<PAGE>   1
 
  AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON MAY 7,
                                      1999
 
                                                 REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                                  VAXGEN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                              <C>                              <C>
            DELAWARE                           2834                          94-3236309
(STATE OR OTHER JURISDICTION OF    (PRIMARY STANDARD INDUSTRIAL           (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)    CLASSIFICATION CODE NUMBER)          IDENTIFICATION NO.)
</TABLE>
 
                        1000 MARINA BOULEVARD, SUITE 200
                           BRISBANE, CALIFORNIA 94005
                                 (650) 624-1000
   (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
            ROBERT C. NOWINSKI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
                        1000 MARINA BOULEVARD, SUITE 200
                           BRISBANE, CALIFORNIA 94005
                               TEL (650) 624-1000
                               FAX (650) 624-1001
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
                               AGENT FOR SERVICE)
 
                                   COPIES TO:
 
<TABLE>
<S>                                              <C>
              BENJAMIN F. STEPHENS                               SUSAN L. PRESTON
               WILLIAM W. BARKER                                KATHRYN A. WALKER
                MARK F. HOFFMAN                                 COOLEY GODWARD LLP
    GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.                   4205 CARILLON POINT
      1001 FOURTH AVENUE PLAZA, SUITE 4500                  KIRKLAND, WASHINGTON 98033
           SEATTLE, WASHINGTON 98154                           TEL: (425) 893-7700
              TEL: (206) 624-3600                              FAX: (425) 893-7777
              FAX: (206) 389-1708
</TABLE>
 
          APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
  As soon as practicable after this registration statement becomes effective.
 
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
 
     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
 
     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
 
     If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<S>                                                     <C>                        <C>
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
                                                            PROPOSED MAXIMUM
                TITLE OF EACH CLASS OF                     AGGREGATE OFFERING              AMOUNT OF
             SECURITIES TO BE REGISTERED                        PRICE(1)               REGISTRATION FEE
------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value.........................         $53,475,000                  $14,866
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Estimated pursuant to Rule 457(o) under the Securities Act solely for the
    purpose of calculating the registration fee.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
                             DESCRIPTION OF ARTWORK


Inside Front Cover:



Introductory text: Preventing HIV infection with AIDSVAX

Graphics on blue background depicting:

          (1) gp120 molecule, arrow pointing to gp120
     
     TEXT: HIV virus, gp120     

          (2) creation of synthetic gp120

     TEXT: Synthetic gp120 created by genetic engineering

          (3) Injection of AIDSVAX in arm of vaccinee

     TEXT: AIDSVAX vaccine, AIDSVAX induces antibodies in blood

          (4) binding of antibodies to gp120

     TEXT: Protection, Antibodies to gp120 block HIV infection

<PAGE>   3
                            DESCRIPTION OF ARTWORK

INSIDE BACK COVER:

Graphic depicting: Colored map of the world on blue background with vertical
  bars indicating number of people living with HIV/AIDS.

TEXT: People Living with HIV/AIDS

<TABLE>
<S>                                             <C>
        North America                              890,000
        Caribbean                                  330,000
        Latin America                            1,400,000
        North Africa, Middle East                  210,000
        Western Europe                             500,000
        Sub Saharan Africa                      22,500,000
        South and South-East Asia                6,700,000
        Eastern Europe, Central Asia               270,000
        East Asia and Pacific                      560,000
        Australia and New Zealand                   12,000
            Total:  33.4 million
</TABLE>

        Source: UNAIDS, AIDS Epidemic Update, Dec. 1998
<PAGE>   4
 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. VAXGEN
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
                      SUBJECT TO COMPLETION -- MAY 7, 1999
 
PROSPECTUS
--------------------------------------------------------------------------------
 
                                3,100,000 Shares
                                 [VAXGEN LOGO]
 
                                  Common Stock
--------------------------------------------------------------------------------
 
VaxGen, Inc. is offering 3,100,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
VaxGen's common stock.
 
VaxGen is developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials, one in North America and
one in Thailand.
 
It is anticipated that the public offering price will be between $13.00 and
$15.00 per share. The shares of VaxGen will be quoted, subject to approval, in
the Nasdaq National Market under the symbol "VXGN".
 
<TABLE>
<CAPTION>
                                                              Per Share      Total
<S>                                                           <C>          <C>
 
Public offering price.......................................  $            $
Underwriting discounts and commissions......................  $            $
Proceeds, before expenses, to VaxGen........................  $            $
</TABLE>
 
SEE "RISK FACTORS" ON PAGES 6 TO 10 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF VAXGEN.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
 
--------------------------------------------------------------------------------
 
The underwriters may, under certain circumstances, purchase up to 465,000
additional shares from VaxGen at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
          .
 
