelity gene
sequencing and various DNA amplification, gene screening and mutation detection
technologies.  In addition to the anticipated introduction of the p53 GeneChip
system in the first half of 1998, the Company has acquired sublicenses,
exclusive in certain fields of use, through an agreement with Oncor, Inc.
("Oncor Agreement"), for certain proprietary technologies which are applied in
molecular profiling, including a functional gene assay, microsatellite
instability technology and a molecular staging assay.

Functional Gene Assay.  A difficulty confronting the use of various genetic
mutation detection technologies in the clinical setting is determining whether
a specific mutation is biologically significant.  Some mutations do not affect
the function of the proteins produced by the gene and thus have no known
biological or clinical relevance.  However, genetic mutations that affect
function can cause disease.  The Company has acquired a worldwide sublicense,
through Oncor, exclusive in certain fields of use, from the Massachusetts
General Hospital to use a functional gene assay and is currently applying this
technology to the detection of p53 mutations.  Additional functional assays may
be co-developed by the Company and its collaborators, including assays for
BRCA1 and BRCA2 (breast and ovarian cancers) and MSH2 and MLH1 (nonpolyposis
colorectal cancer).  The functional gene assay allows for a simple
determination of whether a mutation is biologically significant and also is
able to detect mutations faster and more cost-effectively than gene sequencing.

Microsatellite Instability Analysis.  While all cancer cells have some type of
genetic mutation, only certain mutations cause a genetic instability to occur.
Genetic instability is recognized by abnormal expansions or deletions of
normally present short, repetitive sequences in the DNA.  These expansions or
deletions, called microsatellite alterations, are present in tumor DNA but not
in normal DNA and are often indicative of the presence of cancer.  The Company
believes the detection of the genetic instability associated with these
alterations will provide a fast, reliable and sensitive method for the early
detection of certain cancers.  The Company has a worldwide sublicense, through
Oncor, exclusive in certain fields of use, for technology from  The Johns
Hopkins University to detect the microsatellite alterations associated with
genetic instability.  Using an optimized set of DNA markers and reagents, the
Company is developing the analytical capabilities to detect the genetic
instabilities associated with bladder cancer.  Although the initial results
under a clinical study are encouraging, additional work needs to be performed
to optimize specimen collection, analysis and result interpretation. The
Company believes microsatellite instability analysis also can eventually be
applied to the early detection of colon, cervical and lung cancers.

Molecular Staging Assay.  Conventional techniques of determining whether cancer
surgery has been successful rely on a pathologist using a microscope to make
certain evaluations based largely on subjective criteria.  Recent studies have
found that in more than 20% of head and neck and colon cancer patients in which
conventional microscopic analysis by a pathologist indicated that the
surrounding tissue and lymph nodes were normal and cancer free, molecular
analysis detected the presence of cancer cells.  Utilizing a proprietary
process sublicensed through Oncor, exclusive in certain fields of use, from The
Johns Hopkins University, the Company is able to detect one cancer cell in
10,000 normal cells in the tissue surrounding surgically removed tumors or
lymph nodes.  This process forms the basis of the Company's TumorCheck(TM)
service.  The initial application will be head and neck cancer with additional
targets to potentially include





                                       7
<PAGE>   8
breast and colorectal cancers.  The Company may initiate additional development
work to enhance this service and the underlying technology.

COLLABORATIVE RELATIONSHIPS

Incyte Pharmaceuticals, Inc.

Pursuant to a License, Services and Marketing Agreement (the "Incyte
Agreement"), dated February 25, 1997, the Company and Incyte have formed a
collaboration in clinical genomics. The term of the Incyte Agreement expires on
February 25, 2000 (the "Initial Term") unless extended by mutual agreement or
earlier terminated in accordance with its terms.

The Company has agreed to perform certain specified clinical genomic services
relating to the creation of a tissue repository and the performance of a gene
functional studies program (the "Collaborative Services").  Incyte has agreed
to purchase a specified minimum of Collaborative Services during each year of
the Initial Term.  The Company has recently started to provide this service
under the multi-year collaboration and expects to begin recognizing revenues
relating to this service during 1998.  In addition, under the terms of the
Incyte Agreement, the Company has obtained a non-exclusive, royalty-bearing
license (without the right to sublicense) to use Incyte's high-throughput
sequencing technology for use in the Company's clinical diagnostic services for
a period ending five (5) years following termination of the Incyte Agreement,
subject to certain limitations. In consideration for the grant of the license,
the Company has issued to Incyte shares of the Company's Common Stock and a
warrant to purchase additional shares of the Company's Common Stock.

As part of this multi-year collaboration, the Company is providing tissues and
associated clinical data to Incyte for sequencing and entry into Incyte's
proprietary databases.  The information entered into Incyte's databases will be
owned by Incyte.  The Company expects to begin recognizing revenues relating
to this service during 1998.

Affymetrix, Inc.

In September 1996, the Company entered into an agreement with Affymetrix to
collaborate in the development and clinical validation of genetic testing
services using the Affymetrix GeneChip system for analysis of genes associated
with cancer beginning with the p53 gene.  The GeneChip system is designed to
provide rapid genetic analysis using miniaturized, high-density arrays of DNA
probes, or "chips", and proprietary software to analyze and manage genetic
information.  The GeneChip is a glass chip onto which an array of tens of
thousands of short DNA fragments or probes has been simultaneously synthesized.
If the DNA in a sample fragment finds its complement with the DNA on the chip,
it binds and a signal is detected and read by an automated reader.  The Company
expects to introduce the first CLIA-certified p53 GeneChip assay as part of its
molecular profiling services in the first half of 1998.

In October 1997, the Company expanded its collaboration with Affymetrix.  Under
the new agreement, the companies will co-develop a GeneChip system for BRCA1
and BRCA2 genotyping.  The Company will design and validate the BRCA1 and BRCA2
GeneChip array which will be manufactured by Affymetrix.  Oncormed will own
intellectual property related to the BRCA1/BRCA2 assays with certain rights to
Affymetrix.  Upon successful completion, Affymetrix can sell the BRCA1/BRCA2
GeneChip arrays.  In return, Oncormed will receive royalties on all BRCA1 and
BRCA2 array sales.  In addition, Affymetrix will supply the Company with
GeneChip probe assays that will simultaneously monitor the expression of up to
250 genes associated with cancer in patient tumor samples.  These arrays are
expected to identify patterns





                                       8
<PAGE>   9
of expression that correlate with particular disease outcomes or suggest
particular courses of treatment, and establish the utility of gene expression
arrays as a cancer disease management tool.  The initial term of the new
agreement is three years.

In March 1998, the Company and Affymetrix expanded the collaboration to include
the co-development of a gene expression database to be used by third parties as
a tool in drug development. Affymetrix will design and supply custom and
standard expression monitoring GeneChip probe arrays and related technology.
The Company will contribute tissue samples and apply its expertise in tissue
pathology and molecular genetics to generate high resolution gene expression
data. Affymetrix will be responsible for marketing the database, with net
revenues from subscriptions to be shared equally between the parties. In
addition to the database collaboration, the Company may provide GeneChip
expression analysis services to third parties with a royalty to Affymetrix. The
term of the new collaborative project has not yet been defined.

ZENECA Diagnostics.

During August 1996, the Company and ZENECA Limited, acting through ZENECA
Diagnostics, entered into a five-year Collaboration Agreement under which
ZENECA Diagnostics will supply Oncormed with proprietary cancer reagents based
on the patented ZENECA ARMS technology for use by the Company's advanced cancer
genetic testing laboratory in the U.S.  The agreement automatically renews for
successive twelve-month periods unless terminated by either party.  Use of
ZENECA Diagnostics reagents will enable the Company to develop and provide
enhanced diagnostic testing in the cancer field.  During mid-1997, the Company
and ZENECA Diagnostics successfully completed the first application of the ARMS
technology to detect mutations associated with breast/ovarian cancer.  The
Company intends to license and/or transfer this technology to clinical
laboratories worldwide.

LICENSING RELATIONSHIPS

Oncor, Inc.

In 1997, the Company and Oncor agreed to certain changes to the Restated
Technology License Agreement, dated June 6, 1994 (as amended, the "Oncor
Agreement"). Pursuant to the Oncor Agreement, Oncor is providing the Company
with an exclusive worldwide license to certain of Oncor's existing human genome
technologies that are useful for purposes of development and commercialization
of certain of the Company's services, including: (i) testing, detection and/or
analysis of genes; (ii) genetic assessment of risk of an individual to develop
cancer; and (iii) testing and analysis for the purposes of cancer management.
In addition, Oncor is providing the Company with a non-exclusive worldwide
license to certain of Oncor's existing human genome technologies, and any
future improvements thereto, to be used by the Company in the provision of
services directly to third parties other than services that are provided
pursuant to the exclusive license. The Company does not have the right to
sublicense any Oncor technologies licensed to it by Oncor without Oncor's prior
written consent. Technologies sublicensed to the Company by Oncor include
technologies covered by the collaborative licensing and research agreements
between Oncor and each of The Johns Hopkins University and the Massachusetts
General Hospital. The term of the agreement shall expire in June 2004 unless
earlier terminated in accordance with its terms.

Under the terms of the Oncor Agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of 4% to 2% of the
Company's annual net sales. During the first year of the agreement, the Company
is obligated to pay Oncor a minimum amount equal to $50,000 per quarter. During
the second year of the agreement, the Company is obligated to pay Oncor a
minimum amount equal to $25,000 per quarter. Thereafter, there shall be no
minimum payment required to be made by the Company to Oncor in connection with
the agreement.

In addition, subject to certain third-party contractual limitations, prior to
the license or disposition (whether by assignment, transfer or license) to a
third party by the Company or Oncor of their respective technologies, the
non-offering party shall have a thirty (30) day right of first offer with
respect to such technologies. If the non-offering party accepts the offer, the
Company and Oncor shall negotiate in good faith the terms and conditions of any
such license or acquisition agreement.

Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to





                                       9
<PAGE>   10
all its own technologies and any improvements to such technologies assigned to
Oncor by the Company. The Company has the primary right and obligation to
obtain, maintain and enforce proprietary rights in relation to all its own
technologies.

The Hereditary Cancer Institute.

HCI, located at the Creighton University School of Medicine, Omaha, Nebraska,
and headed by Henry T. Lynch, M.D., is a world-renowned research institute
specializing in the study of familial and inherited cancer. The Company, HCI
and Creighton University are parties to an agreement pursuant to which the
Company has exclusive worldwide commercialization rights to HCI's DNA library
and its familial cancer database.  With the use of the Recognizer, the Company
has identified several new patterns of hereditary cancer in the HCI familial
cancer database.

Under its license agreement with HCI and Creighton University, the Company is
obligated to pay an annual sponsorship fee of $250,000, in quarterly
installments, that is offset by a percentage of the amounts paid under a
related services agreement.  In addition, under the license agreement, the
Company is required to pay a royalty on net sales of products and services
which make use of the HCI database, other than the Company's risk assessment
service, and on license income derived from sublicenses to third parties of the
Company's rights to the HCI database.  As part of its relationship with HCI,
the Company also will share with HCI any revenues from the commercialization of
products or services based upon samples contained in the HCI DNA library.  The
DNA library, which houses DNA samples collected from families at high risk of
inherited cancer, provides a reservoir of biological material which is
potentially important for new gene discoveries.  The HCI license agreement
terminates in December 2000, subject to earlier termination upon one years'
notice, and is automatically renewable for additional two-year periods.

Cancer Research Campaign Technology Limited and Duke University.

Pursuant to a License Agreement, in July 1997, the Company entered into an
exclusive, worldwide royalty bearing license with the Cancer Research Campaign
Technology Limited ("CRCT") and Duke University ("Duke") for the BRCA2
Technology for the purpose of providing diagnostic services, diagnostic
products and research products relating thereto.  In consideration of the grant
of the license, the Company has paid CRCT an up-front fee and will make certain
future payments.  The Company has the right to sublicense the BRCA2 Technology.
In addition, Oncormed will share in a portion of the revenues generated from
any therapeutic licensing.  Contemporaneously, Oncormed granted back to CRCT
and Duke certain limited rights to use the BRCA2 Technology to provide
diagnostic services to any UK National Health Service Hospital and to patients
affiliated with Duke, respectively.  Unless terminated earlier in accordance
with its terms, the BRCA2 Agreement expires, on a country-by-country basis, on
the date of expiration of the last to expire BRCA2 patent in such country or,
if no BRCA2 patent is granted in a given country, ten (10) years after the
first commercial provision of diagnostic services or diagnostic products in
such country.

The Regents of the University of California.

The Company entered into a license agreement, effective August 8, 1996, with
the Regents of the University of California for the use of certain genetic
markers for breast and ovarian cancer.  Under the agreement, the Company is
obligated to pay royalties for the use of the technology as clinical laboratory
services are performed.  Royalty payments are payable quarterly, 60 days after
the end of each quarter.

Other Licensing Arrangements.

The Company also entered into a license agreement for the use of certain genes
and genetic mutations associated with Hereditary Nonpolyposis Colon Cancer with
the Dana-Farber Cancer Institute, Inc., the State





                                       10
<PAGE>   11
of Oregon, the University of Vermont, and Yale University in June 1994.
Royalty payments on sales of services using technology or patents covered by
the agreement are payable quarterly with an  alternative minimum payment of
$7,500 due on January 1 of each year.

The Company entered into a license agreement for the use of certain polymerase
chain reaction technology in the performance of human in vitro clinical
laboratory services with Roche Molecular Systems, Inc.  Under the agreement,
the Company is obligated to pay royalties for the use of the technology as
clinical laboratory services are performed.  Royalty payments are payable
semi-annually, 60 days after the end of each six month period.

RESEARCH AND DEVELOPMENT

The Company's principal research and development programs are targeted at
improving the efficiency and utility of its existing services and developing
new services using enhanced technologies.  Existing and planned research and
development projects include the development of gene chip technology, novel DNA
amplification application, rapid mutation detection array methods, functional
gene assay development, automation of specimen analysis and the development of
gene expression systems.  Development of early detection tests for bladder
cancer is also ongoing.  Additional early detection targets may include colon
and lung cancer.  The Company has sponsored research programs at leading
research and academic institutions in the past and intends to sponsor
additional research programs in the future related to specific genetic diseases
and genetic mutation detection technologies.

The Company's research and development activities also include optimizing and
standardizing procedures, creating quality control and quality assurance
programs, and ensuring that the results obtained through its services are
reproducible, accurate and precise.  Each of the Company's genetic services
undergoes an extensive development process prior to its introduction into the
market, including the verification and validation of the service utilizing
previously analyzed and characterized samples, a technology assessment, and
establishing final written protocols and guidelines.

COMPETITION

The Company is engaged in genomics and clinical diagnostic industries which are
characterized by extensive research and development efforts, rapid
technological progress and intense competition.  There are many public and
private companies, including well-known genomics, pharmaceutical, and
biotechnology companies, engaged in developing medical services and the
technology underlying such services.   Although there are relatively few direct
clinical genomics competitors of the Company, it is anticipated that the number
of direct competitors will increase significantly in the future.  Many of the
Company's current and potential competitors have substantially greater
financial and technological resources, sales and marketing capabilities and
experience, and research and development experience than the Company.
Accordingly the Company's competitors may succeed in developing services that
are more accurate and useful and less costly than any of the Company's
services.  The Company's competitors also may be more successful than the
Company in marketing and selling such services.  In addition, other
technologies are, or in the future may become, the basis for competitive
products and services.

The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's competitors.
Competition may increase further as a result of the potential advances in the
technology underlying the services developed by the Company.  The Company also
is aware that other companies have developed or may be developing genetic and
information technologies, services and products that are or may be competitive
with the Company's services.  There can be no assurance that the Company's
competitors will not succeed in developing technologies, services and products
that are more





                                       11
<PAGE>   12
accurate and useful than any being developed by the Company or that would
render the Company's technology and services obsolete or noncompetitive.

PATENTS AND PROPRIETARY RIGHTS

The Company relies on a combination of patent, trade secret and copyright laws
and confidentiality agreements to protect its proprietary technology, rights
and know-how. The Company's success will depend in part on its ability or the
ability of its licensors or sublicensors to obtain patents, defend patents,
maintain trade secrets, defend copyrights and operate without infringing upon
the proprietary rights of others, both in the United States and in foreign
countries. The patent position of companies relying upon biotechnology is
highly uncertain in general and involves complex legal and factual issues, and
no consistent policy has emerged regarding the breadth of claims allowed in
biotechnology patents.  Except for a patent issued to the Company in early July
1997 for a pattern recognition methodology and in early August 1997 related to
the BRCA1 gene, to date, none of the Company, its licensors or its sublicensors
has been granted any patents related to the technology or genetic discovery
underlying the Company's  services.  Although the Company and certain of the
Company's licensors and sublicensors have patent applications pending relating
to such technologies and discoveries, there can be no assurance that patents
will be issued as a result of such patent applications or that, if issued, such
patents will be sufficiently broad to afford protection against competitors
with similar technologies or discoveries.  There can also be no assurance that
patents, if any, issued to the Company, or for which the Company has license or
sublicense rights, will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide competitive advantages to the
Company. The commercial success of the Company also will depend upon avoiding
the infringement of patents issued to third parties, obtaining licenses to
third parties' technologies and genetic discoveries and maintaining licenses
upon which certain of the Company's services are, or might be, based. In
particular, third parties, including competitors such as Myriad Genetics, Inc.
("Myriad") and other potential competitors, have been issued patents relating
to certain genes and genetic mutations including BRCA1 and related mutations,
underlying certain of the Company's services, and have filed and may in the
future file additional patent applications relating to genes and genetic
mutations including BRCA2, p16 and related mutations.  On November 19, 1996,
the Company filed suit in the U.S. District Court for the District of Columbia,
against the National Institutes of Health challenging the grant of an exclusive
license to the University of Utah in BRCA1.  On November 17, 1997, the Company
filed suit in U.S. District Court for the District of Columbia against Myriad.
The suit claims infringement of the Company's BRCA1 gene patent issued to the
Company on August 5, 1997 (U.S. Patent No. 5,654,155).  On December 2, 1997,
Myriad filed suit in U.S. District Court for the District of Utah against the
Company.  The suit claims infringement of Myriad's patent issued on  December
2, 1997 (U.S. Patent No. 5,693,473).  On January 20, 1998, the Company and
Steven Narod filed suit in the U.S.  District Court for the District of
Columbia, against Myriad.  The suit is an action to correct inventorship
regarding Dr. Narod on U.S. Patents No. 5,693,473 and 5,709,999 issued to
Myriad, and requests that the Court order the Commissioner of Patents and
Trademarks include Dr. Narod as an inventor.  On January 20, 1998, Myriad filed
suit in the U.S. District Court for the District of Utah, against the Company.
The suit claims infringement of Myriad's patent issued on January 20, 1998.
(U.S. Patent No. 5,709,999).  The two Myriad infringement suits in Utah have
been consolidated into a single suit.  There can be no assurance that the
Company will prevail in such litigation or be successful in defending its
BRCA1-related proprietary rights.  In addition, such litigation could subject
the Company to significant liability for damages and could result in
invalidation of the Company's proprietary rights and, even if not meritorious,
could be time-consuming and expensive to defend, and could result in the
diversion of management time and attention, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.  Further, if unsuccessful, such litigation may hinder or prevent the
Company from providing related certain genetic services and could require the
Company to enter into licenses with Myriad or cease such activities.  There can
be no assurance that any required licenses would be available on acceptable
terms, or at all.  The failure of the Company to successfully defend its
intellectual property rights,





                                       12
<PAGE>   13
or the failure by the Company to obtain any licenses related to such rights, if
required, would have a material adverse effect on the Company's business,
financial condition and results of operations.

Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to its own technologies and any improvements to
such technologies assigned to Oncor by the Company. The amount and timing of
resources devoted to such activities are beyond the Company's control. There
can be no assurance that Oncor will perform such obligations on a timely basis
or at all, or that it will expend sufficient resources on such activities. The
Company has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to all its own technologies.

The Company relies on certain technologies, trade secrets and know-how that are
not patentable or proprietary and are available to the Company's competitors.
Although the Company has taken steps to protect its unpatented technologies,
trade secrets and know-how, in part through the use of confidentiality
agreements with its employees, consultants and certain of its contractors,
there can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed or
discovered by competitors.

GOVERNMENT REGULATION

Clinical Laboratory Improvement Act, as amended in 1988, ("CLIA")
provides for regulation of clinical laboratories by the United States
Department of Health and Human Services ("HHS"). These regulations mandate that
virtually all clinical laboratories be certified to perform testing on human
specimens and provide specific conditions for certification. These regulations
also contain requirements for the qualifications, responsibilities, training,
working conditions and oversight of clinical laboratory employees. In addition,
specific standards are imposed for each type of test that is performed in a
laboratory. The Company's laboratory is certified under these regulations and
the Company believes that it is in substantial compliance with them. CLIA and
the regulations promulgated thereunder are enforced through continuous quality
inspections of test methods, equipment, instrumentation, materials and supplies
on a bi-annual and "spot" basis. While the United States Food and Drug
Administration (the "FDA") minimally regulates the genetic tests underlying the
Company's services if they are performed in the Company's CLIA certified
clinical laboratory, there can be no assurance that the FDA will not seek to
further regulate such tests in the future. If, in the future, the FDA should
determine that the tests underlying the Company's services should receive FDA
approval prior to their provision in the Company's laboratory, or impose other
requirements, there can be no assurance that such requirement would be met on a
timely basis or at all. Any change in CLIA or related regulations, or in the
interpretation thereof, or in the Company's certification under CLIA, or in the
FDA's position on regulating the tests underlying the Company's services, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's laboratory is licensed and regulated
by the State of Maryland, in which it is located. The Company's laboratory is
also regulated by certain other states from which the Company may accept
specimens. The Company has received approval for a license from the State of
New York and the State of Florida and intends to seek approval from other
states as required. No assurance can be given that the Company will be able to
obtain such approvals on a timely basis or at all. The loss of, or the failure
to obtain, any required state license or other required approval, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The use of human tissue in medical research and the operation of human tissue
repositories to collect, store and distribute human tissue materials for
research purposes are regulated under federal regulations.  These regulations
mandate that IRBs are the mechanism by which research protocols are reviewed
and approved to assure the protection of human rights.  The Health and Human
Services Office for the Protection from Research Risks oversees this process
and issues guidelines for IRBs to use when evaluating research





                                       13
<PAGE>   14
protocols to assure informed consent and that privacy is protected and
confidentiality is maintained.  Some states have requirements that are similar
to the foregoing guidelines.  The Company believes that it is in compliance
with federal and state regulations in the establishment and operation of a
human tissue repository for use in genomic research.  The Company operates its
repository under an IRB-approved protocol and requires that all institutions
and pathologists supplying tissue have an IRB-approved protocol to assure
patient informed consent, privacy and confidentiality.  The Company does not
have access to patient identifiers.  The use of human tissue, especially for
genetic research, is continuously examined by a number of agencies.  There are
no assurances that federal or state regulations will not be passed in the
future that would materially affect the Company's ability to operate a human
tissue repository.

The Company is subject to extensive federal, state and local regulation,
including regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other laws, rules and regulations governing
health care, clinical laboratory activities, waste disposal, handling of toxic,
dangerous or radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare and are
therefore excluded from coverage under Medicare, the Company's services may
still be subject to laws, rules and regulations governing reimbursement and
fraud and abuse and prohibiting the filing of false claims. These laws, rules
and regulations include "anti-kickback" and "Stark" laws, which contain
extremely broad proscriptions, the violation of which may result in exclusion
from Medicare and Medicaid and criminal and civil penalties. In addition, the
Company is subject to state laws, rules and regulations limiting certain
financial relationships between health care service providers and physicians
and other referral sources as well as state Medicaid requirements.  Although
the Company believes that it is in substantial compliance with all applicable
laws, rules and regulations, there can be no assurance that the Company will
remain in compliance with applicable laws, rules and regulations or that
changes in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business, financial
condition and results of operations.

HUMAN RESOURCES

The Company had 62 employees at December 31, 1997, including 11 employees in
sales and marketing, 27 in laboratory operations and genetic services, 16
employees in administration and eight employees in research and development.
None of the Company's employees is represented by a labor union.  The Company
has experienced no work stoppages and believes that its relations with its
employees are good.

RECENT EVENTS

On February 27, 1998, the Company, entered into a Convertible Preferred Stock
Purchase Agreement (the "Stock Purchase Agreement") with certain unaffiliated
investors (collectively, the "Investors").  Pursuant to the Stock Purchase
Agreement, the Investors purchased a total of Three Hundred Thirty Three (333)
shares of the Company's 6% Series A Convertible Preferred Stock (the "Series A
Stock") from the Company for $3,330,000.

The holders of Series A Stock may convert their shares at any time into shares
of the Company's common stock, $0.01 par value per share (the "Common Stock"),
at a conversion price per share equal to the lesser of (i) $7.5625 or (ii) a
percentage (ranging from 97% to 85% depending upon the timing of such
conversion) of the average of five (5) closing bid prices of the Common Stock
over a thirty (30) trading day period immediately preceding the time of such
conversion.  In addition, at any time on or after February 27, 2000, the
Company may require that the Series A Stock be converted into Common Stock if
the closing bid prices of the Common Stock for at least twenty (20) consecutive
trading days immediately preceding such conversion shall have been at least
$11.34375 per share.  Further, in certain limited circumstances, the





                                       14
<PAGE>   15
holders of the Series A Stock can require that the Company redeem their
respective shares of Series A Stock.

Dividends in the amount of six percent (6%) per annum will be due quarterly on
the shares of Series A Stock.  The Company may pay such dividends either in
cash or through the issuance of shares of Common Stock.

Pursuant to the Stock Purchase Agreement, the Investors also received warrants
(the "Investor Warrants") to purchase an aggregate of 166,666 shares of the
Company's Common Stock at an exercise price of $8.54 per share (the "Series A
Warrants").  The Series A Warrants expire on February 27, 2001.

Subject to the satisfaction of certain closing conditions, the Company and the
Investors have the right to increase the aggregate amount of the equity
financing through the sale by the Company to the Investors of 333 shares of the
Company's 6% Series B Convertible Preferred Stock (the "Series B Stock") for
$3,330,000.  The closing conditions for the purchase of the Series B Stock
include, without limitation: (i) that the average per share market price for
the Common Stock for the thirty (30) trading days immediately preceding the
closing of the Series B Stock (the "Series B Closing") shall have been at least
$8.00 per share, (ii) that the average trading volume of the Common Stock for
the thirty (30) trading days immediately preceding the Series B Closing shall
have been at least 25,000 shares per day, and (iii) that the Series B Closing
shall have occurred within sixty (60) days following ninety (90) days after the
date on which the Series A Stock Registration Statement (as defined below) was
declared effective by the Securities and Exchange Commission.  The closing
conditions may be waived by the Investors.  There can be no assurance that the
Series B closing shall occur.

The holders of Series B Stock may convert their shares at any time into shares
of the Company's Common Stock at a conversion price equal to the lower of (i)
110% of the closing bid price of the Common Stock on the trading day
immediately prior to the Series B Closing or (ii) a percentage (ranging from
97% to 85% depending upon the timing of such conversion) of the average of five
(5) closing bid prices of the Common Stock over a thirty (30) day period
immediately preceding the time of such conversion.  In addition, at any time on
or after two (2) years from the Series B Closing, the Company may require that
the Series B Stock be converted into Common Stock if the closing bid prices of
the Common Stock for at least twenty (20) consecutive trading days immediately
preceding such conversion shall have been at least One Hundred Fifty Percent
(150%) of the closing bid price of the Common Stock on the trading day
immediately prior to the Series B Closing.  Further, if the Series B Stock is
issued, dividends in the amount of six percent (6%) per annum will be due
quarterly on the Series B Stock.  Such dividends may be paid by the Company
either in cash or through the issuance of shares of Common Stock.  In certain
limited circumstances, the holders of the Series B Stock will be able to
require that the Company redeem their shares of Series B Stock.

In the event of the Series B Closing, the Investors will receive warrants (the
"Series B Warrants") to purchase an aggregate of 111,112 shares of the
Company's Common Stock at an exercise price of One Hundred Twenty Two Percent
(122%) of the closing sales price of the Common Stock on the trading day
immediately prior to the Series B Closing.  The Series B Warrants expire three
(3) years from the date of issuance.

In connection with the purchase of the Series A Stock, the Company and the
Investors entered into a Registration Rights Agreement.  Pursuant to the
Registration Rights Agreement, the Company has filed with the Securities and
Exchange Commission a Registration Statement on Form S-3 covering the resale by
the Investors of (i) 200% times the maximum number of shares of Common Stock
into which the Series A Preferred Stock is convertible, (ii) the number of
shares of Common Stock issuable upon exercise of the Series A Warrants, and
(iii) the number of shares of Common Stock issuable upon payment of dividends
on the Series A Preferred Stock, assuming each share of Series A Preferred Stock
is outstanding for two years.  The Company has agreed to use commercially
reasonable efforts to have such registration statement declared effective on or
prior to May 27, 1998.  In addition, in the event of the Series B Closing, the
Company has agreed to use its commercially reasonable efforts to file an
additional Registration Statement on Form S-3 covering the resale by the
Investors of shares of Common Stock issuable (i) upon





                                       15
<PAGE>   16
conversion of the Series B Stock, (ii) upon exercise of the Series B Warrants,
and (iii) as dividends on the Series B Stock.

RISK FACTORS

Additional Financing Requirements; Going Concern; Access to Capital

The Company has incurred cumulative losses since its inception and, as of
December 31, 1997, had an accumulated deficit of approximately $29.5 million.
The Company has expended, and will continue to expend, substantial funds to
continue its sales and marketing efforts, research and development programs and
laboratory operations.  The Company has yet to generate any significant
revenues and cannot anticipate when, or if, it will be able to generate
significant revenues in the future.  The Company's ability to achieve
profitability depends on its ability to successfully market and sell its
services.  There can be no assurance when, or if, the Company will become
profitable.  At March 23, 1998, the Company had cash, cash equivalents and
short-term investments of approximately $2.1 million.  Currently, the Company
expends from $800,000 to $1,000,000 per month and will need to raise additional
funds in the second quarter of 1998 to continue the Company's operations, which
raises substantial doubt whether the Company can continue as a going concern.
The Company is actively seeking additional capital to fund its operations
through private financings or a collaborative licensing or other arrangements
with corporate partners.  There can be no assurance, however, that additional
financing will be available, or if available, will be available on acceptable
terms.  If additional funds are raised by issuing equity securities, further
dilution to existing stockholders will result and future investors may be
granted rights superior to those of existing stockholders.  The unavailability
of adequate funds in the future would have a material adverse effect on the
Company's business, financial condition and results of operations and raises
substantial doubt about whether the Company can continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

Development Stage Company; History of Operating Losses; Uncertainty of Future
Profitability

The Company commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, the Company has been
engaged in research and development activities, organizational efforts and
sales and marketing activities, including the development of its services, the
hiring of its scientific and marketing staff and its initial sales and
marketing efforts. The Company has incurred operating losses since its
inception.  As of December 31, 1997, the Company's accumulated deficit was
approximately $29.5 million. The Company's losses have resulted principally
from selling, general and administrative expenses, laboratory operations and
research and development expenses. The Company has yet to generate any
significant revenues and the Company cannot anticipate when, or if, it will be
able to generate significant revenues in the future.  The Company expects its
operating losses to continue as its sales and marketing efforts, research and
development programs and laboratory operations continue and increase. The
Company also intends to make additional laboratory equipment purchases and
other capital expenditures in the future, although currently it has no specific
material commitments to do so.  The Company's ability to achieve profitability
depends on its ability to successfully market and sell its services. There can
be no assurance when, or if, the Company will become profitable.

Dependence on Proprietary Rights

The Company relies on a combination of patent, trade secret and copyright laws
and confidentiality agreements to protect its proprietary technology, rights
and know-how. The Company's success will depend in part on its ability or the
ability of its licensors or sublicensors to obtain patents, defend patents,
maintain trade secrets, defend copyrights and operate without infringing upon
the proprietary rights of others, both





                                       16
<PAGE>   17
in the United States and in foreign countries. The patent position of companies
relying upon biotechnology is highly uncertain in general and involves complex
legal and factual issues, and no consistent policy has emerged regarding the
breadth of claims allowed in biotechnology patents.  Except for a patent issued
to the Company in early July 1997 for a pattern recognition methodology and in
early August 1997 related to the BRCA1 gene, to date, none of the Company, its
licensors or its sublicensors has been granted any patents related to the
technology or genetic discovery underlying the Company's  services.  Although
the Company and certain of the Company's licensors and sublicensors have patent
applications pending relating to such technologies and discoveries, there can
be no assurance that patents will be issued as a result of such patent
applications or that, if issued, such patents will be sufficiently broad to
afford protection against competitors with similar technologies or discoveries.
There can also be no assurance that patents, if any, issued to the Company, or
for which the Company has license or sublicense rights, will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The commercial success of the Company
also will depend upon avoiding the infringement of patents issued to third
parties, obtaining licenses to third parties' technologies and genetic
discoveries and maintaining licenses upon which certain of the Company's
services are, or might be, based. In particular, third parties, including
competitors such as Myriad and other potential competitors, have been issued
patents relating to certain genes and genetic mutations including BRCA1 and
related mutations, underlying certain of the Company's services, and have filed
and may in the future file additional patent applications relating to genes and
genetic mutations including BRCA2, p16 and related mutations.  On November 19,
1996, the Company filed suit in the U.S.  District Court for the District of
Columbia, against the National Institutes of Health challenging the grant of
an exclusive license to the University of Utah in BRCA1.  On November 17, 1997,
the Company filed suit in U.S. District Court for the District of Columbia
against Myriad.  The suit claims infringement of the Company's BRCA1 gene
patent issued to the Company on August 5, 1997 (U.S. Patent No. 5,654,155).  On
December 2, 1997, Myriad filed suit in U.S. District Court for the District of
Utah against the Company.  The suit claims infringement of Myriad's patent
issued on  December 2, 1997 (U.S. Patent No. 5,693,473).  On January 20, 1998,
the Company and Steven A. Narod filed suit in the U.S. District Court for the
District of Columbia, against Myriad.  The suit is an action to correct
inventorship regarding Dr. Narod on U.S. Patents No. 5,693,473 and 5,709,999
issued to Myriad, and requests that the Court order the Commissioner of Patents
and Trademarks include Dr. Narod as an inventor.  On January 20, 1998, Myriad
filed suit in the U.S. District Court for the District of Utah, against the
Company.  The suit claims infringement of Myriad's patent issued on January 20,
1998. (U.S. Patent No. 5,709,999).  The two Myriad infringement suits in Utah
have been consolidated into a single suit.  There can be no assurance that the
Company will prevail in such litigation or be successful in defending its
BRCA1-related proprietary rights. In addition, such litigation could subject
the Company to significant liability for damages and could result in
invalidation of the Company's proprietary rights and, even if not meritorious,
could be time-consuming and expensive to defend, and could result in the
diversion of management time and attention, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.  Further, if unsuccessful, such litigation may hinder or prevent the
Company from providing related certain genetic services and could require the
Company to enter into licenses with Myriad or cease such activities.  There can
be no assurance that any required licenses would be available on acceptable
terms, or at all.   The failure of the Company to successfully defend its
intellectual property rights, or the failure by the Company to obtain any
licenses related to such rights, if required, would have a material adverse
effect on the Company's business, financial condition and results of
operations.

Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to its own technologies and any improvements to
such technologies assigned to Oncor by the Company. The amount and timing of
resources devoted to such activities are beyond the Company's control. There
can be no assurance that Oncor will perform such obligations on a timely basis
or at all, or that it will expend sufficient resources on such activities. The
Company has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to all its own technologies.





                                       17
<PAGE>   18
The Company relies on certain technologies, trade secrets and know-how that are
not patentable or proprietary and are available to the Company's competitors.
Although the Company has taken steps to protect its unpatented technologies,
trade secrets and know-how, in part through the use of confidentiality
agreements with its employees, consultants and certain of its contractors,
there can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed or
discovered by competitors.

Government Regulation

CLIA provides for regulation of clinical laboratories by the United States
Department of Health and Human Services ("HHS"). These regulations mandate that
virtually all clinical laboratories be certified to perform testing on human
specimens and provide specific conditions for certification. These regulations
also contain requirements for the qualifications, responsibilities, training,
working conditions and oversight of clinical laboratory employees. In addition,
specific standards are imposed for each type of test that is performed in a
laboratory. The Company's laboratory is certified under these regulations and
the Company believes that it is in substantial compliance with them. CLIA and
the regulations promulgated thereunder are enforced through continuous quality
inspections of test methods, equipment, instrumentation, materials and supplies
on a bi-annual and "spot" basis. While the United States Food and Drug
Administration (the "FDA") minimally regulates the genetic tests underlying the
Company's services if they are performed in the Company's CLIA certified
clinical laboratory, there can be no assurance that the FDA will not seek to
further regulate such tests in the future. If, in the future, the FDA should
determine that the tests underlying the Company's services should receive FDA
approval prior to their provision in the Company's laboratory, or impose other
requirements, there can be no assurance that such requirement would be met on a
timely basis or at all. Any change in CLIA or related regulations, or in the
interpretation thereof, or in the Company's certification under CLIA, or in the
FDA's position on regulating the tests underlying the Company's services, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's laboratory is licensed and regulated
by the State of Maryland, in which it is located. The Company's laboratory is
also regulated by certain other states from which the Company may accept
specimens. The Company has received approval for a license from the State of
New York and the State of Florida and intends to seek approval from other
states as required. No assurance can be given that the Company will be able to
obtain such approvals on a timely basis or at all. The loss of, or the failure
to obtain, any required state license or other required approval, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The use of human tissue in medical research and the operation of human tissue
repositories to collect, store and distribute human tissue materials for
research purposes are regulated under federal regulations.  These regulations
mandate that IRBs are the mechanism by which research protocols are reviewed
and approved to assure the protection of human rights.  The Health and Human
Services Office for the Protection from Research Risks oversees this process
and issues guidelines for IRBs to use when evaluating research protocols to
assure informed consent and that privacy is protected and confidentiality is
maintained.  Some states have requirements that are similar to the foregoing
guidelines.  The Company believes that it is in compliance with federal and
state regulations in the establishment and operation of a human tissue
repository for use in genomic research.  The Company operates its repository
under an IRB-approved protocol and requires that all institutions and
pathologists supplying tissue have an IRB-approved protocol to assure patient
informed consent, privacy and confidentiality.  The Company does not have
access to patient identifiers.  The use of human tissue, especially for genetic
research, is continuously examined by a number of agencies.  There are no
assurances that federal or state regulations will not be passed in the future
that would materially affect the Company's ability to operate a human tissue
repository.