PRUDENTIAL SECURITIES                                     PUNK, ZIEGEL & COMPANY
 
            , 1999
<PAGE>   5
 
                          [GRAPHICS TO BE DETERMINED]
 
                             DESCRIPTION OF ARTWORK
 
Inside Front Cover:
 
Introductory text: Preventing HIV infection with AIDSVAX Graphics on blue
background depicting:
 
(1) gp120 molecule, arrow pointing to gp120
TEXT: HIV virus, gp120
 
(2) creation of synthetic gp120
TEXT: Synthetic gp120 created by genetic engineering
 
(3) Injection of AIDSVAX in arm of vaccinee
TEXT: AIDSVAX vaccine, AIDSVAX induces antibodies in blood
 
(4) binding at antibodies to gp120
TEXT: Protection, Antibodies to gp120 block HIV infection
<PAGE>   6
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                     PAGE
                                     ----
<S>                                  <C>
Prospectus Summary.................    3
Risk Factors.......................    6
Forward Looking Statements.........   10
Use of Proceeds....................   11
Dividend Policy....................   11
Dilution...........................   12
Capitalization.....................   13
Selected Financial Data............   14
Management's Discussion and
  Analysis of Financial Condition
  and Results of Operations........   15
</TABLE>
 
<TABLE>
<CAPTION>
                                     PAGE
                                     ----
<S>                                  <C>
Business...........................   19
Management.........................   39
Certain Transactions...............   45
Principal Stockholders.............   46
Description of Capital Stock.......   47
Shares Eligible for Future Sale....   49
Underwriting.......................   50
Legal Matters......................   51
Experts............................   51
Where You Can Find More
  Information......................   51
Index to Financial Statements......  F-1
</TABLE>
 
--------------------------------------------------------------------------------
 
The terms "VaxGen", "Company", "we", "our" and "us" refer to VaxGen, Inc. unless
the context suggests otherwise. The term "Genentech" refers to Genentech, Inc.
The term "you" refers to a prospective investor.
 
     AIDSVAX(R) is a registered trademark of VaxGen. Our web site address is
www.vaxgen.com. Information contained on our web site is not a part of this
prospectus.
--------------------------------------------------------------------------------
 
     You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
 
                                        2
<PAGE>   7
 
                               PROSPECTUS SUMMARY
 
     This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of VaxGen.
Investors should read the entire prospectus carefully.
 
                                  THE COMPANY
 
     We are developing preventive vaccines for worldwide use against HIV. We are
conducting two large-scale Phase III clinical trials of our AIDSVAX vaccines,
one principally in North America and one in Thailand. To date, we are the only
company to advance an HIV vaccine into Phase III clinical trials. If the Phase
III clinical trials are successful, we will apply to the United States Food and
Drug Administration and foreign regulatory authorities for licenses to
manufacture and sell AIDSVAX in the United States and abroad.
 
     Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million during a period of nearly ten years. We were formed in November 1995
to complete the development of, and commercialize, AIDSVAX in partnership with
Genentech. Genentech licensed to us the technology necessary for development and
commercialization of AIDSVAX.
 
  The HIV/AIDS Epidemic
 
     HIV/AIDS is one of the largest epidemics in human history. According to the
World Health Organization and UNAIDS:
 
     - in just two decades, over 47 million people have been infected with HIV
       worldwide;
 
     - 14 million lives have been claimed by AIDS;
 
     - each day approximately 16,000 individuals become infected with HIV; and
 
     - AIDS is one of the top five fatal diseases worldwide.
 
     We believe that, because of the magnitude and severity of the epidemic, an
HIV vaccine would have one of the largest population-based markets in the
history of modern medicine.
 
  Our Vaccines
 
     Our vaccines are designed to prevent infection by HIV, rather than treat
established infection. Because AIDSVAX contains synthetic copies of proteins
from the surface of HIV, it is incapable of causing HIV infection. Humans
vaccinated with AIDSVAX form antibodies against HIV which, in laboratory tests,
bind to the virus and neutralize its infectivity. Vaccination with AIDSVAX also
stimulates immune memory, training the immune system to mobilize rapidly in the
event of future exposure to HIV.
 
     We believe that AIDSVAX will be successful for the following reasons:
 
     - EFFICACY: In Phase II clinical trials, all human volunteers vaccinated
       with AIDSVAX developed neutralizing antibodies to HIV. In chimpanzees,
       vaccination with AIDSVAX protected chimps against infection upon
       subsequent injection with infectious HIV. The level of neutralizing
       antibodies in humans vaccinated with AIDSVAX equaled or exceeded that
       observed in vaccinated chimps.
 
     - SAFETY: In Phase I/II clinical trials, none of the 2,000 human volunteers
       vaccinated with AIDSVAX had serious side effects.
 
     - HIV COVERAGE: AIDSVAX is designed to neutralize the majority of HIV
       subtypes and strains encountered during natural infection in the regions
       where we are conducting Phase III clinical trials.
 
     - BROAD USE: AIDSVAX has no clinical impact on people previously infected
       with HIV. We believe, therefore, that AIDSVAX will be used without
       requiring the prescreening of recipients. This is particularly
       advantageous in populations where there is a high rate of HIV-infected
       people.
 
     - MANUFACTURING: Genentech has manufactured AIDSVAX in commercial
       quantities.
 
     - VACCINE RATIONALE: The design of AIDSVAX follows that of previous
       successful vaccines, such as hepatitis B vaccine. The blocking of HIV
       infection by neutralizing antibody conforms with generally accepted
       principles of vaccinology.
 
                                        3
<PAGE>   8
 
  Our Clinical Trials
 
     We are conducting Phase III clinical trials of AIDSVAX to determine whether
AIDSVAX protects humans from HIV infection by sexual transmission or injection
drug use. The North American Phase III trial is designed for 5,400 volunteers.
It is being conducted in 56 clinics across the United States. It is also being
tested in one clinic in Puerto Rico, one clinic in Canada and one clinic in The
Netherlands. In Thailand, the Phase III clinical trial is designed for 2,500
volunteers and is being conducted in 17 clinical sites in Bangkok.
 
     To gain regulatory approval for AIDSVAX, we believe the vaccine must reduce
the level of HIV infection by 30% or more. This is based on meetings and
documented discussions we have had with the FDA and its Vaccines and Related
Biological Products Advisory Committee.
 
     Our clinical protocol provides for two opportunities to measure efficacy:
 
     - An independent monitoring board will conduct an interim analysis
       approximately midway through the observation period of each clinical
       trial. Should AIDSVAX meet the 30% threshold, the independent monitoring
       board will stop the trial and we will submit an application for
       regulatory approval.
 
     - If the 30% threshold is not met at the interim analysis, we will have a
       second opportunity to determine the vaccine's efficacy at the completion
       of the trial.
 
  Our Strategic Relationships
 
     We intend to use Genentech as our partner to manufacture and distribute
AIDSVAX. Genentech has exclusive options to manufacture and market AIDSVAX on
specified financial terms. If Genentech does not exercise its options, we have
the right to pursue third party arrangements, with Genentech providing the
transfer of technology necessary to manufacture AIDSVAX.
 
     We will work with two federal agencies in relation to our North American
Phase III trial: the Centers for Disease Control and Prevention and the National
Institute for Allergy and Infectious Diseases. The Centers for Disease Control
and Prevention have proposed to co-sponsor the Phase III trial and to fund $8.0
million over a period of four years. The National Institute for Allergy and
Infectious Diseases is working with us on a $4.6 million program related to the
Phase III clinical trial. The purpose of this program is to obtain and store
specimens for studies on the immune system.
 
     We also intend to work selectively with other companies that are developing
vaccines for HIV. For example, we are working with Pasteur Merieux Connaught to
co-develop an alternative HIV vaccine. This vaccine will combine technologies
and components provided by Pasteur Merieux Connaught and us. We anticipate that
such a combination vaccine could enter Phase III clinical trials by 2001.
 
     We believe we have a strong competitive lead in the development of an HIV
vaccine. We are the only company worldwide with Phase III clinical trials of an
HIV vaccine underway. In addition to having the advantage of lead-time, we also
have an exclusive license from Genentech to a portfolio of U.S. and foreign
patents on AIDSVAX and associated technology, consisting of 52 issued patents
and 44 pending patent applications.
 
  Our Management Team
 
     Our management team, together with Genentech, has extensive experience in
the international arena of HIV research, public health policy, and the practical
aspects of developing, manufacturing and marketing biological products. Our
President is Donald Francis, M.D. During his 20-year tenure at the Centers for
Disease Control, he was involved in the control or eradication of several
epidemics, including a major epidemic of cholera in Africa, smallpox in India
and the first known outbreak of the Ebola virus. He subsequently was the lead
clinician for the Phase III trial of the hepatitis B vaccine. Our Chairman of
the Board and Chief Executive Officer is Robert Nowinski, Ph.D. Dr. Nowinski is
a pioneering executive in the biotechnology industry, having founded three
publicly-traded biotechnology companies (Genetic Systems Corp., 1981, ICOS
Corp., 1989, and PathoGenesis Corp., 1991). Our Senior Vice President, Research
& Development is Phillip Berman, Ph.D., who is an inventor of AIDSVAX and a
former senior scientist at Genentech.
 
     VaxGen, Inc. was incorporated in Delaware in November 1995. Our principal
executive offices are located at 1000 Marina Boulevard, Suite 200, Brisbane, CA
94005, and our telephone number is (650) 624-1000.
 
                                        4
<PAGE>   9
 
                                  THE OFFERING
 
Shares offered by VaxGen....................     3,100,000 shares
 
Total shares outstanding after this
offering....................................    10,785,161 shares(1)
 
Use of proceeds.............................    To complete Phase III clinical
                                                trials of AIDSVAX in North
                                                America and Thailand, develop
                                                data management systems, apply
                                                for regulatory approval and for
                                                working capital and other
                                                general corporate purposes.
 
Proposed Nasdaq National Market symbol......    VXGN
---------------
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
    does not include: (a) 891,671 shares of common stock issuable on exercise of
    stock options outstanding at April 15, 1999 at a weighted average exercise
    price of $8.33 per share; (b) 861,150 shares of common stock reserved for
    future issuance under our 1996 stock option plan; (c) 28,929 shares of
    common stock reserved for future issuances under our 1998 Director Stock
    Option Plan; (d) 309,825 shares of common stock issuable on exercise of
    warrants at April 15, 1999 at a weighted average exercise price of $7.73 per
    share; and (e) exercise of the underwriters' over-allotment option.
 
                         SUMMARY FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                   PERIOD FROM
                                NOVEMBER 27, 1995            YEAR ENDED            THREE MONTHS ENDED
                                 (INCEPTION) TO             DECEMBER 31,                MARCH 31,
                                  DECEMBER 31,      ----------------------------   -------------------
                                      1995           1996      1997       1998       1998       1999
                                -----------------   -------   -------   --------   --------   --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>                 <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Loss from operations..........        $(30)         $(2,054)  $(3,946)  $(10,176)  $(1,163)   $(4,044)
Net loss......................        $(30)         $(2,082)  $(3,060)  $ (9,163)  $  (857)   $(3,760)
                                      ====          =======   =======   ========   =======    =======
Net loss per share -- basic
  and diluted.................        $ --          $ (1.90)  $ (0.60)  $  (1.48)  $ (0.14)   $ (0.49)
                                      ====          =======   =======   ========   =======    =======
Weighted average shares
  outstanding -- basic and
  diluted.....................          --            1,093     5,096      6,185     6,066      7,619
</TABLE>
 