                                       18
<PAGE>   19
The Company is subject to extensive federal, state and local regulation,
including regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other laws, rules and regulations governing
health care, clinical laboratory activities, waste disposal, handling of toxic,
dangerous or radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare and are
therefore excluded from coverage under Medicare, the Company's services may
still be subject to laws, rules and regulations governing reimbursement and
fraud and abuse and prohibiting the filing of false claims. These laws, rules
and regulations include "anti-kickback" and "Stark" laws, which contain
extremely broad proscriptions, the violation of which may result in exclusion
from Medicare and Medicaid and criminal and civil penalties. In addition, the
Company is subject to state laws, rules and regulations limiting certain
financial relationships between health care service providers and physicians
and other referral sources as well as state Medicaid requirements.  Although
the Company believes that it is in substantial compliance with all applicable
laws, rules and regulations, there can be no assurance that the Company will
remain in compliance with applicable laws, rules and regulations or that
changes in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business, financial
condition and results of operations.

Relationship with Oncor

In February 1997, the Company and Oncor agreed to certain changes to the Oncor
Agreement. Pursuant to the Oncor Agreement, Oncor is providing the Company with
an exclusive worldwide license to certain of Oncor's existing human genome
technologies that are useful for the development and commercialization of
certain of the Company's services, including: (i) testing, detection and/or
analysis of genes; (ii) genetic assessment of risk of an individual to develop
cancer; and (iii) testing and analysis for the purposes of cancer management.
In addition, Oncor is providing the Company with a non-exclusive worldwide
license to certain of Oncor's existing human genome technologies, and any
future improvements thereto, to be used by the Company in the provision of
services direct to third parties other than services that are provided pursuant
to the exclusive license. The Company does not have the right to sublicense any
Oncor technologies licensed to it by Oncor without Oncor's prior written
consent. Technologies sublicensed to the Company by Oncor include technologies
covered by the collaborative licensing and research agreements between Oncor
and each of The Johns Hopkins University and the Massachusetts General
Hospital. The term of the Oncor Agreement shall expire in June 2004 unless
earlier terminated in accordance with its terms.  Further, in the event of a
change of control of Oncor, the acquiring party shall have the option to either
maintain the Oncor Agreement or to terminate the Oncor Agreement. In  the event
that the acquirer terminates the Oncor Agreement, both the exclusive license
and the non-exclusive license shall remain in full force and effect under rates
to be determined.

Certain of the Company's services are reliant on the technologies licensed
directly from Oncor and from third parties through Oncor which form the basis
for some of the Company's services. The Company's rights under the Oncor
Agreement are subject to certain rights retained by Oncor, which include
Oncor's right to use the licensed technologies for internal, non-commercial
research and development purposes and for development and commercialization of
Oncor's products. Oncor intends to develop its technologies into diagnostic
products for sale to third parties. These third parties may then use these
products to provide services that compete directly with the Company's services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.  There can be no assurance that the Oncor
Agreement will be renewed at the end of its initial term or that it will not be
terminated earlier pursuant to its terms. There also can be no assurance that
conflicts of interest between Oncor and the Company will not arise with respect
to the Oncor Agreement, any services that might be provided by Oncor to the
Company in the future or other aspects of the Company's relationship with
Oncor.





                                       19
<PAGE>   20
The Company's rights to technologies licensed to the Company from third parties
through Oncor are subject to various provisions in the license agreements
between such third parties and Oncor. No assurance can be given that Oncor will
perform its obligations under such agreements, that such agreements will not be
terminated or that such agreements can be renewed upon termination or
expiration.  If Oncor breaches such agreements or otherwise fails to comply
with such agreements, or if such agreements are terminated or otherwise expire,
the development or commercialization of certain of the Company's services may
be delayed or terminated, or the Company would have to expend substantial
additional resources on development and commercialization, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Oncor currently owns approximately 25.4% of the
Company's outstanding Common Stock. Accordingly, Oncor may be able to
effectively control or influence certain actions such as the election of
directors and the authorization of certain transactions that require
stockholder approval and may be able to otherwise effectively control the
Company's policies without concurrence of the Company's other stockholders. In
addition, Stephen Turner, Chief Executive Officer of Codon Pharmaceuticals,
Inc., a subsidiary of Oncor, is a director of the Company, and Timothy J.
Triche, M.D., Ph.D., a director of Oncor, is the Chief Executive Officer and
Chairman of the Board of Directors of the Company.

Reliance on Pharmaceutical Industry

The Company expects that a significant portion of its revenues in the
foreseeable future will be derived from services provided to the genomics,
pharmaceutical and biotechnology industries.  Accordingly, the Company's
success in the foreseeable future will be directly dependent upon the success
of the companies within those industries and their continued demand for the
Company's services.  The Company's operations may in the future be subject to
substantial period-to-period fluctuations as a consequence of reductions and
delays in research and development expenditures by companies in such industries
resulting from factors such as changes in economic conditions, pricing
pressures, market-driven pressures on companies to consolidate and reduce
costs, and other factors affecting research and development spending.

Lengthy Sales Cycle

The ability of the Company to obtain collaborators and subscribers for its
services depends in significant part upon the perception that such services can
help accelerate the translation of cancer-related genetic discoveries into
clinically-useful products.  The sales cycle for the Company's services is
typically lengthy due to the education effort that is required as well as the
need to effectively sell the benefits of the Company's services to a variety of
constituencies within potential collaborators and subscribers, including
research and development personnel and key management.  In addition, each
subscription and collaboration will involve the negotiation of agreements
containing terms that may be unique to each subscriber or collaborator.  The
Company may expend substantial funds and management effort with no assurance
that a collaboration or subscription will result.

Limited Patient Populations For Certain Services

Certain of the Company's services currently address subtypes of broader types
of cancers. Patients with such subtypes typically represent only a small
percentage of those patients who are under treatment or have a history of the
broader types of cancer.  Accordingly, the market for such services may be
limited and such services may not generate significant revenues.

Unproven Commercial Strategy

The Company's success will depend upon its ability to assemble a portfolio of
identified disease-related genes and regulatory regions which have potential
therapeutic value and to select appropriate





                                       20
<PAGE>   21
commercialization strategies for drug discovery and development.  While the
Company anticipates that it will select appropriate commercialization
strategies, depending on the service, with several different strategic
partners, failure to allocate its resources to those services with the most
commercial potential and to the appropriate strategic partner could have a
material adverse effect on the Company's business, financial condition and
results of operations.  Even if the Company is successful in identifying
disease-related genes, relatively few products based on genes have been
developed and commercialized to date, and there can be no assurance that the
Company or other entities working in collaboration with the Company will be
able to discover drugs and develop commercial products based upon its gene
discoveries.  In addition, the development and commercialization of drugs based
on genes discovered by the Company will be subject to the risks inherent in any
new drug.  These risks include the possibilities that any or all of the
products will be found to be ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances; that the products, if safe and effective, will
be difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company or its strategic
partners from marketing products; or that third parties will market superior or
equivalent products.  As a result, the Company's commercial strategy is
unproven.

The Company's clinical genomics services represent a new approach to cancer
management for which there is little precedent and for which the market is
evolving. The Company's business is to help accelerate the translation of
genetic discoveries into clinically useful cancer therapeutics and diagnostics.
The Company's ability to successfully develop its business is unproven and is
dependent on its ability to translate genetic discoveries into clinically
useful cancer therapeutics and diagnostics; expand the distribution of its
services both domestically and internationally; develop strategic alliances and
collaborations with pharmaceutical, genomics and biotechnology partners;
identify, license and develop emerging genetic discoveries and mutation
detection technologies; and continue to expand its portfolio of services.
There can be no assurance that the market for the Company's services will
continue to evolve or that the Company's business strategy will be successful.
The discoveries and technologies which form the basis for the Company's
clinical services have not been widely adopted by the medical community and
there can be no assurance that adoption of these technologies and services will
occur.

Uncertain Availability of Health Care Reimbursement and Market Acceptance of
Services

The successful commercialization of the Company's genetic testing and
information services depends in part on the ability of its customers to obtain
adequate reimbursement for such services and related treatments from
governmental agencies, private health care insurers and other third party
payors. Government and private third party payors are increasingly attempting
to contain health care costs by limiting both the extent of coverage and the
reimbursement rate for new diagnostic and therapeutic products and services.
Medicare has determined that the Company's genetic testing and information
services are screening services and therefore are excluded from coverage under
Medicare.  Although, various third party payors have begun to reimburse some of
the Company's services, there can be no assurance that third party
reimbursement for the Company's services will be consistently available to its
customers or that any such reimbursement will be adequate. Disapproval of, or
limitations in, coverage by third party payors could materially and adversely
affect market acceptance of the Company's services which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Dependence on Strategic Collaborations and Licenses with Others





                                       21
<PAGE>   22
The Company's strategy for the research, development and commercialization of
certain of its services is to rely in part on various collaborative and license
arrangements with academic medical centers, research institutions and
commercial entities. Accordingly, the Company is dependent in part upon such
third parties performing their obligations. The Company has entered into
certain collaborative and license arrangements, including arrangements with
HCI, Affymetrix, ZENECA Diagnostics, Incyte and CRCT/Duke, and is continually
seeking to enter into additional arrangements with other collaborators and
licensors. There can be no assurance that the Company will be able to enter
into acceptable collaborative and license arrangements in the future or that
the parties with which the Company has established or will establish
arrangements will perform their obligations under such arrangements. There also
can be no assurance that its current arrangements or any future arrangements
will lead to the development of additional services with commercial potential,
that the Company will be able to obtain or license proprietary rights with
respect to any technology developed in connection with these arrangements and
that the Company will be able to ensure the confidentiality of any proprietary
rights and information developed in such arrangements or prevent the public
disclosure thereof. In general, the Company's collaborative and license
arrangements provide that they may be terminated under certain circumstances.
There can be no assurance that such arrangements will not be terminated or that
the Company will be able to extend any of its collaborative and license
arrangements upon their expiration.  The Company currently has certain licenses
from third parties, either directly or indirectly through the Oncor Agreement,
and in the future may require additional licenses from these or other parties
to develop and market commercially viable services.  There can be no assurance
that such licenses will be obtainable on commercially reasonable terms, if at
all, or renewable, that the patents underlying such licenses, if any, will be
valid and enforceable or that the nature of the technology underlying such
licenses will remain proprietary.

The Company's rights to technologies licensed to the Company from third parties
through the Oncor Agreement are subject to the license agreements between such
third parties and Oncor. No assurance can be given that the third parties to
these agreements will perform their obligations under such agreements on a
timely basis or at all. If such third parties breach or terminate their
agreements with Oncor or otherwise fail to, or are unable to, comply with the
provisions of their agreements with Oncor for whatever reason, the Company
would have no direct recourse and would be dependent on Oncor to enforce such
agreements. The agreements between Oncor and the third parties expire at
various times. There can be no assurance that these agreements will be renewed
at the end of their initial terms or that such agreements will not be
terminated or canceled prior to their expiration. The Company has no rights
under these third party agreements and is reliant upon Oncor to negotiate
renewals of such agreements and resolve disputes under such agreements. If the
third parties to the agreements that the Company licenses from Oncor through
the Oncor Agreement breach such agreements or otherwise fail to comply with
such agreements, or such agreements are terminated or otherwise expire, the
development or commercialization of certain of the Company's services may be
delayed or terminated, or the Company would have to expend substantial
additional resources on development and commercialization, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Competition

The Company is engaged in the genomics, biotechnology and pharmaceutical
industries which are characterized by extensive research and development
efforts, rapid technological progress and intense competition. There are many
public and private companies, including well-known pharmaceutical companies,
biotechnology companies and academic institutions, engaged in developing
medical services and the technology underlying such services. Although there
are relatively few direct competitors of the Company, it is anticipated that
the number of direct competitors will increase significantly in the future.
Many of the Company's current and potential competitors have substantially
greater financial and technological resources, sales and marketing capabilities
and experience, and research and development experience than the





                                       22
<PAGE>   23
Company.  Accordingly, the Company's competitors may succeed in developing
services and the underlying technology more rapidly than the Company and in
developing services that are more accurate and useful and less costly than any
of the Company's services. The Company's competitors also may be more
successful than the Company in marketing and selling such services. In
addition, other technologies are, or in the future may become, the basis for
competitive products and services. Oncor may develop technologies under the
Oncor Agreement into products that Oncor will sell to third parties. These
third parties may then use these products to provide services that compete
directly with the Company's services, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.

The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's competitors.
Competition may increase further as a result of the potential advances in the
technology underlying the services developed by the Company. The Company also
is aware that other companies have developed or may be developing genomics
discovery, development and information technologies, services and products that
are and may be competitive with the Company's services. There can be no
assurance that the Company's competitors will not succeed in developing
technologies, services and products that are more accurate and useful than any
being developed by the Company or that would render the Company's technology
and services obsolete or noncompetitive.

The Company requires that all employees and consultants (including certain
scientific advisors) enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company and
require disclosure and assignment to the Company of their ideas, developments,
discoveries or inventions developed during the course of their service to the
Company. However, no assurance can be given that competitors of the Company
will not gain access to trade secrets and other proprietary information
developed by the Company and disclosed to employees, consultants and/or
scientific advisors.

Confidentiality; Risk of Discrimination Against Customers; Potential Adverse
Impact on Insurability

The availability of genetic predisposition testing and human tissue usage for
research purposes has raised certain ethical, legal and social issues regarding
the appropriate utilization and confidentiality of information provided by such
testing. The medical information  obtained or determined about an individual
from the Company's services is of an extremely sensitive nature. In providing
its services, the Company is subject to certain statutory, regulatory and
common law requirements regarding the confidentiality of such medical
information.  The Company maintains an internal regulatory compliance review
program to monitor compliance with applicable confidentiality requirements, and
believes that it is in substantial compliance with such requirements.  Failure
to comply with such confidentiality requirements could result in material
liability to the Company. It is possible that discrimination by insurance
companies could occur through the raising of premiums by insurers to
prohibitive levels, the cancellation of insurance or the unwillingness to
provide coverage to patients shown to have a genetic predisposition to a
particular disease. The Company could experience a delay in market acceptance
or a reduction in the size of its potential serviceable market if insurance
discrimination were to become a significant factor, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. Similarly, governmental authorities could, for social or other
purposes, limit the use of or prohibit genetic predisposition testing and human
tissue usage for research purposes. If efforts by the Company and others to
mitigate potential discrimination are not successful or if the use of genetic
testing is limited, the Company could experience a delay or reduction in market
acceptance of its services, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

Limited Sales and Marketing Experience

The Company has limited experience in selling and marketing its services and
will have to further develop





                                       23
<PAGE>   24
its sales force and/or rely on collaborators, licensees or others to provide
for the sales and marketing of its services.  There can be no assurance that
the Company will be able to establish adequate sales and marketing capacity or
make arrangements with collaborators, licensees or others to perform such
activities on acceptable terms or at all.

Risk of Liability; Adequacy of Insurance Coverage

The marketing and sale of genetic testing and information services could expose
the Company to the risk of certain types of litigation, including medical
malpractice or negligence claims or contract disputes. The Company currently
maintains medical malpractice insurance coverage. There can be no assurance,
however, that such coverage will be adequate to protect the Company against
future claims or that insurance will be available to the Company in the future
on acceptable terms, if at all. A medical malpractice or other claim for which
the Company was not adequately insured could have a material adverse effect on
the Company's business, financial condition and results of operations.

Dependence on Key Management and Qualified Personnel

The Company is highly dependent upon the efforts of its senior management,
scientific advisory board and consultants. The loss of the services of one or
more members of senior management could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the loss of the services of certain members of the Company's scientific
advisory board and certain consultants could materially and adversely affect
the Company to the extent that the Company is pursuing research and development
in areas of such scientific advisors' or consultants' expertise.   Although the
Company is the beneficiary of $1 million key-man life insurance policies on
each of its Chief Executive Officer, Timothy J. Triche, M.D., Ph.D., and its
President and Chief Operating Officer, Douglas Dolginow, M.D., the Company does
not believe such amounts would be adequate to compensate for the loss of either
executive. Due to the specialized scientific nature of the Company's business,
the Company is also highly dependent upon its ability to attract and retain
qualified scientific, technical and key management personnel. There is intense
competition for qualified personnel in the areas of the Company's activities
and there can be no assurance that the Company will be able to continue to
attract and retain the qualified personnel necessary for the development of its
existing business and its expansion into areas and activities requiring
additional expertise. The loss of, or failure to recruit, scientific,
technical, sales and marketing and managerial personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company's scientific advisors and consultants may be employed by or have
consulting agreements with entities other than the Company, some of which may
compete with the Company. To the extent that members of the Company's
scientific advisory board or consultants have consulting arrangements with or
become employed by any competitor of the Company, the Company could be
materially and adversely affected. Any inventions or processes independently
discovered by the scientific  advisors or the consultants will not, unless
otherwise agreed, become the property of the Company and will remain the
property of such persons or their full-time employers. In addition, the
institutions with  which the scientific advisors and consultants are affiliated
may make available the research services of their scientific and other skilled
personnel, including the scientific advisors and consultants, to competitors of
the Company pursuant to sponsored research agreements. Under such sponsored
research agreements, such institutions may be obligated to assign or license to
a competitor of the Company patents and other proprietary information that may
result from research sponsored by an entity other than the Company, including
research performed by a scientific advisor or consultant for a competitor of
the Company.





                                       24
<PAGE>   25
Certain Anti-Takeover Provisions

The Company's Certificate of Incorporation grants the Board of Directors the
authority to issue up to 2,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders.  Pursuant to the terms of the
Convertible Preferred Stock Purchase Agreement, dated February 27, 1998 (the
"Stock Purchase Agreement"), the Company has issued an aggregate of 333 shares
of 6% Series A Convertible Preferred Stock (the "Series A Stock") to certain
investors.  In addition, pursuant to the terms of the Stock Purchase Agreement,
the Company  may, subject to certain conditions, issue 333 shares of 6% Series
B Convertible Stock (the "Series B Stock").  The rights of the holders of
Common Stock will be subject to, and may be materially and adversely affected
by, the rights of the holders of the Series A Stock, the Series B Stock or any
Preferred Stock that may be issued in the future.  The issuance of the Series A
Stock, the Series B Stock or any additional shares of Preferred Stock could
have the effect of discouraging a third party from acquiring a majority of the
outstanding Common Stock of the Company and preventing stockholders from
realizing a premium on their shares. Further, the Company is subject to Section
203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met.

Dividend Policy

The Company is obligated to pay dividends of 6% per annum on the Series A
Stock, which amount is payable by the Company on a quarterly basis either in
cash or through the issuance of shares of Common Stock.  The Company has never
declared or paid any cash dividends on its Common Stock.  The Company currently
anticipates that it will retain all its earnings for use in the operation of
its business and, therefore, does not anticipate that it will pay any cash
dividends on its Common Stock in the foreseeable future.

Possible Volatility of Stock Price

The price of the Company's Common Stock has fluctuated substantially since its
initial public offering on September 27, 1994.  See "Market Price for Common
Stock." The market price of the shares of the Common Stock, like that of the
common stock of many other biotechnology companies, is likely to continue to be
highly volatile.  Factors such as fluctuations in the Company's operating
results, additional financing requirements and access to capital, governmental
regulation, healthcare legislation, developments in patent or other proprietary
rights of the Company or its competitors, including litigation, and market
conditions for biotechnology stocks and life science stocks in general, could
have a significant impact on the future price of the Common Stock.  In
addition, the number of shares of Common Stock issuable upon conversion of the
Series A Stock or the Series B Stock, if issued, and the subsequent sale of
such shares could have a significant impact on the future price of the Common
Stock. Further, the failure of the Company to maintain compliance with the
listing requirements of the American Stock Exchange may result in the delisting
of the Company's Common Stock from the American Stock Exchange.

Control by Existing Stockholders

As of December 31, 1997, officers and directors of the Company and stockholders
owning more than five percent of the Common Stock, together with their
affiliates, beneficially owned approximately 59.0% of the outstanding Common
Stock.  Oncor, Inc. currently holds approximately 25.4% of the Company's
outstanding Common Stock.  Such shares were acquired by Oncor in a transaction
not involving a public offering and are therefore "restricted securities" under
the Securities Act and may only be sold (i) in accordance with Rule 144
promulgated thereunder or (ii) pursuant to an effective registration statement
under the Securiites Act.  However, Oncor has no rights with respect to the
registration of such shares of Common Stock under the Securities Act.
Furthermore, Oncor is considered an "affiliate" of the Company and is therefore
subject to the volume and other limitations of Rule 144 promulgated under the
Securities Act.  As a result, these stockholders, if acting together, would be
able to significantly influence all matters requiring approval by the
stockholders of the Company, including the election of





                                       25
<PAGE>   26
directors and the approval of mergers and consolidations, sales of all or
substantially all of the assets of the Company or other business combination
transactions.





                                       26
<PAGE>   27
Item 2        Properties

              The Company's principal administrative, operational and marketing
              facilities consist of approximately 14,500 square feet in
              Gaithersburg, Maryland under a lease agreement expiring in
              November 1998.  The Company intends to renew this lease during
              1998.  The Company has leased an additional 2,900 square feet of
              space to house administrative and operations facilities in Omaha,
              Nebraska under a lease agreement which expires in November 2001.
              The Company believes that its facilities are adequate for its
              current needs and that suitable additional space will be
              available as needed.

Item 3        Legal Proceedings

              On November 19, 1996, the Company filed suit in the U.S. District
              Court for the District of Columbia, against the National
              Institutes of Health challenging the grant of an exclusive
              license to the University of Utah in BRCA1.  On November 17,
              1997, the Company filed suit in U.S. District Court for the
              District of Columbia against Myriad. The suit claims infringement
              of the Company's BRCA1 gene patent issued to the Company on
              August 5, 1997 (U.S. Patent No. 5,654,155).  On December 2, 1997,
              Myriad filed suit in U.S. District Court for the District of Utah
              against the Company.  The suit claims infringement of Myriad's
              patent issued on  December 2, 1997 (U.S. Patent No. 5,693,473).
              On January 20, 1998, the Company and Steven A. Narod filed suit
              in the U.S.  District Court for the District of Columbia, against
              Myriad.  The suit is an action to correct inventorship regarding
              Dr. Narod on U.S. Patents No. 5,693,473 and 5,709,999 issued to
              Myriad, and requests that the Court order the Commissioner of
              Patents and Trademarks include Dr. Narod as an inventor.  On
              January 20, 1998, Myriad filed suit in the U.S. District Court
              for the District of Utah, against the Company.  The suit claims
              infringement of Myriad's patent issued on January 20, 1998. (U.S.
              Patent No. 5,709,999).  The two Myriad infringement suits in Utah
              have been consolidated into a single suit.

Item 4        Submission of Matters to a Vote of Security Holders

              None.





                                       27
<PAGE>   28
                                    PART II

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

              The Company's Common Stock is listed on the AMEX under the symbol
              "ONM."  Prior to May 15, 1995, the Company's Common Stock was
              traded on the Nasdaq SmallCap Market ("Nasdaq"). The following
              table sets forth, for the calendar periods indicated, the range
              of high and low sale prices for the Common Stock as reported by
              the AMEX or Nasdaq, as the case may be.
<TABLE>
<CAPTION>
                                                                                                  High        Low
                                                                                                  ----        ---
                                                                                                   Stock Price
                                                                                                   -----------
         <S>                                                                                     <C>       <C>
         CALENDAR YEAR 1995:
              First Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12 1/4      8
              Second Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12          6 7/8
              Third Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10 7/8      7 1/8
              Fourth Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10 1/8      5 1/2
         CALENDAR YEAR 1996:
              First Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9 1/8      6 1/8
              Second Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8 1/2      5 7/8
              Third Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7          2 3/4
              Fourth Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5          3 1/4
         CALENDAR YEAR 1997:
              First Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7 15/16    4
              Second Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6 1/16     3 1/2
              Third Quarter         . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8 1/8      4 7/8
              Fourth Quarter        . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8          5 7/16
         CALENDAR YEAR 1998:
              First Quarter (through February 28, 1998) . . . . . . . . . . . . . . . . . . .     7 1/2      5 1/4
</TABLE>

         As of March 3, 1998, the approximate number of holders of the Common
         Stock was 1,189.

         Dividend Policy

         The Company is obligated to pay dividends of 6% per annum on the
         Series A Stock, which amount is payable by the Company on a quarterly
         basis either in cash or through the issuance of shares of Common
         Stock.  The Company has never declared or paid cash dividends on its
         Common Stock.  The Company currently anticipates that it will retain
         and reinvest all available funds for use in the operation of its
         business, and therefore does not anticipate paying any cash dividends
         on its Common Stock in the foreseeable future.





                                       28
<PAGE>   29

Item 6   Selected Financial Data

         Set forth below is selected financial data with respect to the Company
         for the years ended December 31, 1997, 1996, 1995 and 1994 and the
         period from inception (July 12, 1993) through December 31, 1993 and as
         of December 31, 1997, 1996, 1995, 1994 and 1993 which has been derived
         from the audited financial statements of the Company.   The financial
         statements of the Company as of December 31, 1997 and 1996 and for the
         years ended December 31, 1997, 1996, 1995 and the period from
         inception (July 12, 1993) through December 31, 1997, together with the
         notes thereto and the related report of Arthur Andersen LLP,
         independent public accountants, are included elsewhere in this report.
         The selected financial data set forth below should be read in
         conjunction with "Management's Discussion and Analysis of Financial
         Condition and Results of Operations" set forth below and the audited
         financial statements of the Company included elsewhere in this report.


<TABLE>
<CAPTION>
================================================================================================================================
                                                                                                              For the Period
                                                                                                              from Inception
                                   For Year Ended    For Year Ended   For Year Ended       For Year Ended     (July 12, 1993)
                                     December 31,     December 31,      December 31,        December 31,          through
Statement of Operations Data:          1997               1996              1995                 1994         December 31, 1993
                                  --------------    ---------------   --------------       --------------    ------------------
<S>                              <C>                <C>                <C>                  <C>                <C>
Net Revenues                     $    959,645       $    627,390       $     311,387        $     34,303       $   -------
Net Loss                          (10,746,329)        (7,455,973)         (6,510,547)         (3,981,373)         (838,352)
Net Loss Per Common Share               (1.39)             (1.10)              (1.32)              (0.90)            (0.20)
</TABLE>


<TABLE>
<CAPTION>
                                       As of             As of             As of                 As of           As of
                                    December 31,       December 31,      December 31,          December 31,    December 31,
Balance Sheet Data:                    1997               1996              1995                  1994            1993
                                  --------------    ---------------   --------------       --------------    -------------
<S>                              <C>                <C>                <C>                  <C>              <C>
Cash, Cash Equivalents and       $  1,478,551       $  7,498,680       $     718,844        $  7,262,010      $  3,848,621
 Short-term Investments
Total Assets                        3,176,615          9,113,975           2,451,874           8,372,183         4,046,366
Total Debt                            715,751            715,751             715,751             715,751           664,069
Total Stockholder's Equity            676,810          6,949,879             393,807           6,840,026         3,332,087
===========================================================================================================================
</TABLE>





                                       29
<PAGE>   30
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations:

         The following discussion and analysis provides information which
         management believes is relevant to an assessment and understanding of
         the Company's results of operations and financial condition.  The
         discussion should be read in conjunction with the audited financial
         statements of the Company and notes thereto included elsewhere in this
         report.  This report contains certain statements of a forward-looking
         nature relating to future events or the future financial performance
         of the Company.  Investors are cautioned that such statements are only
         predictions and that actual events or results may differ materially.
         In evaluating such statements, investors should carefully consider the
         various factors identified in this Report which could cause actual
         results to differ materially from those indicated by such
         forward-looking statements, including the matters set forth in
         "Business - Risk Factors."

         OVERVIEW

         The Company commenced operations in July 1993, has a limited operating
         history and is a development stage company.  Since its inception, the
         Company has been engaged in research and development activities,
         organizational efforts and sales and marketing activities, including
         the development of its services, the hiring of its scientific and
         marketing staff and its initial marketing efforts.  The Company has
         incurred operating losses since its inception.  As of December 31,
         1997, the Company's accumulated deficit was approximately $29.5
         million.  The Company's losses have resulted principally from selling,
         general and administrative expenses, laboratory operations and
         research and development expenses.  The Company has expended, and will
         continue to expend, substantial funds to continue its sales and
         marketing efforts, research and development programs and laboratory
         operations.  The Company has yet to generate any significant revenues
         and cannot anticipate when, or if, it will be able to generate
         significant revenues in the future.  The Company's ability to achieve
         profitability depends on its ability to successfully market and sell
         its services.  There can be no assurance when, or if, the Company will
         become profitable.  At March 23, 1998, the Company had cash, cash
         equivalents and short-term investments of approximately $2.1 million.
         Currently, the Company expends from $800,000 to $1,000,000 per month
         and will need to raise additional funds in the second quarter of 1998
         to continue the Company's operations, which raises substantial doubt
         whether the Company can continue as a going concern.  The Company is
         actively seeking additional capital to fund its operations through
         private financings or a collaborative licensing or other arrangements
         with corporate partners.  There can be no assurance, however, that
         additional financing will be available, or if available, will be
         available on acceptable terms.  If additional funds are raised by
         issuing equity securities, further dilution to existing stockholders
         will result and future investors may be granted rights superior to
         those of existing stockholders.  The unavailability of adequate funds
         in the future would have a material adverse effect on the Company's
         business, financial condition and results of operations and raises
         substantial doubt about whether the Company can continue as a going
         concern.

         Revenues are principally derived from providing genetic testing and
         information services, technology licensing associated with its
         proprietary information and software licensing associated with its
         risk assessment service.  Revenues are also derived from grant
         contract work.  Revenues from the Company's genetic testing and
         information services and grant work are recognized as they





                                       30
<PAGE>   31
Item 7    Management's Discussion and Analysis of Financial Condition and
          Results of Operations: (Continued)

         are provided.  Revenues from technology licensing fees are recognized
         when the licensing agreement has been executed.  Revenues from
         technology licensing royalties are recognized when earned.  Revenues
         from its risk assessment service are recognized over the license
         period.  The Company has yet to generate any significant revenues and
         the Company cannot anticipate when, or if, it will be able to generate
         significant revenues in the future.  The Company expects its operating
         losses to continue as its sales and marketing efforts, research and
         development programs and laboratory operations continue and increase.
         The Company's ability to achieve profitability depends on its ability
         to successfully market and sell its services.  There can be no
         assurance when, or if, the Company will become profitable.

         RESULTS OF OPERATIONS

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

         Total revenues for the year ended December 31, 1997 were approximately
         $960,000, compared with approximately $627,000 for the year ended
         December 31, 1996.  The increase was primarily attributable to an
         increase in genetic testing services, a technology license fee
         associated with the Company's BRCA1 patent and BRCA2 Agreement and
         revenues associated with grant contract work.  Revenues associated
         with grants are not necessarily indicative of the revenues from grants
         which may be recognized in the future.  The Company's net accounts
         receivable at December 31, 1997 was approximately $299,000 compared to
         approximately $129,000 at December 31, 1996.  At December 31, 1997,
         one customer represented approximately 60% of the Company's net
         accounts receivable balance.  As of February 28, 1997, that
         outstanding receivable was paid in full.  At December 31, 1997,
         approximately $11,000 of accounts receivable was related to billings
         made prior to the actual provision of the related services and
         recognition of related revenue.  As of December 31, 1997, all amounts
         billed pursuant to such arrangements have been included in deferred
         revenue.  The Company is in the development stage and cannot
         anticipate when, or if, it will generate any significant revenues.

         Cost of sales-direct was  approximately $474,000 for the year ended
         December 31, 1997, compared to approximately $283,000 for the year
         ended December 31, 1996.  Cost of sales-direct includes costs for
         supplies, direct labor, shipping, reference laboratory work,
         consultant fees, royalties (other than those under the license with
         Oncor) for testing services and computer hardware costs associated
         with the Company's risk assessment service.  The increase in cost of
         sales-direct reflected the corresponding increase in the Company's
         revenues.

         Laboratory operations expenses were approximately $3,426,000 for the
         year ended December 31, 1997, compared with approximately $2,760,000
         for the year ended December 31, 1996.  The increase was primarily
         attributable to a one-time license fee for the BRCA2 service, to the
         hiring of additional personnel in the laboratory for operations and to
         the initiation of certain of the Company's genetic testing services.
         Related party expenses incurred during these periods consisted of
         technology license fees paid to Oncor and the rental of laboratory
         equipment from Codon. Pharmaceuticals, Inc.  ("Codon"), a subsidiary
         of Oncor.  These related party expenses are expected to decrease as a
         percentage of total laboratory operations expenses in the future.  As
         sales of the Company's services increase, a greater portion of the
         expenses associated with laboratory operations will be included in
         cost of sales-direct.

         Selling, general and administrative expenses were approximately
         $5,780,000 for the year ended



                                       31
<PAGE>   32
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         December 31, 1997, compared with approximately $4,791,000 for the
         year ended December 31, 1996.  General and administrative expenses
         were approximately $4,573,000 for the year ended December 31, 1997,
         compared with approximately $3,563,000 for the year ended December
         31, 1996.  The increase in general and administrative expenses was
         due to increased professional fees, specifically in legal fees
         associated with patent issues and related litigation, increased
         depreciation and amortization costs, and the addition of personnel
         and related costs.  Selling expenses were approximately $1,207,000
         for the year ended December 31, 1997, compared with approximately
         $1,228,000 for the year ended

         December 31, 1996.  Selling expenses remained constant between the
         periods.  For the year ended December 31, 1997, there were no related
         party selling, general and administrative expenses as compared to
         approximately $4,000 for the corresponding period in 1996.  It is
         anticipated that related party selling, general and administrative
         expenses will continue to be nominal in the future.  The Company
         anticipates that its selling, general and administrative expenses will
         increase as it continues to market and sell its portfolio of services.

         Research and development expenses were approximately $772,000 for the
         year ended December 31, 1997, compared with approximately $709,000 for
         the year ended December 31, 1996.  The increase in research and
         development expenses was primarily attributable to the hiring of
         additional personnel and the related laboratory supply costs to work
         on new research and development projects.

         Acquired in-process research and development projects were
         approximately $1.5 million for the year ended December 31, 1997,
         compared with $0 for the year ended December 31, 1996.  A one-time
         write off of approximately $1.5 million during the first quarter of
         1997 was associated with licensing of technology under a License,
         Services and Marketing Agreement with Incyte Pharmaceuticals, Inc.
         (the "Incyte Agreement").

         Interest income was approximately $284,000 for the year ended December
         31, 1997, compared with approximately $514,000 for the year ended
         December 31, 1996.  The decrease in interest income was due to the
         decreased amounts available for investment.  The Company's follow-on
         offering was completed in the first quarter of 1996.  Interest expense
         was approximately $56,000 for the year ended December 31, 1997,
         compared with approximately $54,000 for the year ended December 31,
         1996.

         Net operating losses were approximately $10,746,000 for the year ended
         December 31, 1997, compared with approximately $7,456,000 for the year
         ended December 31, 1996.  As discussed above, the increase was
         primarily attributable to a one-time write off associated with the
         Incyte Agreement, a one-time license fee for the BRCA2 service and
         legal fees associated with patent work and related litigation.

         Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

         Total revenues for the year ended December 31, 1996 were approximately
         $627,000, compared with approximately $311,000 for the year ended
         December 31, 1995.  The increase was primarily attributable to a 2
         fold increase in predisposition testing services, and a 1.7 fold
         increase in fees received for a Company-sponsored educational
         conference.  There was also an increase in revenues associated with
         grants and risk assessment services. The Company received $6,000 in
         revenues for





                                       32
<PAGE>   33
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         certain experiments performed for Oncor for the year ended December
         31, 1996, compared with $42,000 for the same period in 1995.  The
         Company's net accounts receivable at December 31, 1996 was
         approximately $129,000, compared to $86,000 at year ended December 31,
         1995.  At December 31, 1996, approximately $8,000 of accounts
         receivable was related to billings made prior to the actual provision
         of the related services and recognition of related revenue.  As of
         December 31, 1996, all amounts billed pursuant to such arrangements
         have been included in deferred revenue.

         Cost of sales-direct was  approximately $283,000 for the year ended
         December 31, 1996, compared to approximately $168,000 for the year
         ended December 31, 1995.  Cost of sales-direct includes costs for
         supplies, direct labor, shipping, royalties (other than those under
         the license with Oncor) for testing services, computer hardware costs
         associated with the Company's risk assessment service and costs
         associated with its educational conference.  The increase in cost of
         sales-direct reflected the corresponding increase in the Company's
         revenues.

         Laboratory operations expenses were approximately $2,760,000 for the
         year ended December 31, 1996, compared with approximately $2,259,000
         for the year ended December 31, 1995.  The increase was primarily
         attributable to the hiring of additional personnel in the laboratory
         for operations and to the initiation of certain of the Company's
         genetic testing services.  Related party expenses incurred during
         these periods consisted of technology license fees paid to Oncor and
         the rental of laboratory equipment from Codon, a subsidiary of Oncor.

         Selling, general and administrative expenses were approximately
         $4,791,000 for the year ended December 31, 1996, compared with
         approximately $4,119,000 for the year ended December 31, 1995.
         General and administrative expenses were  approximately $3,563,000 for
         the year ended December 31, 1996, compared with approximately
         $2,884,000 for the year ended December 31, 1995.  The increase in
         general and administrative expenses was due to increased professional
         fees, specifically in legal fees associated with patent, trademark and
         personnel issues, increased depreciation and amortization costs, and
         the addition of personnel and related costs.  Selling expenses were
         approximately $1,228,000 for the year ended December 31, 1996,
         compared with approximately $1,235,000 for the year ended December 31,
         1995.  Selling expenses remained constant between the periods.  For
         the year ended December 31, 1996, related party selling, general and
         administrative expenses decreased to approximately $4,000 as compared
         to approximately $247,000 for the  corresponding period in 1995.  As
         the Company completed its initial public offering in late 1994,
         various functions and services previously performed by Oncor were
         assumed by the Company during late 1994 and early 1995.

         Research and development expenses were approximately $709,000 for the
         year ended December 31, 1996, compared with approximately $452,000 for
         the year ended December 31, 1995.  The increase in research and
         development expenses was primarily attributable to the hiring of
         additional personnel to work on new research and development projects.

         Interest income was approximately $514,000 for the year ended December
         31, 1996, compared with approximately $228,000 for the year ended
         December 31, 1995.  The increase in interest income was due to the
         increased amounts available for investment from the Company's
         follow-on offering completed in the first quarter of 1996.  Interest
         expense was approximately $54,000 for the year ended December 31,
         1996, compared with $53,000 for the year ended December 31, 1995.





                                       33
<PAGE>   34
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         For the reasons set forth above, net operating losses were
         approximately $7,456,000 for the year ended December 31, 1996,
         compared with approximately $6,511,000 for the year ended December 31,
         1995.