<TABLE>
<CAPTION>
                                                              AT             AT MARCH 31, 1999
                                                         DECEMBER 31,    -------------------------
                                                             1998        ACTUAL     AS ADJUSTED(1)
                                                         ------------    -------    --------------
                                                                      (IN THOUSANDS)
<S>                                                      <C>             <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment securities.......    $19,468       $20,607       $59,707
Working capital........................................     17,866        19,318        58,418
Total assets...........................................     21,472        22,693        61,793
Stockholders' equity...................................     19,398        20,896        59,996
</TABLE>
 
---------------
(1) As adjusted to give effect to the estimated net proceeds from the sale of
    the 3,100,000 shares of common stock to be sold in this offering at an
    assumed initial public offering price of $14.00 per share.
 
                                        5
<PAGE>   10
 
                                  RISK FACTORS
 
     You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
common stock of VaxGen. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
 
  OUR SUCCESS IS ENTIRELY DEPENDENT UPON OUR ONLY PRODUCT CANDIDATE,
AIDSVAX. AIDSVAX is our only product candidate. We do not know whether AIDSVAX
will be effective in preventing HIV infection. Our success will depend entirely
on the success of AIDSVAX. In particular, we must be able to:
 
     - establish the safety and efficacy of AIDSVAX in humans;
 
     - obtain regulatory approvals for AIDSVAX; and
 
     - successfully commercialize AIDSVAX through collaborative relationships.
 
     If AIDSVAX does not obtain regulatory approval, we do not have other
products from which to derive revenue.
 
  WE CANNOT BE CERTAIN WHEN OUR PHASE III CLINICAL TRIALS WILL BE COMPLETED, OR
WHETHER THEY WILL BE SUCCESSFUL. We must provide the FDA and foreign regulatory
authorities with clinical data that demonstrate the safety and efficacy of
AIDSVAX before it can be approved for commercial sale. Clinical testing is a
long, expensive and uncertain process. We cannot assure you that our clinical
trials will be completed on schedule, that the clinical data will be adequate
for regulatory submission or that regulatory authorities will approve AIDSVAX.
Our trials could be delayed for a variety of reasons, including:
 
     - delays in enrolling volunteers;
 
     - lower than anticipated retention rate of volunteers in the trial; or
 
     - serious adverse events related to the vaccine.
 
     Results of previous animal trials may not be relevant for determining the
protective effect of AIDSVAX against HIV infection in humans. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. Serious adverse events related to the vaccine
during the trial could cause the trial to be prematurely terminated. Negative or
inconclusive results could cause the trial to be unacceptable for submission to
regulatory authorities.
 
  WE ARE SUBJECT TO EXTENSIVE REGULATIONS BY DOMESTIC AND FOREIGN REGULATIONS.
AIDSVAX is subject to extensive government regulations related to: development,
clinical trials, manufacturing and commercialization. The process of obtaining
FDA and other regulatory approvals is costly, time consuming, uncertain and
subject to unanticipated delays. With regard to the clinical trials, we cannot
assure you that clinical data will be acceptable to regulatory authorities, if
at all. We cannot assure you that regulatory authorities will approve AIDSVAX at
our protocol established minimum efficacy threshold of 30%.
 
     The FDA may refuse to approve an application if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy. Moreover, if regulatory approval of a product
is granted, the approval may be limited to specific indications. For instance,
the FDA may approve the licenses for only high risk populations. Foreign
regulatory authorities may apply similar limitations or may refuse to grant any
approval.
 
     There can be no assurance that the FDA will approve AIDSVAX manufacturing
processes and facilities. Should Genentech elect not to manufacture AIDSVAX, we
must secure a third party manufacturer. We cannot assure you that we will
successfully identify a third party manufacturer or that such third party
manufacturing process and facilities will be granted FDA approval. At a minimum,
the FDA will require equivalence testing between Genentech produced AIDSVAX and
third party produced AIDSVAX. Depending upon differences in manufacturing
processes, the FDA may also require additional
 
                                        6
<PAGE>   11
 
clinical studies for safety and efficacy. Any failure to obtain or delay in
obtaining such approvals would have a material adverse effect on our business,
financial condition and results of operation.
 
     Even after regulatory approval for AIDSVAX is obtained, the AIDSVAX
manufacturing facilities are subject to continual review and periodic
inspection. Domestic manufacturing facilities are subject to preapproval and
biennial inspections by the FDA and must comply with the FDA's Good
Manufacturing Priorities regulations. In complying with these regulations,
manufacturers must spend funds, time and effort in the area of production and
quality control to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing.
 
  WE DO NOT EXPECT AIDSVAX TO BE COMMERCIALLY AVAILABLE FOR AT LEAST FOUR
YEARS. AIDSVAX has not received regulatory approval for commercial sale. The
Phase III clinical testing necessary before we can file an application with the
FDA for product approval will take at least 36 months from the date of this
prospectus. The FDA review process could take at least six months. We anticipate
that it will take at least six months after obtaining regulatory approval for
Genentech or another third party to begin commercialization of AIDSVAX. As a
result, we do not believe that AIDSVAX will be on the market before 2003.
 
  WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES. To date we have engaged primarily in research, development and clinical
testing. At March 31, 1999, we had an accumulated deficit of approximately $18.1
million. We sustained net losses of approximately $2.1 million in 1996, $3.1
million in 1997 and $9.2 million in 1998, and $3.8 million for the three months
ended March 31, 1999. We expect to incur substantial losses for at least an
additional four to five years.
 