         LIQUIDITY AND CAPITAL RESOURCES

         Cash expenditures have exceeded revenues since the Company's
         inception.  The Company has incurred cumulative losses since its
         inception and, as of December 31, 1997, had an accumulated deficit of
         approximately $29.5 million.  The Company has yet to generate any
         significant revenues and cannot anticipate when, or if, it will be
         able to generate significant revenues in the future.  The Company's
         operations have historically been funded primarily through private
         placements and public offerings of equity securities. In February
         1998, the Company completed a $3.3 million private placement of equity
         securities, resulting in net proceeds of approximately $2.9 million to
         the Company.  In addition, subject to certain conditions, the private
         placement may be increased to $6.0 million.  However, there can be no
         assurance that the additional sale of securities through the private
         placement will occur.  As of March 23, 1998, cash, cash equivalents
         and short-term investments totaled approximately $2.1 million.
         Currently the Company expends from $800,000 to $1,000,000 per month
         and will need to raise additional funds in the second quarter of 1998
         to continue the Company's operations, which raises substantial doubt
         whether the Company can continue as a going concern.  The Company is
         currently pursuing potential sources of financing including private
         financings or a collaborative agreement or other arrangements with
         corporate partners. There can be no assurance that any additional
         financing will be available or, if available, will be on terms
         acceptable to the Company.    The unavailability of adequate funds in
         the future would have a material adverse effect on the Company's
         business, financial condition and results of operations and raises
         substantial doubt about whether the Company can continue as a going
         concern.  The Company expects its operating losses to continue as its
         sales and marketing efforts, research and development programs and
         laboratory operations continue and increase.  The Company also intends
         to make additional laboratory equipment purchases and other capital
         expenditures in the future, although currently it has no specific
         material commitments to do so. The Company's ability to achieve
         profitability depends on its ability to successfully market and sell
         its services.  There can be no assurance when, or if, the Company will
         become profitable.

         Cash used in operating activities was $8.4 million for the year ended
         December 31, 1997 compared with $7.0 million for the year ended
         December 31, 1996.   The increase was attributable to expanded
         laboratory operations to perform certain testing services and
         additional general and administrative costs including professional
         expenses and personnel.

         In February 1997, the Company and Oncor agreed to certain changes to
         the Restated Technology License Agreement, dated June 6, 1994 (as
         amended, the "Oncor Agreement").  Pursuant to the Oncor Agreement,
         Oncor is providing the Company with an exclusive worldwide license to
         certain of Oncor's existing human genome technologies that are useful
         for the purposes of development and commercialization of certain of
         the Company's services, including: (i) testing, detection and/or
         analysis of cancer-predisposing genes: (ii) genetic assessment of risk
         of an individual to develop cancer; and (iii) testing and analysis for
         the purposes of cancer management.  In addition, Oncor is providing
         the Company with a non-exclusive worldwide license to certain of
         Oncor's existing human





                                       34
<PAGE>   35
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         genome technologies, and any future improvements thereto, to be used
         by the Company in the provision of services direct to third parties
         other than those to whom services that are provided pursuant to the
         exclusive license.  The Company does not have the right to sublicense
         any Oncor technologies licensed to it by Oncor without Oncor's prior
         written consent.  Technologies sublicensed to the Company by Oncor
         include technologies covered by the collaborative licensing and
         research agreements between Oncor and each of The Johns Hopkins
         University and the Massachusetts General Hospital.  The term of the
         Oncor Agreement shall expire in June 2004 unless earlier terminated in
         accordance with its terms.  Further, in the event of a change of
         control of Oncor, the acquiring party shall have the option to either
         maintain the Oncor Agreement or to terminate the Oncor Agreement.  In
         the event that the acquirer terminates the Oncor Agreement, both the
         exclusive license and the non-exclusive license shall remain in full
         force and effect under rates to be determined.

         Under the terms of the Oncor Agreement, the Company is obligated to
         make payments on a quarterly basis to Oncor equal to a range of four
         percent (4%) to two percent (2%) of the Company's annual net sales.
         During the period from April 1, 1997 to March 31, 1998, the Company is
         obligated to pay Oncor a minimum amount equal to $50,000 per quarter.
         During the period from April 1, 1998 to March 31, 1999, the Company is
         obligated to pay Oncor a minimum amount equal to $25,000 per quarter.
         Thereafter, there shall be no minimum payment required to be made by
         the Company to Oncor in connection with the agreement.

         In June 1994, the Company converted $715,751 owed to Oncor for license
         fees previously incurred and for prior services rendered into a
         Convertible Subordinated Promissory Note (the "Note"), which principal
         is due in June 1999.  The Note bears interest at an annual rate of 7%
         and is convertible into Common Stock at Oncor's option at a conversion
         price of $20 per share of Common Stock.  Under the terms of the Note,
         the Company is obligated to pay interest on a quarterly basis. The
         quarterly interest payments are approximately $12,700.  During the
         fourth quarter of 1994, Oncor assigned the Note to its wholly-owned
         subsidiary, Oncor Finance, Inc.

         Under its license agreement with HCI and Creighton University, the
         Company is obligated to pay an annual sponsorship fee of $250,000, in
         quarterly installments, which is reduced by a percentage of the
         amounts paid under a related services agreement.

         Cash used in investing activities was approximately $22,000 for the
         year ended December 31, 1997





                                       35
<PAGE>   36
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         compared to approximately $1,943,000 for the year ended December 31,
         1996.   The decrease was due to the redemption of short term
         investments originally purchased in 1996.

         Cash provided by financing activities was $2.8 million for the year
         ended December 31, 1997 compared with $14.3 million for the year ended
         December 31, 1996. In 1997, the Company completed a $3 million private
         placement of equity securities.  See "Business - Collaborative
         Relationships - Incyte Pharmaceuticals, Inc."

         Minimum payments due under lease commitments and various research,
         license and consulting agreements, excluding the license with Oncor,
         will be approximately $898,000 during 1998.

         Pursuant to the Incyte Agreement, the Company and Incyte have formed a
         collaboration in clinical genomics.  The Company has agreed to perform
         certain specified clinical genomic services relating to the creation
         of a tissue repository and the performance of a gene functional
         studies program (the "Collaborative Services").  Incyte has agreed to
         purchase certain Collaborative Services during each year of the
         Initial Term.  In addition, under the terms of the Incyte Agreement,
         the Company has obtained a non-exclusive, royalty-bearing license
         (without the right to sublicense) to use Incyte's high-throughput
         sequencing technology for use in the Company's clinical diagnostic
         services for a period ending five (5) years following termination of
         the Incyte Agreement, subject to certain limitations.  In
         consideration for the grant of the license and $3,000,000 in cash, the
         Company issued to Incyte (i) Seven Hundred Seventy Three Thousand
         Five Hundred Eighty Eight (773,588) shares of the Company's Common
         Stock, and (ii) a warrant to purchase up to an aggregate of ten
         percent (10%) of the Company's Common Stock issued and outstanding on
         the date of such warrant's exercise.  The warrant is exercisable until
         February 25, 2000 at an exercise price per share equal to the greater
         of one hundred-ten percent (110%) of the fair market value per share
         of Common Stock on the trading day prior to the date of exercise or
         Nine Dollars ($9.00) per share (if the warrant is exercised after
         February 25, 1998, but on or prior to February 25, 1999), or Thirteen
         Dollars and Fifty Cents ($13.50) per share (if the warrant is
         exercised after February 25, 1999, but on or prior to February 25,
         2000).  Notwithstanding the foregoing sentence, Incyte has the option
         to fix the exercise price per share during each of aforementioned
         periods; provided, however, that in no event shall the exercise price
         per share during each of the aforementioned periods be less than Eight
         Dollars ($8.00), Nine Dollars ($9.00) or Thirteen Dollars and Fifty
         Cents ($13.50) per share, respectively.  The Company has also agreed
         to issue to Incyte, under certain circumstances, up to an additional
         aggregate of One Hundred Thirty Thousand Seven Hundred Twenty Six
         (130,726) shares of the Company's Common Stock.  As of December 31,
         1997, 5,735 shares of Common Stock had been issued.  Pursuant to the
         terms of an Investor's Rights Agreement between the Company and
         Incyte, Incyte was granted certain registration and other stockholder
         rights.

         Pursuant to a License Agreement (the "BRCA2 Agreement"), dated July 7,
         1997, by and among the Company, Cancer Research Campaign Technology
         Limited ("CRCT") and Duke University ("Duke"), CRCT and Duke have
         granted the Company an exclusive, worldwide royalty-bearing license to
         certain patents and patent applications relating to the BRCA2 gene and
         related discoveries (the "BRCA2 Technology") for the purpose of
         providing diagnostic services, diagnostic products and research
         products relating thereto.  In consideration of the grant of the
         license, the Company has paid CRCT an up-front fee.
         Contemporaneously, the Company granted back to CRCT and Duke





                                       36
<PAGE>   37
Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations: (Continued)

         certain limited rights to use the BRCA2 Technology to provide
         diagnostic services to any UK National Health Service Hospital and to
         patients affiliated with Duke, respectively.  Unless terminated
         earlier in accordance with its terms, the BRCA2 Agreement expires, on
         a country-by-country basis, on the date of expiration of the last to
         expire BRCA2 patent in such country or, if no BRCA2 patent is granted
         in a given country, ten (10) years after the first commercial
         provision of diagnostic services or diagnostic products in such
         country.

         The Company has incurred cumulative losses since its inception and, as
         of December 31, 1997, had an accumulated deficit of approximately
         $29.5 million.  The Company has expended, and will continue to expend,
         substantial funds to continue its sales and marketing efforts,
         research and development programs and laboratory operations.  The
         Company has yet to generate any significant revenues and cannot
         anticipate when, or if, it will be able to generate significant
         revenues in the future.  The Company's ability to achieve
         profitability depends on its ability to successfully market and sell
         its services.  There can be no assurance when, or if, the Company will
         become profitable.  At March 23, 1998, the Company had cash, cash
         equivalents and short-term investments of approximately $2.1 million.
         Currently, the Company expends from $800,000 to $1,000,000 per month
         and will need to raise additional funds in the second quarter of 1998
         to continue the Company's operations, which raises substantial doubt
         about whether the Company can continue as a going concern.  The
         Company is actively seeking additional capital to fund its operations
         through private financings or a collaborative licensing or other
         arrangements with corporate partners.  There can be no assurance,
         however, that additional financing will be available, or if available,
         will be available on acceptable terms.  If additional funds are raised
         by issuing equity securities, further dilution to existing
         stockholders will result and future investors may be granted rights
         superior to those of existing stockholders.  The unavailability of
         adequate funds in the future would have a material adverse effect on
         the Company's business, financial condition and results of operations
         and raises substantial doubt about whether the Company can continue as
         a going concern.

         NEW ACCOUNTING PRONOUNCEMENTS

         In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
         Income" ("SFAS No. 130").  SFAS No. 130 established standards for the
         reporting and display of comprehensive income and its components in
         the financial statements.  SFAS No.  130 is effective for fiscal years
         beginning after December 15, 1997.  Reclassification of financial
         statements for earlier periods provided for comparative purposes is
         required.  Management is in the process of determining the financial
         statement impact of the application of SFAS No. 130.

         Also in June, 1997, the FASB issued FAS No. 131, "Disclosures about
         Segments of an Enterprise and Related Information" ("SFAS No. 130").
         SFAS No. 131 established standards for the way that public business
         enterprises report information about operating segments in annual
         financial statements and requires that those enterprises report
         selected information about operating segments in interim financial
         reports issued to stockholders.  It also establishes standards for
         related disclosures about products and services, geographic areas, and
         major customers.  SFAS No. 131 is effective for financial statements
         for fiscal years beginning after December 31, 1997.  Financial
         statement disclosures for prior periods are required to be restated.
         Management is in the process of determining the financial statement
         impact of the application of SFAS No. 131.





                                       37
<PAGE>   38


Item 8   Financial Statements and Supplementary Data

         The information required by the item is incorporated herein by
         reference to the financial statements listed in Item 14 below.

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

         None.





                                       38
<PAGE>   39
                                    PART III


Item 10    Directors and Executive Officers of the Registrant

           The Company incorporates herein by reference the information
           concerning directors and executive officers in its Notice of Annual
           Stockholders' Meeting and Proxy Statement to be filed within 120
           days after the end of the Company's fiscal year (the "1998 Proxy
           Statement").

Item 11    Executive Compensation

           The Company incorporates herein by reference the information
           concerning executive compensation contained in the 1998 Proxy
           Statement.

Item 12    Security Ownership of Certain Beneficial Owners and Management

           The Company incorporates herein by reference the information
           concerning security ownership of certain beneficial owners and
           management contained in the 1998 Proxy Statement.

Item 13    Certain Relationship and Related Transactions

           The Company incorporates herein by reference the information
           concerning certain relationships and related transactions contained
           in the 1998 Proxy Statement.





                                       39
<PAGE>   40
                                    PART IV

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

            (a)   Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                           Page Number
                                                                                           -----------
            <S>   <C>                                                                           <C>
                  Index                                                                         F-1

                  Report of Independent Public Accountants                                      F-2

                  Balance Sheets as of December 31, 1997 and 1996                               F-3

                  Statements of Operations for the years ended December 31, 1997, 1996          F-4
                  and 1995; and for the period from Inception (July 12, 1993) through
                  December 31, 1997

                  Statements of Stockholders' Equity for the period from Inception              F-5
                  (July 12, 1993) through December 31, 1993 and for the years ended
                  December 31, 1994, 1995, 1996 and 1997

                  Statements of Cash Flows for the years ended December 31, 1997, 1996 and      F-6
                  1995; and for the period from Inception (July 12, 1993) through December
                  31, 1997

                  Notes to Financial Statements                                                 F-7

            (b)   Financial Statement Schedules

                  Report of Independent Public Accountants                                      S-1

                  Schedule II - Valuation and Qualifying Accounts                               S-2

            (c)   Reports on Form 8-K

                  In a report filed on Form 8-K, dated March 6, 1997, the
                  Company announced a collaboration with Incyte
                  Pharmaceuticals, Inc.

                  In a report filed on Form 8-K, dated November 21, 1997, the
                  Company announced that it had filed suit in U.S.  District
                  Court for the District of Columbia against Myriad Genetics,
                  Inc.

                  In a report filed on Form 8-K, dated March 5, 1998, the
                  Company announced the completion of a $3 million equity
                  financing through a private placement of 6% Series A
                  convertible preferred stock to certain investors.
</TABLE>





                                       40
<PAGE>   41
Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K:
            (Continued)

            (d)   Exhibits

                  3.1          Certificate of Incorporation of the Company.

                  3.2*         Bylaws of the Company, as amended.

                  3.3###       Certification of Designation,  Preferences and
                               Rights of 6% Series A Convertible Preferred
                               Stock.

                  4.1**        Specimen certificate for shares of the
                               Company's Common Stock.

                  4.2          See Exhibit  3.1, 3.2 and 3.3 for provisions of
                               the Certificate of Incorporation and Bylaws of
                               the Company defining rights of holders of
                               Capital Stock of the Company.

                  4.3**        Form of Underwriter's Warrant Certificate.

                  4.4###       Specimen certificate for shares of the
                               Company's 6% Series A Convertible Preferred
                               Stock.

                  4.5###       Form of Common Stock Purchase Warrant

                  10.1**       Sublease, dated June 1994, between the Company
                               and Oncor.

                  10.2**       Lease, dated December 1, 1993, between Scoular
                               Properties, Inc., and the Company, as amended.

                  10.3**       Asset Purchase Agreement and Plan of
                               Reorganization, dated September 1, 1993, among
                               the Company, Genetic Systems Management, Inc.,
                               Henry T.  Lynch, Ralph Rosenberg, Steven Evans,
                               and Jerome Block.

                  10.4**       Form of Subscription Agreement, with a schedule
                               of substantially identical documents.

                  10.5**       Form of Registration Rights Agreement, with a
                               schedule of substantially identical documents.

                  10.6**       License Agreement, dated September 1, 1993,
                               among Creighton University, The Hereditary
                               Cancer Institute and the Company.

                  10.7**       Services Agreement, dated September 1, 1993,
                               between the Company and The Hereditary Cancer
                               Institute.

                  10.8**       Stock Purchase Agreement, dated September 15,
                               1993, between the Company and Morgan Guarantee
                               Trust Company of New York and Socrates G.
                               Pappajohn, as Trustees.





                                       41
<PAGE>   42
Item 14    Exhibits, Financial Statement Schedules and Reports on Form
           8-K:   (Continued)

           10.9**      Technology License Agreement, dated as of July
                       12, 1993, between Oncor and the Company.

           10.10**     Restated Technology License Agreement, dated as
                       of June 6, 1994, between Oncor and the Company.

           10.11**     Consulting Agreement, dated March 1, 1994, with
                       David Sidransky.

           10.12*      Restated 1993 Stock Option Plan.

           10.13**     Note, dated June 6, 1994, issued by the Company to Oncor.

           10.14**     Clinical Study Agreement, dated May 31, 1994,
                       between the Company and The University of
                       Texas, MD Anderson Cancer Center.

           10.15**     Research and License Agreement, dated February
                       1, 1994, between Oncor and The General Hospital
                       Corporation.

           10.16**     License Agreement, dated March 9, 1994, between
                       The Johns Hopkins University and the Company.

           10.17**     License Agreement, dated October 27, 1993,
                       between Oncor and The Johns Hopkins University.

           10.18**     License Agreement, dated November 1, 1993,
                       among Oncor, Institute Suisse De Recherches
                       Experimentales Sur Le Cancer and The General
                       Hospital Corporation.

           10.19**     Collaborative Research Agreement, dated October
                       20, 1992, between Oncor and The Johns Hopkins
                       University.

           10.20**     Agreement between Roche Molecular Systems, Inc.
                       and the Company.

           10.21**     Licensing Agreement and related correspondence
                       between Genetic Systems Management and Hoag
                       Cancer Center.

           10.22**     Licensing Agreement and related correspondence
                       between Genetic Systems Management and Harris
                       Methodist Northwest.

           10.23**     Clinical Study Agreement, dated August 1, 1994,
                       between the Company and Sloan-Kettering
                       Institute of Cancer Research.

           10.24**     License Agreement, dated June 1, 1994, among
                       the Company, the Dana-Farber Cancer Institute,
                       Inc., The State of Oregon, the University of
                       Vermont and Yale University.





                                       42
<PAGE>   43
Item 14    Exhibits, Financial Statement Schedules and Reports on Form
           8-K:   (Continued)

           10.25*      Stock Option Agreement, dated February 6, 1995,
                        between the Company and Leslie Alexandre.

           10.26*      Services Agreement, dated February 16, 1995,
                       between the Company and Preferred Oncology
                       Networks of America, Inc.

           10.27*      Lease, dated December 2, 1994, between Saul
                       Holdings Limited Partnership and Oncor.

           10.28*      Assignment of Lease, dated March 15, 1995,
                       between Oncor, the Company and Saul Holdings
                       Limited Partnership.

           10.29***    Sponsored Research and License Agreement among
                       the Company, the Hereditary Cancer Institute
                       and Creighton University.

           10.30***    Services Agreement among the Company, the Hereditary
                       Cancer Institute and Creighton University.

           10.31***    Services Agreement between the Company and Oncor.

           10.32****   Correspondence, dated September 26, 1995, from
                       the Company to Memorial Sloan-Kettering Cancer
                       Center.

           10.33****   Correspondence, dated September 7, 1995, from
                       the Registrant to UT MD Anderson Cancer Center.

           10.34#      Term Sheet, dated February 24, 1997, between
                       the Company and Oncor.

           10.35#      License, Services and Marketing Agreement,
                       dated February 25, 1997, between the Company
                       and Incyte Pharmaceuticals, Inc.

           10.36##     License Agreement, dated July 7, 1997, between
                       the Company, Cancer Research Campaign
                       Technology Limited and Duke University

           10.37###    Convertible Preferred Stock Purchase Agreement,
                       dated February 27, 1998, between the Company
                       and the investors named therein.