  WE MAY NEED ADDITIONAL FUNDS. We cannot be certain that our existing capital
resources, together with the net offering proceeds and anticipated funding from
the Centers for Disease Control and Prevention and the National Institutes of
Health, will be sufficient to support our current and planned operations for at
least the next four years. We may need to raise additional funds if:
 
     - AIDSVAX is not sufficiently effective to commercialize in its current
       formulation;
 
     - our Phase III clinical trials are delayed, are not successful or are more
       costly than currently estimated;
 
     - commercialization of AIDSVAX is delayed for any other reason;
 
     - additional trials are required; or
 
     - we do not receive the anticipated funding from the Centers for Disease
       Control or the National Institutes of Health.
 
We cannot assure you that we will be able to raise sufficient funds in the
future.
 
  WE RELY ON GENENTECH FOR THE MANUFACTURE OF AIDSVAX. OUR INABILITY TO
MANUFACTURE AIDSVAX, AND OUR DEPENDENCE ON GENENTECH, MAY ADVERSELY IMPACT OUR
BUSINESS. We have no manufacturing facilities. We are entirely dependent on
third parties to produce AIDSVAX. To date, we have relied on Genentech for this
purpose. Genentech currently has an exclusive option to manufacture AIDSVAX. We
believe that Genentech is the manufacturer best able to produce AIDSVAX. Our
license agreement with Genentech does not specify the price we will be required
to pay Genentech for AIDSVAX.
 
     If Genentech does not manufacture AIDSVAX, we will need to locate and
engage another manufacturer. The cost and time to establish manufacturing
facilities to produce AIDSVAX would be substantial. As a result, using a
manufacturer other than Genentech could delay bringing AIDSVAX to market. This
delay could require us to raise additional funds.
 
     We cannot assure you that we will be able to enter into an agreement with a
third party to manufacture AIDSVAX. We also have no way to determine the price
we would be charged by a third party to manufacture AIDSVAX if Genentech does
not manufacture AIDSVAX. Any manufacturer other
 
                                        7
<PAGE>   12
 
than Genentech would have to prove both to us and to the FDA and to other
regulatory authorities that its manufacturing process complies with government
regulations.
 
  WE RELY ON GENENTECH FOR THE SALE, MARKETING AND COMMERCIALIZATION OF AIDSVAX.
OUR LACK OF SALES AND MARKETING PERSONNEL, AND OF DISTRIBUTION RELATIONSHIPS,
MAY ADVERSELY IMPACT OUR BUSINESS. We have no sales, marketing or
commercialization capability. Genentech currently has an exclusive option to
market and distribute AIDSVAX. We intend to rely on Genentech to provide an
established distribution system and sales force to market AIDSVAX. If Genentech
does not elect to exercise its option to market and distribute the product, we
will need to locate and engage another partner to market and commercialize
AIDSVAX. We cannot assure you that we will be able to establish marketing or
commercialization arrangements with third parties on favorable terms.
 
  POLITICAL OR SOCIAL FACTORS MAY DELAY OR ADVERSELY AFFECT OUR ABILITY TO BRING
AIDSVAX TO MARKET. Products developed for use in addressing the HIV/AIDS
epidemic have been, and will continue to be, subject to competing and changing
political and social pressures. The political and social response to the
HIV/AIDS epidemic has been politically charged and unpredictable. These
pressures can transcend national barriers. They may delay or cause resistance to
bringing our product to market or limit pricing of our product.
 
  IF WE LOSE OUR LICENSE AGREEMENT WITH GENENTECH, OUR BUSINESS WILL BE
ADVERSELY AFFECTED. We cannot conduct our business without the technology we
license from Genentech. Our license agreement with Genentech permits Genentech
to terminate the agreement, or terminate the exclusivity of our license, if we:
 
     - fail to use due diligence in developing, seeking regulatory approval for,
       marketing or commercializing products covered by the Genentech license
       agreement;
 
     - fail to file the first market approval application for AIDSVAX with the
       FDA prior to May 2002, subject to potential extension for up to two years
       in certain circumstances, any other extension being Genentech's sole
       decision;
 
     - breach the license agreement and fail to cure the breach within the time
       period provided in the agreement;
 
and we are not able to cure these breaches within the period provided in the
Genentech license agreement. Genentech may also terminate the agreement at any
time if we fail to maintain a tangible net worth of at least $1 million.
 
  VACCINES ARE DIFFICULT TO DEVELOP. Vaccine development is inherently
difficult. It is often characterized by incremental, methodical advances before
a highly effective vaccine is available. The HIV epidemic has occurred in a
period of two decades. Consequently, the overall scientific knowledge of HIV is
limited. While our research has indicated that gp120 is a critical protein in
developing a preventive vaccine, other proteins may be necessary to develop a
more potent vaccine. Also, we have selected alum as adjuvant for our vaccine.
Other formulations of the vaccine may prove to be superior.
 
  FAILURE TO RETAIN KEY MANAGEMENT EMPLOYEES COULD ADVERSELY AFFECT OUR
BUSINESS. We are highly dependent on our senior management and scientific staff,
particularly Dr. Donald Francis, our President, Dr. Robert Nowinski, our
Chairman and Chief Executive Officer, and Dr. Phillip Berman, our Senior Vice
President, Research & Development. These individuals have played a critical role
in developing the vaccine, raising financing and conducting clinical trials. The
loss of the services of any of these key members of senior management may
prevent us from achieving our business objectives.
 