           10.38###    Registration Rights Agreement, dated February
                       27, 1998, between the Company and the investors
                       named therein.

           11.1        Statement re: Computation of Per Share Earnings.

           23          Consent of Arthur Andersen LLP.





                                       43
<PAGE>   44
Item 14  Exhibits, Financial Statement Schedules and Reports on Form
         8-K:   (Continued)

--------------
* Incorporated by reference to the Exhibits filed with the Company's Form 10-K
for the year ended December 31, 1994.

** Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No.33-80758.

*** Incorporated by reference to the Exhibits filed with the Company's Form
10-Q  for the period ended June 30, 1995.

**** Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No.33-98826.

# Incorporated by reference to the Exhibits filed with the Company's Form 10-Q
for the period ended March 31, 1997.

## Incorporated by reference to the Exhibits filed with the Company's Form 10-Q
for the period ended September 30, 1997.

### Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-3, File No. 333-48665





                                       44
<PAGE>   45
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                ONCORMED, INC.

                 By:     /s / DR. TIMOTHY J. TRICHE
                    -----------------------------------------------------------
                    Dr. Timothy J. Triche, Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:


<TABLE>
<S>    <C>                <C>
Date:  March 27, 1998            /s / DR. TIMOTHY J.  TRICHE
                          --------------------------------------------------------------------------
                          Dr. Timothy J. Triche, Chairman and Chief Executive Officer
                          (Principal Executive Officer)

Date:  March 27, 1998            /s / DR. DOUGLAS DOLGINOW
                          --------------------------------------------------------------------------
                          Dr. Douglas Dolginow, President and Chief Operating Officer

Date:  March 27, 1998            /s / L. ROBERT JOHNSTON, JR.
                          --------------------------------------------------------------------------
                          L. Robert Johnston, Jr., Senior Vice President and Chief Financial Officer
                          (Principal Financial and Accounting Officer)

Date:  March 27, 1998            /s / JOHN PAPPAJOHN
                          --------------------------------------------------------------------------
                          John Pappajohn, Director

Date:  March 27, 1998            /s / JOHN W.  COLLOTON
                          --------------------------------------------------------------------------
                          John W.  Colloton, Director

Date:  March 27, 1998            /s / STEPHEN TURNER
                          --------------------------------------------------------------------------
                          Stephen Turner, Director

Date:  March 27, 1998            /s / DR. WAYNE PATTERSON
                          --------------------------------------------------------------------------
                          Dr. Wayne Patterson, Director
</TABLE>





                                       45
<PAGE>   46
                                     INDEX


<TABLE>
<CAPTION>
                                                                                                                Page Number
                                                                                                                -----------
<S>                                                                                                                  <C>
Report of Independent Public Accountants                                                                             F-2



Balance Sheets as of December 31, 1997 and 1996                                                                      F-3



Statements of Operations for the years ended December 31, 1997, 1996 and 1995;                                       F-4
and for the period from Inception (July 12, 1993) through December 31, 1997


Statements of Stockholders' Equity for the period from Inception (July 12, 1993)                                     F-5
through December 31, 1993, and for the years ended December 31, 1994, 1995,
1996 and 1997


Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995;                                       F-6
and for the period from Inception (July 12, 1993) through December 31, 1997


Notes to Financial Statements                                                                                        F-7
</TABLE>





                                      F-1
<PAGE>   47
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Oncormed, Inc.:

We have audited the accompanying balance sheets of Oncormed, Inc.  (a Delaware
corporation in the development stage) as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1997, 1996 and 1995, and for the period from inception
(July 12, 1993) to December 31, 1997. These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncormed, Inc.  as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years ended December 31, 1997, 1996 and 1995 and for the period from inception
to December 31, 1997, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has incurred significant losses and will
require additional financing in the second quarter of 1998 to continue
operations.  These factors raise substantial doubt about its ability to
continue as a going concern.  Management's plans in regard to these matters are
also described in Note 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




                                                ARTHUR ANDERSEN LLP


Washington, D.C.
February 20, 1998





                                      F-2
<PAGE>   48
                                 ONCORMED, INC.
                         (A Development Stage Company)
                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                            As of           As of
                                                                         December 31,     December 31,
                                                                            1997             1996
                                                                      -------------     -------------
<S>                                                                   <C>               <C>
ASSETS
Current assets:
     Cash and cash equivalents                                        $     439,618     $  6,031,809
     Short term investments                                               1,038,933        1,466,871
     Accounts receivable, net of allowance for doubtful accounts
       of $42,000 and $32,000 at 12/31/97 and 12/31/96,
       respectively                                                         298,538          129,366
     Other current assets                                                   275,274          306,078
                                                                      -------------     ------------
         Total current assets                                             2,052,363        7,934,124
                                                                      -------------     ------------

Non-current assets:
     Property and equipment, net                                          1,067,303        1,179,851
     Deferred offering costs                                                 56,949             ---
                                                                      -------------     ------------
         Total non-current assets                                         1,124,252        1,179,851
                                                                      -------------     ------------
       TOTAL ASSETS                                                   $   3,176,615     $  9,113,975
                                                                      =============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                 $     761,169     $    680,575
     Accrued expenses and other liabilities                                 859,390          593,037
     Payable to Oncor, Inc.                                                  82,552          124,730
     Deferred revenue                                                        72,347           46,420
                                                                      -------------     ------------
         Total current liabilities                                        1,775,458        1,444,762
                                                                      -------------     ------------
Non-current liabilities:
     Note payable to Oncor, Inc.                                            715,751          715,751
     Deferred revenue                                                         8,596            3,583
                                                                      -------------     ------------
         Total non-current liabilities                                      724,347          719,334
                                                                      -------------     ------------
       TOTAL LIABILITIES                                                  2,499,805        2,164,096
                                                                      -------------     ------------
Commitments and Contingencies   (Notes 1, 3 and 6)

Stockholders' Equity:
  Preferred stock, $.01 par value,
    2,000,000 shares authorized, none outstanding                              ---              ---
  Common stock, $.01 par value, 40,000,000 shares
   authorized, 7,876,423 and 6,991,108 shares issued
   and outstanding as of 12/31/97 and 12/31/96, respectively                 78,764           69,911
  Additional paid-in capital                                             30,234,082       25,741,842
  Deferred compensation                                                    (103,462)         (75,629)
  Deficit accumulated during the development stage                      (29,532,574)     (18,786,245)
                                                                      -------------     ------------

     TOTAL STOCKHOLDERS' EQUITY                                             676,810        6,949,879
                                                                      -------------     ------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $   3,176,615     $  9,113,975
                                                                      =============     ============
</TABLE>

      The accompanying notes are an integral part of these balance sheets.





                                      F-3
<PAGE>   49





                                 ONCORMED, INC.
                         (A Development Stage Company)
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                               Period from
                                                                                                Inception
                                                                                              (July 12, 1993)
                                                    For the Years Ended December 31,              Through
                                            -----------------------------------------------     December 31,
                                                  1997              1996           1995             1997
                                            -------------      ------------    ------------    -------------
<S>                                         <C>                <C>             <C>             <C>
REVENUES                                    $     959,645      $    627,390    $    311,387    $   1,932,725

OPERATING EXPENSES:
  Cost of sales - direct                          474,172           283,082         167,568          935,976
  Laboratory operations                         3,426,093         2,759,656       2,259,136        9,788,125
  Selling, general and administrative           5,779,874         4,791,029       4,119,221       17,509,846
  Research and development                        772,446           709,340         451,596        2,732,454
  Acquired in-process research
    and development projects                    1,481,148               --             --          1,481,148
                                            -------------      ------------    ------------    -------------

    Total expenses                             11,933,733         8,543,107       6,997,521       32,447,549
                                            -------------      ------------    ------------    -------------

OPERATING LOSS                                (10,974,088)       (7,915,717)     (6,686,134)     (30,514,824)
Interest income                                   284,068           514,205         228,470        1,174,282
Interest expense                                  (56,309)          (54,461)        (52,883)        (192,032)
                                            -------------      ------------    ------------    -------------

NET LOSS                                    $ (10,746,329)     $ (7,455,973)   $ (6,510,547)   $ (29,532,574)
                                            =============      ============    ============    =============



BASIC AND DILUTED
NET LOSS PER SHARE                          $       (1.39)     $      (1.10)   $     (1.32)    $       (5.31)
                                            =============      ============    ===========     =============


SHARES USED IN COMPUTING
NET LOSS PER SHARE                              7,709,301         6,805,083      4,947,991         5,557,433
                                            =============      ============    ===========     =============
</TABLE>

        The accompanying notes are an integral part of these statements.





                                      F-4
<PAGE>   50
                                 ONCORMED, INC.
                         (A Development Stage Company)
                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                               Series A
                                                              Convertible
                                                            Preferred Stock                 Common Stock              Stock
                                                   ---------------------------   ----------------------------      Subscription
                                                        Shares      Amount         Shares              Amount       Receivable
                                                   ------------ -------------    -----------    --------------   ---------------
<S>                                                <C>           <C>             <C>            <C>              <C>
INCEPTION, July 12, 1993                                 -----         $-----         -----           $-----           $-----
  Sale of Common Stock at $0.50
    per share, July & Sept.  1993                        -----          -----     2,250,000           22,500        (125,000)
  Issuance of Common Stock in
    exchange for software and technology at
    $0.50 per share, Sept. 1993                          -----          -----       110,000            1,100            -----
  Exercise of stock options for
    cash at $0.50 per share, Nov. 1993                   -----          -----        50,000              500            -----
  Cash received in payment of
    stock subs., Nov. and Dec. 1993                      -----          -----         -----            -----          100,000
  Sale of Series A Convertible
    Preferred Stock at $3.00 per share,
    Dec. 1993 (net of expenses)                      1,000,000      2,990,439         -----            -----             ----
  Net loss                                              -----           -----         -----            -----            -----
                                                   -----------  -------------    ----------     ------------     ------------

BALANCE, December 31, 1993                           1,000,000     $2,990,439     2,410,000          $24,100        $ (25,000)
  Cash received in payment of stock
    subs., Feb. 1994                                     -----          -----         -----            -----           25,000
  Sale of Common Stock from IPO
     on Oct. 5, 1994,  at $6 per share,
     net of expenses                                     -----          -----     1,335,000           13,350           ------
  Issuance of Common Stock
    Warrants in connection with IPO
     on Oct. 5, 1994 exercisable at
     $6.90 per share                                     -----          -----         -----            -----            -----
  Conversion of Series A Convertible
    Preferred Stock to Common Stock
    due to IPO                                     (1,000,000)    (2,990,439)     1,000,000           10,000            -----
  Sale of Common Stock from IPO
     -- Over-allotment, on Nov. 4, 1994
     at $6.00 per share, net of expenses                 -----          -----       200,250            2,003            -----
  Compensation element of stock
    option grants                                        -----          -----         -----            -----            -----
  Amortization of deferred comp.                         -----          -----         -----            -----            -----
  Net loss                                               -----          -----         -----            -----            -----
                                                   -----------  -------------    ----------     ------------     ------------

BALANCE, December 31, 1994                               -----   $      -----    4,945,250           $49,453     $      -----
   Exercise of stock options for cash
     at $0.50 per share                                  -----          -----        4,800                48            -----
   Amortization of deferred comp.                        -----          -----         -----            -----            -----
   Net Loss                                              -----          -----         -----            -----            -----
                                                   -----------  -------------    -----------    ------------     ------------

BALANCE, December 31, 1995                               -----   $      -----    4,950,050           $49,501     $      -----
  Sale of Common Stock from public
     offering on February 2, 1996, net
     of expenses                                         -----          -----    2,000,000            20,000            -----
  Exercise of stock options for cash
     at a range of $0.50-$6.00 per share                 -----          -----       41,058               410            -----
  Compensation element of non-employee
        stock option grants                              -----          -----         -----            -----            -----
  Amortization of non-employee stock
        option grants and def. comp.                     -----          -----         -----            -----            -----
  Net Loss                                               -----          -----         -----            -----            -----
                                                   -----------  -------------    ----------     ------------     ------------

BALANCE, December 31, 1996                               -----   $      -----     6,991,108          $69,911     $      -----

  Sale of Common Stock from private
     placement on February 25, 1997                      -----          -----       779,323       $    7,793            -----
  Exercise of stock options for cash at
     a range of $0.50 - $5.00 per share                  -----          -----        94,200              942            -----
  Sale of Common Stock from employee
     stock purchase plan at $3.825 per share
     on Jan. 31, 1997 and $4.83
     on Jul. 31, 1997                                    -----          -----        11,792              118            -----
  Compensation element of non-employee
        stock option grants                              -----          -----         -----            -----            -----
  Amortization of non-employee stock
        options and def. comp.                           -----          -----         -----            -----            -----
  Net Loss                                               -----          -----         -----            -----            -----
                                                   -----------  -------------    ----------     ------------     ------------
BALANCE, December 31, 1997                               -----     $    -----     7,876,423     $     78,764      $     -----
                                                   ===========  =============    ==========     ============     ============


<CAPTION>


                                                                                                   Deficit
                                                                                                 Accumulated
                                                    Common     Additional                         During the
                                                     Stock       Paid-in        Deferred         Development
                                                    Warrants     Capital       Compensation         Stage            Total
                                                   ----------  -----------     -------------   ---------------   ----------------
<S>                                                 <C>         <C>              <C>           <C>                <C>
INCEPTION, July 12, 1993                              -----       $   -----          $-----            $-----             $ -----
  Sale of Common Stock at $0.50
    per share, July & Sept.  1993                     -----       1,102,500           -----             -----           1,000,000
  Issuance of Common Stock in
    exchange for software and technology at
    $0.50 per share, Sept. 1993                       -----          53,900           -----             -----              55,000
  Exercise of stock options for
    cash at $0.50 per share, Nov. 1993                -----          24,500           -----             -----              25,000
  Cash received in payment of
    stock subs., Nov. and Dec. 1993                   -----           -----           -----             -----             100,000
  Sale of Series A Convertible
    Preferred Stock at $3.00 per share,
    Dec. 1993 (net of expenses)                       -----           -----           -----             -----           2,990,439
  Net loss                                            -----           -----           -----          (838,352)           (838,352)
                                                   --------    ------------    ------------    --------------     ---------------

BALANCE, December 31, 1993                            -----      $1,180,900          $-----        $ (838,352)         $3,332,087
  Cash received in payment of stock
    subs., Feb. 1994                                  -----           -----           -----             -----              25,000
  Sale of Common Stock from IPO
     on Oct. 5, 1994,  at $6 per share,
     net of expenses                                  -----       6,317,903           -----             -----           6,331,253
  Issuance of Common Stock
    Warrants in connection with IPO
     on Oct. 5, 1994 exercisable at
     $6.90 per share                                133,500             100           -----             -----                 100
  Conversion of Series A Convertible
    Preferred Stock to Common Stock
    due to IPO                                        -----       2,980,439           -----             -----               -----
  Sale of Common Stock from IPO
     -- Over-allotment, on Nov. 4, 1994
     at $6.00 per share, net of expenses              -----       1,049,309           -----             -----           1,051,312
  Compensation element of stock
    option grants                                     -----         256,500        (256,500)            -----               -----
  Amortization of deferred comp.                      -----          (4,686)         86,333             -----              81,647
  Net loss                                            -----           -----           -----        (3,981,373)         (3,981,373)
                                                   --------    ------------    ------------    --------------     ---------------

BALANCE, December 31, 1994                          133,500     $11,780,465      $ (170,167)      $(4,819,725)         $6,840,026
   Exercise of stock options for cash
     at $0.50 per share                               -----           2,352           -----             -----               2,400
   Amortization of deferred comp.                                     -----          61,928             -----              61,928
   Net Loss                                           -----           -----           -----        (6,510,547)         (6,510,547)
                                                   --------    ------------    ------------     -------------     ---------------

BALANCE, December 31, 1995                          133,500     $11,782,817      $ (108,239)     $(11,330,272)           $393,807
   Sale of Common Stock from public
     offering on February 2, 1996, net
     of expenses                                      -----      13,892,825           -----             -----          13,912,825
   Exercise of stock options for cash
     at a range of $0.50-$6.00 per share              -----          38,369           -----             -----              38,779
   Compensation element of non-employee
        stock option grants                           -----          27,831         (27,831)            -----               -----
   Amortization of non-employee stock
        option grants and def. comp.                  -----           -----          60,441             -----              60,441
   Net Loss                                           -----           -----           -----        (7,455,973)         (7,455,973)
                                                   --------    ------------    ------------     -------------     ---------------

BALANCE, December 31, 1996                          133,500     $25,741,842        $(75,629)     $(18,786,245)        $ 6,949,879

   Sale of Common Stock from private
     placement on February 25, 1997                   -----       4,203,902           -----             -----           4,211,695
   Exercise of stock options for cash at
     a range of $0.50 - $5.00 per share               -----          96,471           -----             -----              97,413
   Sale of Common Stock from employee
     stock purchase plan at $3.825 per share
     on Jan. 31, 1997 and $4.83
     on Jul. 31, 1997                                 -----          48,512           -----             -----              48,630
   Compensation element of non-employee
        stock option grants                           -----         143,355        (143,355)            -----               -----
   Amortization of non-employee stock
        options and def. comp.                        -----           -----         115,522             -----             115,522
   Net Loss                                           -----           -----           -----       (10,746,329)        (10,746,329)
                                                   --------    ------------    ------------     -------------     ---------------
BALANCE, December 31, 1997                          133,500     $30,234,082       $(103,462)    $ (29,532,574)     $      676,810
                                                   ========    ============    ===========-     =============     ===============
</TABLE>

        The accompanying notes are an integral part of these statements.





                                      F-5
<PAGE>   51
                                 ONCORMED, INC.
                         (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                               Period from
                                                                                                                Inception
                                                                    For the Years Ended December 31,          (July 12, 1993)
                                                           -----------------------------------------------        Through
                                                               1997              1996            1995       December 31, 1997
                                                           -------------     ------------    ------------    ----------------
<S>                                                        <C>               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                 $(10,746,329)     $(7,455,973)    $(6,510,547)    $(29,532,574)
  Adjustments to reconcile net loss to net cash used in
     operating activities--
    Depreciation and amortization                               562,611          517,435         365,080        1,606,058
    Amortization of deferred compensation and non-
      employee stock options                                    115,522           60,441          61,928          319,538
    Acquired in-process research and
       development costs                                      1,481,148              --              --         1,481,148
    Changes in operating assets and liabilities:
       Accounts receivable                                     (169,172)         (43,212)        (83,979)        (298,538)
       Other assets                                              30,804         (179,954)         71,853         (275,274)
       Accounts payable                                          80,594          557,132          52,336          761,169
       Accrued expenses and other liabilities                   266,353         (296,015)        322,449          859,390
       Deferred revenue                                          30,940         (141,909)        158,193           80,943
       Payable to Oncor, Inc.                                   (42,178)         (13,179)        (7,068)           82,552
                                                           -------------     ------------    ------------    -------------
   Net cash used in operating activities                     (8,389,707)      (6,995,234)     (5,569,755)     (24,915,588)
                                                           -------------     ------------    ------------    -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                         (450,063)        (476,350)       (675,996)      (2,618,362)
   Net redemptions/(purchases) of short-term investments        427,938       (1,466,871)             --       (1,038,933)
                                                           -------------     ------------    ------------    -------------
   Net cash used in investing activities                        (22,125)      (1,943,221)       (675,996)      (3,657,295)
                                                           -------------     ------------    ------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from sale of common stock                      2,779,177       13,912,825             --        25,199,667
  Net proceeds from sale of preferred stock                         --              --               --         2,990,439
  Net proceeds from exercise of stock options                    97,413           38,780           2,400          163,593
  Net proceeds from Note payable to Oncor, Inc.                     --              --               --           715,751
  Deferred offering costs                                       (56,949)         299,815        (299,815)         (56,949)
                                                           -------------     ------------    ------------    -------------
  Net cash provided by (used in) financing activities         2,819,641       14,251,420        (297,415)      29,012,501
                                                           -------------     ------------    ------------    -------------

NET (DECREASE) INCREASE IN CASH AND
       CASH EQUIVALENTS                                      (5,592,191)       5,312,965      (6,543,166)         439,618
CASH AND CASH EQUIVALENTS, beginning of period                6,031,809          718,844       7,262,010             --
                                                           -------------     ------------    ------------    -------------

CASH AND CASH EQUIVALENTS, end of period                   $    439,618      $ 6,031,809     $   718,844     $    439,618
                                                           =============     ============    ============    =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
  Issuance of common stock in exchange for software
      and technology                                       $        --       $       --      $       --      $     55,000
                                                           =============     ============    ============    =============
  Issuance of common stock in exchange for stock
      subscription receivable                              $       --        $       --      $       --      $     25,000
                                                           =============     ============    ============    =============
  Issuance of common stock and warrants in exchange for
      research and development projects in-process         $   1,481,148     $       --      $       --      $  1,481,148
                                                           =============     ============    ============    =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for interest                 $      56,309     $     54,461    $     52,883    $    192,032
                                                           =============     ============    ============    =============
</TABLE>

        The accompanying notes are an integral part of these statements.