                                        8
<PAGE>   13
 
  WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR OPERATE OUR
BUSINESS WITHOUT INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHERS. We rely on
patent and other intellectual property protection to prevent our competitors
from manufacturing and marketing AIDSVAX. Our technology, including technology
licensed from Genentech, will be protected from unauthorized use by others only
to the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends on our ability,
and Genentech's ability, to:
 
     - obtain patents;
 
     - protect trade secrets;
 
     - operate without infringing upon the proprietary rights of others; and
 
     - prevent others from infringing on our proprietary rights.
 
     We cannot be certain that our patents or patents that we license from
Genentech will be enforceable and afford protection against competitors. We
cannot assure you that our operations or technology will not infringe
intellectual property rights of others.
 
  A FORMER BOARD MEMBER HAS MADE ALLEGATIONS AND CLAIMS AGAINST US. Mr. Daniel
Reiner was a member of our board of directors from March 1998 to April 1999.
After being notified that he would not be renominated to the board of directors
in 1999, he notified our board of directors that he believed that:
 
     - we had entered into an employment agreement with him;
 
     - we were in breach of the alleged employment agreement;
 
     - we breached an agreement to keep him on the board of directors;
 
     - management of VaxGen had wasted corporate assets; and
 
     - members of management made misrepresentations of fact in connection with
       our private placement in 1997.
 
     In response to Mr. Reiner's allegations, we formed a special committee of
the board of directors, consisting entirely of non-employee directors, to
investigate his claims. As part of its investigation, the special committee
interviewed several officers and board members, including Mr. Reiner. The
special committee presented its findings to the board of directors on March 11,
1999. The special committee concluded that it was not necessary for the board of
directors to take any action in response to any of the claims made.
 
     We believe Mr. Reiner's claims are without merit. However, there can be no
assurance that Mr. Reiner will not continue to pursue these claims. Nor can
there be any assurance that if he did pursue these claims further that they
would be resolved in our favor. If Mr. Reiner pursues these claims further, we
intend to vigorously defend the claims.
 
  WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS. We face an inherent risk of
exposure to product liability suits in connection with AIDSVAX vaccines being
tested in human clinical trials and products that may be sold commercially. We
may be subject to a product liability suit if AIDSVAX causes injury, or if
vaccinated individuals subsequently become infected with HIV. Product liability
claims may result in decreased demand for a vaccine, even if the claims have no
merit. A liability claim, regardless of merit or eventual outcome, could
materially adversely affect our business, results of operation and financial
condition.
 
     THIS OFFERING'S NET PROCEEDS MAY BE ALLOCATED IN WAYS WITH WHICH YOU AND
OTHER STOCKHOLDERS MAY NOT AGREE. Management will have significant flexibility
in applying the net proceeds of this offering. See "Use of Proceeds" for a
discussion of our intended uses of the net proceeds of this offering.
 
     PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION. Investors in this offering will contribute $43,400,000 of
the total amount paid by all investors in our company but will own only
3,100,000 of the shares outstanding.
                                        9
<PAGE>   14
 
     PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR OUR COMMON
STOCK. AFTER THIS OFFERING, ITS MARKET PRICE MAY FLUCTUATE WIDELY. The factors
that could cause the market price of our common stock to fluctuate include:
 
     - future announcement concerning us or our competitors;
 
     - quarterly fluctuations in operating results;
 
     - changes in earnings estimates or recommendations by analysts; or
 
     - unsubstantiated reports concerning us or the status of our trials.
 
     FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD LOWER OUR STOCK
PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. The market
price of our common stock could drop due to sales of a large number of shares of
our common stock or the perception that these sales could occur. These factors
could also make it more difficult to raise funds through future offerings of
common stock.
 
     After this offering, we will have 10,785,161 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 11,250,161 shares outstanding. The 3,100,000 shares of common stock
(3,565,000 shares if the underwriters exercise their over-allotment option in
full) sold in this offering will be freely tradeable without restrictions under
the securities act, except for any shares purchased by one of our affiliates,
which will be limited by Rule 144 under the Securities Act. Our officers and
directors and stockholders have entered into lock-up agreements pursuant to
which they have agreed not to offer or sell any shares of common stock for a
period of 180 days after this offering. Also, Prudential Securities may, at any
time and without notice, waive the terms of these lock-up agreements. Upon
expiration of this lock-up period shares may be sold in the future without
registration. See Underwriting for a more detailed discussion. The remaining
7,685,161 shares are "restricted securities" within the meaning of Rule 143.
Holders of these shares generally will be entitled to sell them in the public
market without registration. See Shares Eligible for Future Sale for a more
detailed discussion.
 
                           FORWARD-LOOKING STATEMENTS
 
     This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about VaxGen, including, among other things:
 
     - general economic and business conditions;
 
     - our expectations and estimates concerning future financial performance,
       financing plans and the impact of competition;
 
     - anticipated trends in our business;
 
     - existing and future regulations affecting our business; and
 
     - other risk factors set forth under "Risk Factors" in this prospectus.
 
     In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to VaxGen, our business or our management, are
intended to identify forward-looking statements.
 
     We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.
 