                                      F-6
<PAGE>   52
                                 ONCORMED, INC.
                         (A Development Stage Company)
                         NOTES TO FINANCIAL STATEMENTS
                    As of December 31, 1997, 1996 and 1995,
  and for the period from Inception (July 12, 1993) through December 31, 1997

1.  BUSINESS DESCRIPTION:

    Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
    State of Delaware as a subsidiary of Oncor, Inc.  ("Oncor").  As of
    December 31, 1997, Oncor's ownership of the Company's outstanding common
    stock was approximately 25.4 percent.  The Company is a genomics services
    company that characterizes newly discovered genes to establish their
    medical relevance and provides molecular profiling of patients for
    pharmacogenomic and therapeutic purposes.  The Company is in the
    development stage and has a limited operating history, has incurred
    operating losses since its inception and expects losses to continue and
    increase.  Since its inception, the Company has been engaged in research
    and development activities, organizational efforts, and sales and marketing
    activities including the development of its services, the hiring of its
    scientific and marketing staff and its initial sales and marketing efforts.
    The Company's services are currently offered principally in the United
    States.  There can be no assurance that the Company will be successful in
    the development or commercialization of its services.

    The Company has incurred cumulative losses since its inception and, as of
    December 31, 1997, had an accumulated deficit of approximately $29.5
    million.  The Company has yet to generate any significant revenues and
    cannot anticipate when, or if, it will be able to generate significant
    revenues in the future.  The Company expects that its operating losses will
    continue as its sales and marketing efforts, research and development
    programs and laboratory operations continue and increase.  At March 23,
    1998, the Company had cash, cash equivalents and short-term investments of
    approximately $2.1 million.  Currently, the Company expends from $800,000
    to $1,000,000 per month and will need to raise additional funds in the
    second quarter of 1998 to continue the Company's operations, which raises
    substantial doubt about whether the Company can continue as a going
    concern.  The Company is currently actively pursuing potential sources of
    financing including private financings or a collaborative agreement or
    other arrangements with corporate partners.  There can be no assurance that
    any additional financing will be available or, if available, will be on
    terms acceptable to the Company.  The unavailability of adequate funds in
    the future would have a material adverse effect on the Company's business,
    financial condition and results of operations and raises substantial doubt
    about whether the Company can continue as a going concern.  The financial
    statements do not include any adjustments that might result if the Company
    is unable to continue as a going concern.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    Use of Estimates

    The preparation of these financial statements required the use of certain
    estimates by management in determining the entity's assets, liabilities,
    revenue and expenses.  Actual results may vary from these estimates.





                                      F-7
<PAGE>   53
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (Continued)

    Cash Equivalents and Short Term Investments

    All highly liquid investments with a maturity of three months or less at
    the date of purchase are considered to be cash equivalents; investments
    with maturities between three and twelve months are considered to be short
    term investments.  The Company invests its excess funds in commercial paper
    with banks, money market instruments in U.S. treasury and investment grade
    securities, and overnight reverse repurchase agreements collateralized by
    U.S. treasury and investment grade securities.  Short term investments are
    stated at cost, which approximates market.

    As of December 31, 1997, the Company had invested approximately $402,000 in
    overnight repurchase agreements.  The underlying collateral consists of
    U.S. government securities and U.S. government agency securities.
    Generally, the maturity date of the Company's repurchase agreements is the
    next business day.  Due to the short-term nature of the agreements, the
    Company does not take possession of the securities, which are instead held
    at the Company's bank from which it purchases the securities.  The carrying
    value of the agreements approximates fair value because of the short
    maturity of the investments.  As a result, the Company believes that it is
    not exposed to any significant risk under its overnight repurchase
    agreements.

    Impairment of Long-Lived Assets

    The Company complies with SFAS No. 121, Accounting for the Impairment of
    Long-Lived Assets and for Long-Lived Assets to Be Disposed of.  The Company
    reviews its long-lived assets, principally property, plant and equipment,
    for impairment whenever events or changes in circumstances indicate that
    the carrying amount of the assets may not be fully recoverable.  To
    determine recoverability of its long-lived assets, the Company evaluates
    the probability that future undiscounted net cash flows will be less than
    the carrying amount of the assets.  Impairment is measured at fair value.

    Other Current Assets

    Included in other current assets as of December 31, 1997 is approximately
    $180,000 for prepaid insurance.

    Property and Equipment

    Property and equipment are recorded at cost.  Depreciation and amortization
    expense is calculated using the straight-line method over estimated useful
    lives of three to five years.  Leasehold improvements are amortized over
    the shorter of the lease terms or useful lives.

    Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                              As of December 31,
                                                                              ------------------
                                                                        1997                     1996
                                                                    ------------             -----------
         <S>                                                        <C>                       <C>
         Laboratory equipment                                       $ 1,048,174               $  756,495
         Computer equipment                                             483,659                  409,560
         Computer software                                              364,164                  335,160
         Furniture/office equipment                                     461,455                  428,716
         Leasehold improvements                                         315,909                  293,368
                                                                    -----------               ----------
                                                                      2,673,361                2,223,299
         Less-accumulated depreciation and amortization              (1,606,058)               1,043,448)
                                                                    -----------               ----------
           Property and equipment, net                              $ 1,067,303               $1,179,851
                                                                    ===========               ==========
</TABLE>





                                      F-8
<PAGE>   54
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    Accrued Expenses and Other Liabilities

    Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                       As of December 31,
                                                                       ------------------
                                                                      1997              1996
                                                                   ----------       ----------
         <S>                                                        <C>              <C>
         Payroll and related expenses                                $255,291        $318,408
         Insurance                                                    136,448         130,406
         Professional/legal fees                                      400,696          58,868
         Marketing/operations costs                                    40,304          48,385
         Other                                                         26,651          36,970
                                                                    ---------        --------
                 Total accrued expenses and other liabilities        $859,390        $593,037
                                                                    =========        ========
</TABLE>

    Income Taxes

    The Company accounts for income taxes in accordance with Statement of
    Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
    No.109").  The Company has incurred losses for both financial and income
    tax reporting purposes since inception.  Accordingly, no provision or
    benefit for income taxes has been recorded in the accompanying financial
    statements.

    The components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                      As of December 31,
                                                                      ------------------
                                                                   1997                  1996
                                                            --------------          -------------
         <S>                                                <C>                      <C>
         Net operating loss and credit carry forwards       $ 10,710,000             $ 7,330,000
         Total other                                             946,000                 181,000
                                                            ------------             -----------
           Total deferred tax assets                          11,656,000               7,511,000
              Less - total deferred tax liabilities             (155,000)               (112,000)
                                                            ------------             -----------
           Net deferred tax asset                             11,501,000               7,399,000
              Less - valuation reserve                       (11,501,000)             (7,399,000)
                                                            ------------             -----------
           Deferred tax asset, net of valuation reserve     $     -----              $    -----
                                                            ============             ===========
</TABLE>

    SFAS No. 109 requires that the benefit of deferred tax assets be recorded
    to the extent that management assesses the realization of such deferred tax
    assets to be "more likely than not."  As of December 31, 1997 and 1996, a
    valuation reserve was recorded against the Company's entire deferred tax
    asset due to the uncertainty of realization.

    At December 31, 1997, the Company had net operating loss ("NOL")
    carry-forwards of approximately $18.8 million available to offset future
    taxable income.  The Company also has research and development tax credits
    of approximately $48,000 available to reduce future Federal income tax.  A
    portion of the NOL carry-forwards and research and development tax credit
    carry-forwards are subject to a limitation due to the change in ownership
    which occurred on the date of the Company's initial public offering.  Due
    to the ownership change which occurred, the amount of the net operating
    loss carry-forward and research and development tax credit carry-forward
    which can be utilized on an annual basis will be subject to limitations;
    however, the Company believes the entire net operating loss carry-forward
    will be available to be utilized during the carry-forward period.  The tax
    NOL and research and development tax credits may be used through 2012, but
    begin to expire in 2008.  Despite the NOL and research and development
    credit carry-forwards, the Company may have an income tax liability in





                                      F-9
<PAGE>   55
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    future years due to the application of the alternative minimum tax rules.
    The utilization of these tax NOL and research and development credit
    carry-forwards is subject to statutory limitation regarding subsequent
    changes in ownership.

    Revenue Recognition

    Revenues are principally derived from providing genetic testing and
    information services, technology licensing fees and royalties associated
    with its proprietary information and software licensing associated with its
    risk assessment service.  Revenues are also derived from grant contract
    work.  Revenues from the Company's genetic testing and information services
    and grant work are recognized as they are provided.  Revenues from
    technology licensing fees are recognized when the licensing agreement has
    been executed.  Revenues from technology licensing royalties are recognized
    when earned. Revenues from its risk assessment service are recognized over
    the license period. During 1997, one customer accounted for approximately
    19% of the Company's revenue.  At December 31, 1997, one customer
    represented approximately 60% of the Company's net accounts receivable
    balance.  As of February 28, 1998, that outstanding receivable was paid in
    full.

    Research and Development Costs

    Research and development costs are charged to expense as incurred.

    Net Loss Per Common Share

    In March 1997, the Financial Accounting Standards Board ("FASB") issued
    SFAS No. 128, "Earnings Per Share."  SFAS No. 128 is effective for the
    financial statements issued for period ending after December 15, 1997.  The
    Company has implemented SFAS No.  128 for 1997.  SFAS No. 128 requires dual
    presentation of basic and diluted earnings per share.  Basic loss per share
    includes no dilution and is computed by dividing net loss available to
    common stockholders by weighted average number of common shares outstanding
    for the period.  Diluted loss per share includes the potential dilution
    that could occur if securities or other contracts to issue common stock
    were exercised or converted into common stock.  Options and convertible
    securities that were outstanding at December 31, 1997, were not included in
    the computation of diluted loss per share as their effect would be
    anti-dilutive.  As a result, the basic and diluted loss per share amounts
    are identical.

    In February 1998, the Securities and Exchange Commission issued Staff
    Accounting Bulletin ("SAB") No. 98 on computations of earnings per share.
    SAB 98 replaces SAB 83 which previously required that all issuances of
    common stock, options and warrants issued within one year of an initial
    public offering be included in the calculation of earnings per share as if
    outstanding for all periods presented.  Under SAB 98, only issuances of
    common stock, options and warrants issued for nominal consideration in
    periods preceding an initial public offering are required to be included in
    the calculation of earnings per share as if they were outstanding for all
    periods presented.  In the periods preceding the Company's initial public
    offering, the Company had no issuances of common stock, options or warrants
    for nominal consideration.

    Earnings per share for the inception to date period presented which
    includes the periods preceding the Company's initial public offering has
    been restated to comply with SAB 98.





                                      F-10
<PAGE>   56
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

    Reclassification

    Certain 1995 and 1996 balances have been reclassified to conform with 1997
    financial statement presentation.

3.  RELATED-PARTY TRANSACTIONS:

    License Agreement

    Previously, under the license agreement with Oncor, the Company was
    obligated to pay royalties on a semi-annual basis to Oncor for Oncor
    technologies existing as of the date of the Oncor Agreement, equal to the
    greater of (i) six percent of the Company's net sales revenues resulting
    from services based on Oncor's technologies, subject to certain
    adjustments, or (ii) $100,000.  In February 1997, the Company and Oncor
    agreed to certain changes to the license agreement with Oncor (as amended,
    the "Oncor Agreement").  Fees payable to Oncor under the license agreement
    with Oncor and the Oncor Agreement of approximately $200,000, $200,000,
    $200,000 and $892,000 are included in laboratory operations expense for the
    years ended December 31, 1997, 1996 and 1995, and the period from inception
    (July 12, 1993) to December 31, 1997, respectively.

    Pursuant to the Oncor Agreement, Oncor is providing the Company with an
    exclusive worldwide license to certain of Oncor's existing human genome
    technologies that are useful for purposes of development and
    commercialization of certain of the Company's services, including: (i)
    testing, detection and/or analysis of cancer-predisposing genes; (ii)
    genetic assessment of risk of an individual to develop cancer; and (iii)
    testing and analysis for the purposes of cancer management.  In addition,
    Oncor is providing the Company with a non-exclusive worldwide license to
    certain of Oncor's existing human genome technologies, and any future
    improvements thereto, to be used by the Company in the provision of
    services direct to third parties other than those to whom services are
    provided pursuant to the exclusive license.  The Company does not have the
    right to sublicense any Oncor technologies licensed to it by Oncor without
    Oncor's prior written consent.  Technologies sublicensed to the Company by
    Oncor include technologies covered by the collaborative licensing and
    research agreements between Oncor and each of The Johns Hopkins University
    and the Massachusetts General Hospital.  The term of the Oncor Agreement
    shall expire in June 2004 unless earlier terminated in accordance with its
    terms.  Further, in the event of a change of control of Oncor, the
    acquiring party shall have the option to either maintain the Oncor
    Agreement or to terminate the Oncor Agreement.  In the event that the
    acquirer terminates the Oncor Agreement, both the exclusive license and the
    non-exclusive license shall remain in full force and effect under rates to
    be determined.

    Under the terms of the Oncor Agreement, the Company is obligated to make
    payments on a quarterly basis to Oncor equal to a range of four percent
    (4%) to two percent (2%) of the Company's annual net sales.  During the
    period from April 1, 1997 to March 31, 1998, the Company is obligated to
    pay Oncor a minimum amount equal to $50,000 per quarter.  During the period
    from April 1, 1998 to March 31, 1999, the Company is obligated to pay Oncor
    a minimum amount equal to $25,000 per quarter.  Thereafter, there shall be
    no minimum payment required to be made by the Company to Oncor in
    connection with the agreement.

    In addition, subject to certain third-party contractual limitations, prior
    to the license or disposition (whether by assignment, transfer or license)
    to a third party by the Company or Oncor of their respective technologies,
    the non-offering party shall have a right of first offer with respect to
    such





                                      F-11
<PAGE>   57
3.  RELATED-PARTY TRANSACTIONS: (Continued)

    technologies.  If the non-offering party accepts the offer, the Company and
    Oncor shall negotiate in good faith the terms and conditions of any such
    license or acquisition agreement.

    Oncor has the primary right and obligation to obtain, maintain and enforce
    proprietary rights in relation to all its own technologies and any
    improvements to such technologies assigned to Oncor by the Company.  The
    Company has the primary right and obligation to obtain, maintain and
    enforce proprietary rights in relation to all its own technologies.

    During the second quarter of 1995, the Company finalized a services
    agreement with Oncor and Codon Pharmaceuticals, Inc.  ("Codon", a
    subsidiary of Oncor), whereby the Company agreed to pay for laboratory
    supplies and equipment provided by Oncor and Codon ("Services Agreement").
    The Services Agreement also provides that the Company will perform certain
    experiments for Oncor at specified rates.

    Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
                                                                                               Period from
                                                                                                Inception
                                                                                             (July 12, 1993)
                                                   For the Years Ended December 31,              Through
                                              -------------------------------------------      December 31,
                                                1997               1996          1995              1997
                                             ----------        -----------    -----------     ------------
       <S>                                    <C>              <C>            <C>             <C>
       Sales to related party                 $   3,941        $    5,700     $    42,180     $     51,821
       Operating Expenses to related party:
         Laboratory operations                  272,000           272,610         200,000        1,036,610
         Selling, general and administrative          0             4,394         247,000          977,896
         Research and development                 2,803            71,784             ---          173,085
</TABLE>

    All of the related party revenues for the year ended December 31, 1997 were
    for testing services performed for Oncor.  Of the related party expenses
    for the year ended December 31, 1997, $72,000 in laboratory operations was
    for equipment rental from Codon, a subsidiary of Oncor.  As of December 31,
    1997, the total amount owed to Oncor by the Company under the above
    agreements and for other services excluding the Oncor License was
    approximately $32,000.

    Promissory Note with Oncor, Inc.

    In June 1994, the Company converted $715,751 owed to Oncor for license fees
    previously incurred and for prior services rendered into a Convertible
    Subordinated Promissory Note (the "Convertible Note"), which principal is
    due in June 1999.  The Convertible Note bears interest at seven percent and
    is convertible into common stock at the holder's option at a conversion
    price of $20 per share of common stock.  Interest expense recorded by the
    Company relating to the Convertible Note was $50,798 for the year ended
    December 31, 1997.  The fair value of the Convertible Note is not
    materially different from the carrying value.





                                      F-12
<PAGE>   58
4.  DEFERRED REVENUES:

    Deferred revenues totaling approximately $81,000 and $50,000 as of December
    31, 1997 and 1996, respectively, consisted of prepaid amounts related to
    laboratory testing and prepaid fees related to various risk assessment
    service agreements.

5.  STOCKHOLDERS' EQUITY:

    Preferred Stock

    The Company is authorized to issue up to 2,000,000 shares of preferred
    stock.  In December 1993, the Company completed a private placement of
    1,000,000 shares of Series A Convertible Preferred Stock for $3,000,000.
    Concurrent with the initial public offering, each share of Series A
    Convertible Preferred Stock was converted into common stock on a one for
    one basis.   On February 27, 1998, the Company completed a $3 million
    equity financing through a private placement of 6% Series A convertible
    preferred stock to certain investors.  The preferred stock is convertible
    into the Company's common stock at a conversion price to be determined
    based on either the closing bid price of  the Common Stock as of February
    26, 1998, or the closing bid price of the Company's Common Stock at the
    time of such conversion.  The convertible preferred stock may be redeemed
    at the option of the investors in certain circumstances.  In addition, in
    connection with the transaction, the Company has issued to the investors
    warrants to purchase shares of common stock.  Subject to certain
    conditions, the Company and the investors each have the right to increase
    the aggregate amount of the equity financing by an additional $3 million
    (for aggregate investment of $6 million).  On March 5, 1998, the Company
    filed a Form 8-K in connection with this transaction.  See "Business -
    Recent Events."

    Common Stock

    On October 25, 1995, the Board approved and on November 27, 1995, the
    stockholders approved an increase in authorized common stock from
    10,000,000 shares to 40,000,000 shares.

    On February 2, 1996, the Company completed the sale of 2,000,000 shares of
    common stock in a public offering ("Offering") resulting in gross proceeds
    to the Company of approximately $15.5 million.  Net proceeds to the Company
    for the Offering, after transaction costs, were approximately $13.9
    million.

    On February 25, 1997, in consideration for the grant of the license and
    $3,000,000 in cash, the Company issued to Incyte 773,588 shares of the
    Company's Common Stock and a warrant to purchase up to an aggregate of 10%
    of the Company's Common Stock issued and outstanding on the date of such
    warrant's exercise. As a result of this transaction, Oncor's ownership of
    the Company's outstanding common stock was reduced from approximately 29
    percent to approximately 25.4 percent.  See Footnote 7 - Agreements.

    Warrants

    Concurrent  with  the  initial public offering, the Company issued warrants
    to the underwriter to purchase an aggregate of 133,500 shares of common
    stock at $6.90 per share.  The warrants are exercisable from September 27,
    1996 to September 26, 1999.





                                      F-13
<PAGE>   59
5.  STOCKHOLDERS' EQUITY: (Continued)

    As part of a license, services and marketing agreement with Incyte
    Pharmaceuticals, Inc., the Company issued a warrant to Incyte to purchase
    up to an aggregate of ten percent of the Company's common stock.  See
    Footnote 7 - Agreements.

    As part of the Series A convertible preferred stock transaction, the
    investors received warrants to purchase an aggregate of 166,666 shares of
    the Company's Common Stock at an exercise price of $8.54 per share. These
    warrants expire on February 27, 2001.

    Stock Purchase Plan

    On April 19, 1996, the Board approved and on June 12, 1996, the
    stockholders approved the adoption of the Company's Employee Stock Purchase
    Plan to provide all eligible employees, who have completed ninety days of
    service, an opportunity to purchase shares of its common stock through
    payroll deductions.  Each purchase period has a duration of six (6) months.
    Purchase periods run from the first business day in August to the last
    business day in January and from the first business day in February to the
    last business day in July.  The purchase price is the lower of 85% of the
    fair market value of the stock on the first or last day of the purchase
    period.  The aggregate number of shares purchased by an employee may not
    exceed 750 shares per purchase period (subject to periodic adjustments and
    limitations imposed by the Internal Revenue Code).

    A total of 200,000 shares are available for purchase under the plan.  There
    were approximately 12,000 shares issued under the plan during fiscal 1997.
    On January 30, 1998, approximately 3,000 shares of common stock were issued
    under the plan.

    Stock Option Plan

    The Board of Directors of the Company approved a restated stock option
    plan, under which 1,500,000 shares of the Company's common stock were
    originally reserved for issuance.  On October 25, 1995, the Board approved
    and on November 27, 1995, the stockholders approved the increase of shares
    authorized for issuance from 1,500,000 shares to 2,250,000 shares.  The
    Company's options generally vest over three to five years and terminate in
    ten years after the date of grant.  The Company adopted the disclosure
    requirements of SFAS No. 123, Accounting for Stock-Based Compensation,
    effective for the Company's December 31, 1996 financial statements.  The
    Company applies APB Opinion No. 25 and related Interpretations in
    accounting for its stock based plans.  Accordingly, compensation cost has
    been recognized for its stock plans based on the intrinsic value of the
    stock option at date of grant (i.e. the difference between the exercise
    price and the fair market value of the Company's common stock).  Had
    compensation expense been recorded for the Company's stock-based
    compensation plan based on the fair market value of the Company's common
    stock at the grant dates for stock option awards under the plan consistent
    with the method of SFAS No. 123, the Company's net loss and net loss per
    share would have been increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                       1997              1996             1995
                                                  ------------------ ----------------  ----------------
    <S>                                              <C>              <C>               <C>
    Net loss, as reported                            $(10,746,329)     $(7,455,973)      $(6,510,547)
    Net loss, pro forma                              $(11,045,253)     $(7,604,319)      $(6,548,304)
    Net Loss per share, as reported                  $      (1.39)     $     (1.10)      $     (1.32)
    Net Loss per share, pro forma                    $      (1.43)     $     (1.12)      $     (1.12)
</TABLE>




                                      F-14
<PAGE>   60
5.  STOCKHOLDERS' EQUITY: (Continued)

    The fair value of each option is estimated on the date of grant using the
    Black-Scholes option-pricing model with the following assumptions used for
    grants in 1995, 1996 and 1997, respectively: no dividend yield, expected
    volatility of 30%, 30% and 52.1%, risk-free interest rate of 6.04%, 6.12%
    and 5.84%, and expected life of five years, five years and ten years.
    Because the SFAS No. 123 method of accounting has not been applied to
    options granted prior to January 1, 1995, per the rules, the resulting pro
    forma compensation cost may not be representative of that to be expected in
    future years.

    A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                       Number of             Wtd Average
                                                                         Shares              Exercise Price
                                                                     -------------           --------------
         <S>                                                          <C>                    <C>
         Options outstanding at December 31, 1993                          405,000            $ 0.50
                 Granted                                                   909,500            $ 2.87
                 Exercised                                                     ---              ---
                 Canceled                                                  (14,500)           $ 1.83
                                                                       -----------            ----------------
         Options outstanding at December 31, 1994                        1,300,000            $ 2.14
                 Granted                                                   158,500            $ 8.11
                 Exercised                                                  (4,800)           $ 0.50
                 Canceled                                                  (14,200)           $ 5.72
                                                                       -----------            ----------------
         Options outstanding at December 31, 1995                        1,439,500            $ 2.77
                 Granted                                                   283,000            $ 5.29
                 Exercised                                                 (41,058)           $ 0.94
                 Canceled                                                 (139,200)           $ 6.75
                                                                       -----------            ----------------
         Options outstanding at December 31, 1996                        1,542,242            $ 2.92
                 Granted                                                   190,500            $ 6.05
                 Exercised                                                 (94,200)           $ 1.03
                 Canceled                                                  (52,500)           $ 7.98
                                                                        ----------            -----------------
         Options outstanding at December 31, 1997                        1,586,042            $ 3.24
                                                                         =========            =================
</TABLE>

    The number of options exercisable as of December 31, 1997, 1996, 1995 and
    1994 was 1,147,959, 1,001,193,  641,306, and 263,493, respectively, with
    weighted average exercise prices of $2.70, $2.36, $2.07 and $1.41,
    respectively.

    The outstanding options at December 31, 1997 have exercise prices between
    $0.50 and $10.125 with a weighted average exercise price of $3.24 and a
    weighted average remaining contractual life of 6.9 years.  The options
    exercisable at December 31, 1997 have exercise prices between $0.50 and
    $10.125.  On July 29, 1997, the Company offered to reprice options for all
    employees, other than officers and directors, to the fair market value at
    that date of $5.375 per share.  The number of options would remain the
    same. However, there would be a new four year vesting schedule starting on
    July 29, 1997.  The number of options repriced was 40,500.  The number of
    options available for future grants as of December 31, 1997 was 473,900.

    Included in the grants described above for the years ended December 31,
    1997 and 1996, are options to purchase 39,360 and 18,000 shares granted to
    non-employees, respectively.  Pursuant to SFAS No. 123, the Company
    accounts for these options using a fair value method, with the fair value
    of these options determined at the date of issuance.  For these options,
    the Company recorded approximately





                                      F-15
<PAGE>   61
5.  STOCKHOLDERS' EQUITY: (Continued)

    $78,700 and $6,400 in expenses and approximately $64,700 and $21,400 in
    deferred compensation for the years ending December 31, 1997 and 1996,
    respectively.

    Compensation expense for employees is recognized for the difference between
    the exercise price of the options granted and the fair market value of the
    Company's common stock.  Total deferred compensation of $256,500 was
    recorded in 1994.  This amount was adjusted by $4,686 due to the
    cancellation of options.  Compensation expense of $36,852, $54,037, and
    $61,928 has been recognized for the years ended December 31, 1997, 1996 and
    1995, respectively.

6.  COMMITMENTS:

    Lease Commitments and Rental Expense

    The Company leases office space under operating lease agreements which
    expire at various dates through 2001.  The Company intends to renew its
    primary lease, which expires in November 1998.  The lease payments below do
    not reflect the intended lease renewal.  Minimum future annual lease
    payments under these lease agreements as of December 31, 1997, are as
    follows:

<TABLE>
<CAPTION>
                      For the Year Ending
                           December 31,                                        Amount
                      ----------------------                                 ----------
                              <S>                                            <C>
                              1998                                             194,000
                              1999                                              48,000
                              2000                                              50,000
                              2001                                              48,000
                                                                             ---------
                              Total                                          $ 340,000
                                                                             =========
</TABLE>

    Total rent expense approximated $177,000, $177,000, $180,000, and $640,000
    for the years ended December 31, 1997, 1996 and 1995 and the period from
    inception (July 12, 1993) to December 31, 1997, respectively.

    Licensing and Research Agreements

    In addition to the Oncor License discussed in Note 3, the Company has
    entered into several licensing, consulting and clinical study agreements.
    The terms of significant agreements are as follows:

    Incyte Pharmaceuticals, Inc.--In February 1997, the Company entered into a
    license, services and marketing agreement with Incyte Pharmaceuticals, Inc.
    to form a collaboration in clinical genomics.  As part of the agreement,
    the Company licenses certain technologies at agreed upon rates.  The term
    of the agreement expires on February 25, 2000 unless extended by mutual
    agreement or earlier terminated in accordance with its terms.






                                      F-16
<PAGE>   62
6.  COMMITMENTS: (Continued)

    Hereditary Cancer Institute--In September 1993, the Company entered into a
    licensing and marketing agreement with The Hereditary Cancer Institute
    ("HCI") and the Creighton University School of Medicine, which included
    access to HCI's familial cancer database, software and physician consulting
    services.  In July 1995, the Company extended for five years the license
    agreement, expanded the scope of the license agreement to include
    commercialization rights to HCI's DNA library, and entered into a services
    agreement for the provision by HCI of genetic history reports.  Under the
    extended license agreement, the Company continues to pay an annual
    sponsorship fee of $250,000, in quarterly installments which is offset by a
    percentage of the amounts paid under the services agreement.   In addition,
    under the extended license agreement, the Company is required to pay a
    royalty on net sales of products and services which make use of the HCI
    database, other than genetic history reports, and on license income derived
    from sublicenses to third parties of the Company's rights to the HCI
    database.

    ZENECA Diagnostics--In August 1996, the Company and ZENECA
    Limited, acting through ZENECA Diagnostics, entered into a five-year
    collaboration agreement under which ZENECA Diagnostics will supply the
    Company with proprietary cancer reagents based on patented ZENECA ARMS
    technology for use by the Company's advanced cancer genetic testing
    laboratory in the U.S. The agreement automatically renews for successive
    twelve-month periods unless terminated by either party.  During mid-1997,
    the Company and ZENECA Diagnostics successfully completed the first
    application of the ARMS technology to detect mutations associated with
    breast/ovarian cancer.

    The Regents of the University of California--The Company entered into a
    license agreement, effective August 8, 1996, with the Regents of the
    University of California for the use of certain genetic markers for breast
    and ovarian cancer.  Under the agreement, the Company is obligated to pay
    royalties for the use of the technology as clinical laboratory services are
    performed.  Royalty payments are payable semi-annually, 60 days after the
    end of each six month period.

    Cancer Research Campaign Technology Limited and Duke University--Pursuant
    to a License Agreement (the "BRCA2 Agreement"), dated July 7, 1997, by and
    among the Company, Cancer Research Campaign Technology Limited ("CRCT") and
    Duke University ("Duke"), CRCT and Duke have granted the Company an
    exclusive, worldwide royalty-bearing license to certain patents and patent
    applications relating to the BRCA2 gene and related discoveries (the "BRCA2
    Technology") for the purpose of providing diagnostic services, diagnostic
    products and research products relating thereto.  In consideration of the
    grant of the license, the Company has paid CRCT an up-front fee.
    Contemporaneously, the Company granted back to CRCT and Duke certain
    limited rights to use the BRCA2 Technology to provide diagnostic services
    to any UK National Health Service Hospital and to patients affiliated with
    Duke, respectively.  Unless terminated earlier in accordance with its
    terms, the BRCA2 Agreement expires, on a country-by-country basis, on the
    date of expiration of the last to expire BRCA2 patent in such country or,
    if no BRCA2 patent is granted in a given country, ten (10) years after the
    first commercial provision of diagnostic services or diagnostic products in
    such country. In addition, the Company will share in a portion of the
    revenues generated from any therapeutic licensing.  Royalty payments are
    payable quarterly, 40 business days after the end of each quarter.





                                      F-17
<PAGE>   63
6.  COMMITMENTS: (Continued)

    Minimum payments due under these and other agreements, excluding the Oncor
    License, as of December 31, 1997, are as follows:

<TABLE>
<CAPTION>
                      For the Year Ending December 31,                  Amount
                      --------------------------------              -------------
                              <S>                                   <C>
                              1998                                      704,000
                              1999                                      448,000
                              2000                                      329,000
                              2001                                        7,500
                              2002                                        7,500
                                                                    -----------
                                                                    $ 1,496,000
                                                                    ===========
</TABLE>

7.  AGREEMENTS:

    Pursuant to a License, Services and Marketing Agreement (the "Incyte
    Agreement"), dated February 25, 1997, the Company and Incyte
    Pharmaceuticals, Inc., a Delaware corporation ("Incyte"), formed a
    collaboration in clinical genomics.  The term of the Incyte Agreement
    expires on February 25, 2000 (the "Initial Term") unless extended by mutual
    agreement or earlier terminated in accordance with its terms.

    The Company has agreed to perform certain specified clinical genomic
    services relating to the creation of a tissue repository and the
    performance of a gene functional studies program (the "Collaborative
    Services").  Incyte has agreed to purchase a specified minimum of
    Collaborative Services during each year of the Initial Term.  In addition,
    under the terms of the Incyte Agreement, the Company obtained a
    non-exclusive, royalty-bearing license (without the right to sublicense) to
    use Incyte's high-throughput sequencing technology for use in the Company's
    clinical diagnostic services for a period ending five (5) years following
    termination of the Incyte Agreement, subject to certain limitations.  In
    consideration for the grant of the license and $3,000,000 in cash, the
    Company issued to Incyte (i) 773,588 shares of the Company's Common Stock,
    and (ii) a warrant to purchase up to an aggregate of 10% of the Company's
    Common Stock issued and outstanding on the date of such warrant's exercise.
    The warrant is exercisable until February 25, 2000 at an exercise price per
    share equal to the greater of 110% of the fair market value per share of
    Common Stock on the trading day prior to the date of exercise or (i)  $8.00
    per share (if the warrant is exercised on or prior to February 25, 1998),
    (ii) $9.00 per share (if the warrant is exercised after February 25, 1998,
    but on or prior to February 25, 1999), or (iii) $13.50 per share (if the
    warrant is exercised after February 25, 1999, but on or prior to February
    25, 2000).  Notwithstanding the foregoing sentence, Incyte has the option
    to fix the exercise price per share during each of aforementioned periods;
    provided, however, that in no event shall the exercise price per share
    during each of the aforementioned periods be less than $8.00, $9.00 or
    $13.50 per share, respectively.  The Company has also agreed to issue to
    Incyte, under certain circumstances, up to an additional aggregate of
    130,726 shares of the Company's Common Stock.  Pursuant to the terms of an
    Investor's Rights Agreement between the Company and Incyte, Incyte was
    granted certain registration and other stockholder rights.

    The Company issued certain of the shares to Incyte in consideration for
    current and future technologies to further enhance the efficiencies of the
    laboratory.  The technologies are in development and approximately $1.5
    million was allocated to research and development projects in-process and
    expensed in the first quarter of 1997.





                                      F-18
<PAGE>   64
7.  AGREEMENTS: (Continued)

    Affymetrix, Inc.--In September 1996, the Company entered into an agreement
    with Affymetrix, Inc. ("Affymetrix") to collaborate in the development and
    clinical validation of genetic testing services using the Affymetrix
    GeneChip system for analysis of genes associated with cancer beginning with
    the p53 gene.  In October 1997, the Company expanded its collaboration with
    Affymetrix.  Under the new agreement, the companies will co-develop a
    GeneChip system for BRCA1 and BRCA2 genotyping.

    The Company will design and validate the BRCA1 and BRCA2 GeneChip array
    which will be manufactured by Affymetrix.  The Company will receive
    royalties on all BRCA1 and BRCA2 array sales.  The initial term of the new
    agreement is three years.

8.  RETIREMENT PLANS:

    The Company sponsors a 401(k) defined contribution plan ("401(k) Plan") in
    which all regular employees who have attained age 21 may participate.
    Because the 401(k) Plan does not currently provide for Company
    contributions, no related expense has been recorded since inception.

9.  SUBSEQUENT EVENTS:

    In January 1998, the Company and Children's Hospital Los Angeles ("CHLA")
    entered into an agreement (the "CHLA Agreement") whereby CHLA agreed to
    provide resources and personnel to act as a biorepository site for the
    Company's library of tissue samples.  The CHLA Agreement expires on January
    29, 2001, unless modified by written amendment, renewal or extension or
    earlier terminated in accordance with its terms.  The Company has agreed to
    pay for all of CHLA's costs incurred in the performance of the scope of
    work, as described in the CHLA Agreement.

    On February 27, 1998, the Company completed a $3 million equity financing
    through a private placement of 6% Series A convertible preferred stock to
    certain investors.  The preferred stock is convertible into the Company's
    common stock at a conversion price to be determined based on either the
    closing bid price of  the Common Stock as of February 26, 1998, or the
    closing bid price of the Company's Common Stock at the time of such
    conversion.  The convertible preferred stock may be redeemed at the option
    of the investors in certain circumstances.  In addition, in connection with
    the transaction, the Company has issued to the investors warrants to
    purchase shares of common stock.  Subject to certain conditions, the
    Company and the investors each have the right to increase the aggregate
    amount of the equity financing by an additional $3 million (for an
    aggregate investment of $6 million).  On March 5, 1998, the Company filed a
    Form 8-K in connection with this transaction.  See "Business - Recent
    Events."

    On March 6, 1998, Incyte exercised its pro rata share and purchased
    Thirty Three (33) shares of the 6% Series A convertible preferred stock for
    an aggregate of $330,000.





                                      F-19
<PAGE>   65
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Oncormed, Inc.:

We have audited, in accordance with generally accepted auditing standards, the
financial statements of  Oncormed, Inc. (a Delaware corporation in the
development stage), included in this Form 10-K and have issued our report
thereon dated February 20, 1998.  Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole.  The
schedule listed in the index to the financial statements is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements.  This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements  and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein,  in relation to the basic financial statements taken
as a whole.





                                                             ARTHUR ANDERSEN LLP


Washington, D.C.
February 20, 1998





                                      S-1
<PAGE>   66
                Schedule II - VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>
                                             Balance at                 Charged                                    Balance
                                             beginning                  to costs                                   at end
Description                                  of period                and expenses             Write-off          of period
-----------                               ---------------             ------------            -----------      ---------------
<S>                                    <C>                         <C>                      <C>            <C>
December 31, 1993
-----------------

Allowance for doubtful accounts        $           ---             $           ---          $       ---    $            ---

December 31, 1994
-----------------

Allowance for doubtful accounts                    ---                         ---                  ---                 ---

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

Allowance for doubtful accounts                    ---                        7,000                 ---                7,000

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

Allowance for doubtful accounts                   7,000                      28,000                3,000              32,000

December 31, 1997
-----------------

Allowance for doubtful accounts                  32,000                      23,000               13,000              42,000
</TABLE>





                                      S-2