                                       10
<PAGE>   15
 
                                USE OF PROCEEDS
 
     The net proceeds to VaxGen from the sale of the common stock in this
offering, assuming a public offering price of $14.00 per share, are estimated to
be $39.1 million ($45.1 million if the underwriters exercise their
over-allotment option in full), after deducting underwriting discounts and
commissions and offering expenses. We intend to use these net proceeds as
follows:
 
     - to complete Phase III clinical trials of AIDSVAX, including the costs to
       engage medical clinics to perform the clinical trials;
 
     - development and operation of laboratory and data management systems;
 
     - costs of obtaining regulatory approvals; and
 
     - administrative costs and general corporate purposes.
 
     We have not determined the amount of net proceeds to be used for each of
the specific purposes indicated. Accordingly, we will have broad discretion to
use the proceeds as we see fit. Pending such uses, we may invest the net
proceeds temporarily in short-term, investment grade, interest-bearing
securities or guaranteed obligations of the United States government.
 
                                DIVIDEND POLICY
 
     We have not declared or paid dividends. We do not anticipate declaring or
paying dividends in the foreseeable future.
 
                                       11
<PAGE>   16
 
                                    DILUTION
 
     Purchasers of common stock will experience immediate and substantial
dilution in the net tangible book value of the common stock from the initial
public offering price. Net tangible book value per share is equal to the amount
of total net tangible assets less total liabilities divided by the number of
outstanding shares. After giving effect to the application of the sale of
3,100,000 shares of common stock at an assumed initial public offering price of
$14.00 per share and after the deduction of underwriting discounts and
commissions and estimated offering expenses, VaxGen would have had a net
tangible book value per share at March 31, 1999 of $60.0 million, or $5.56 per
share. This is an immediate increase in net tangible book value of $2.84 per
share to existing stockholders and an immediate and substantial dilution of
$8.44 per share to new investors purchasing common stock in this offering. The
following table illustrates the per share dilution.
 
<TABLE>
<S>                                                           <C>      <C>
Assumed initial public offering price..............................    $14.00
  Net tangible book value at March 31, 1999.................  $2.72
  Increase attributable to new investors....................   2.84
                                                              -----
Net tangible book value after the offering.........................      5.56
                                                                       ------
Dilution in net tangible book value to new investors...............    $ 8.44
                                                                       ======
</TABLE>
 
     The following table summarizes, at March 31, 1999, the differences between
existing stockholders and new investors in this offering with respect to the
number of shares of common stock purchased from VaxGen, the total consideration
paid to VaxGen, and the average consideration paid per share before the
deduction of underwriting discounts and commissions and estimated offering
expenses paid by VaxGen.
 
<TABLE>
<CAPTION>
                                      SHARES PURCHASED(1)      TOTAL CONSIDERATION
                                     ---------------------    ----------------------    AVERAGE PRICE
                                       NUMBER      PERCENT      AMOUNT       PERCENT      PER SHARE
                                     ----------    -------    -----------    -------    -------------
<S>                                  <C>           <C>        <C>            <C>        <C>
Existing stockholders..............   7,685,161      71.3%    $42,239,000      49.3%       $ 5.50
New investors......................   3,100,000      28.7%    $43,400,000      50.7%       $14.00
                                     ----------     -----     -----------     -----
          Total....................  10,785,161     100.0%    $85,639,000     100.0%       $ 7.94
                                     ==========     =====     ===========     =====
</TABLE>
 
---------------
(1) If the underwriters' over-allotment option is exercised in full, the number
    of shares purchased by investors in the offering will be increased to
    3,565,000.
 
                                       12
<PAGE>   17
 
                                 CAPITALIZATION
 
     The following table sets forth at March 31, 1999, the capitalization of
VaxGen on an actual basis and as adjusted to reflect the application of
estimated net proceeds of $39,100,000 from the sale of 3,100,000 shares of
common stock offered by us at an assumed initial public offering price of $14.00
per share. This table should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
 
<TABLE>
<CAPTION>
                                                                AT MARCH 31, 1999
                                                              ----------------------
                                                               ACTUAL    AS ADJUSTED
                                                              --------   -----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>        <C>
Cash, cash equivalents and investment securities............  $ 20,607    $ 59,707
Long-term obligations.......................................        66          66
Stockholders' equity:
  Preferred stock, $0.01 par value, 20,000,000 shares
     authorized, none outstanding...........................        --          --
  Common stock, $0.01 par value; 20,000,000 shares
     authorized, 7,685,161 shares issued and outstanding,
     actual; 10,785,161 shares issued and outstanding, as
     adjusted(1)............................................        77         108
  Additional paid-in capital................................    38,886      77,955
  Accumulated other comprehensive income....................        28          28
  Deficit accumulated during the development stage..........   (18,095)    (18,095)
                                                              --------    --------
Total stockholders' equity..................................    20,896      59,996
                                                              --------    --------
Total capitalization........................................  $ 20,962    $ 60,062
                                                              ========    ========
</TABLE>
 
---------------
(1) Reflects a one-for-two reverse stock split effective on April 9, 1999, and
    does not include: (a) 891,671 shares of common stock issuable on exercise of
    stock options outstanding at April 15, 1999 at a weighted average exercise
    price of $8.33 per share; (b) 861,150 shares of common stock reserved for
    future issuance under our 1996 stock option plan; (c) 28,929 shares of
    common stock reserved for future issuances under our 1998 Director Stock
    Option Plan; (d) 309,825 shares of common stock issuable on exercise of
    warrants at April 15, 1999 at a weighted average exercise price of $7.73 per
    share; and (e) exercise of the underwriters' over-allotment option.
 
                                       13
<PAGE>   18
 
                            SELECTED FINANCIAL DATA
 
     This selected financial information should be read with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the balance sheet data at December 31, 1996, 1997 and 1998 are derived
from our audited financial statements. The statement of operations data and
balance sheet data for and at the periods ended December 31, 1995 and March 31,
1999 and for the period ended March 31, 1998 are derived from our unaudited
financial statements.
 
<TABLE>
<CAPTION>
                                       PERIOD FROM
                                       NOVEMBER 27,
                                           1995
                                       (INCEPTION)                                     THREE MONTHS
                                         THROUGH        YEAR ENDED DECEMBER 31,       ENDED MARCH 31,
                                       DECEMBER 31,   ----------------------------   -----------------
                                           1995        1996      1997       1998      1998      1999
                                       ------------   -------   -------   --------   -------   -------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>            <C>       <C>       <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Operating expenses
     Research and development........      $ (3)      $(1,683)  $(3,146)  $ (6,831)  $  (716)  $(3,038)
     General and administrative......       (27)         (371)     (800)    (3,345)     (447)   (1,006)
                                           ----       -------   -------   --------   -------   -------
  Loss from operations...............       (30)       (2,054)   (3,946)   (10,176)   (1,163)   (4,044)
  Total other income (expense),
     net.............................        --           (28)      886      1,013       306       284
                                           ----       -------   -------   --------   -------   -------
  Net loss...........................      $(30)      $(2,082)  $(3,060)  $ (9,163)  $  (857)  $(3,760)
                                           ====       =======   =======   ========   =======   =======
  Net loss per share -- basic and
     diluted.........................      $ --       $ (1.90)  $ (0.60)  $  (1.48)  $ (0.14)  $ (0.49)
                                           ====       =======   =======   ========   =======   =======
  Weighted average shares
     outstanding -- basic and
     diluted.........................        --         1,093     5,096      6,185     6,066     7,619
</TABLE>
 
<TABLE>
<CAPTION>
                                                              AT DECEMBER 31,                AT
                                                     ----------------------------------   MARCH 31,
                                                     1995    1996      1997      1998       1999
                                                     ----   -------   -------   -------   ---------
                                                                     (IN THOUSANDS)
<S>                                                  <C>    <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
     Cash, cash equivalents and investment
       securities..................................  $ --   $    38   $23,880   $19,468    $20,607
     Working capital (deficiency)..................   (15)   (1,458)   19,843    17,866     19,318
     Total assets..................................    11       229    24,301    21,472     22,693
     Long-term obligations.........................    15       795        --        --         66
     Total stockholders' equity (deficit)..........   (30)   (2,069)   19,882    19,398     20,896
</TABLE>
 
                                       14
<PAGE>   19
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion and analysis should be read in conjunction with
the "Selected Financial Data," financial statements and related notes included
elsewhere in this prospectus.
 
OVERVIEW
 
     Initial development of AIDSVAX was funded by Genentech at a cost of over
$50 million over a period of nearly ten years. In November 1995, we were formed
to continue development of AIDSVAX in partnership with Genentech. In connection
with our formation, Genentech licensed to us the technology necessary for
completing development and commercialization of AIDSVAX.
 
     Since our formation, we have focused on developing and testing AIDSVAX. We
recently commenced two Phase III clinical trials, one principally in North
America and one in Thailand to determine efficacy of AIDSVAX. The North American
Phase III clinical trial is being conducted in 59 clinical centers and is
designed for 5,400 trial volunteers. The Thai Phase III clinical trial is being
conducted in 17 clinical centers in Bangkok and is designed for 2,500 trial
volunteers.
 
     In 1996, we entered into two agreements with Genentech: a services
agreement and a license agreement. The services agreement defines the parties'
day-to-day working relationship. Pursuant to this agreement, Genentech provides
limited research and development, regulatory filings, and other administrative
assistance. The services agreement was extended in January 1999 for two years.
 
     Under the license agreement, among other things, Genentech has committed to
make limited amounts of AIDSVAX, and may elect to manufacture more AIDSVAX.
Genentech has an option to manufacture AIDSVAX on specified financial terms. If
Genentech does not exercise its option to manufacture, then we have the right to
pursue third party arrangements. Genentech also has a marketing option,
exercisable for 90 days after we submit our first filing with the FDA to obtain
an exclusive worldwide license to use, market and sell AIDSVAX. If Genentech
exercises the option, we will share net profits from the sale and license of
AIDSVAX. If Genentech does not exercise the marketing option, then we will pay
Genentech a royalty on all sales of AIDSVAX.
 
     To date, we have generated no operating revenues. We anticipate only modest
revenues from government or other grants or from collaborations with other
entities over the next three to five years. We have incurred losses since
inception as a result of research and development and general and administrative
expenses in support of our operations. As of March 31, 1999, we had a deficit
accumulated during the development stage of $18,095,000. We anticipate incurring
substantial losses over at least the next four to five years as we complete our
clinical trials, apply for regulatory approvals, continue development of our
technology and expand our operations.
 
     We believe that the net proceeds from this offering will be sufficient to
complete our Phase III clinical trials, apply for regulatory approval in the
United States and Thailand, and bring AIDSVAX to market. However, we may require
additional funds. We do not currently have other sources of financing. Our
future capital requirements depend on several factors, including:
 
     - the progress of our Phase III clinical trials;
 
     - the progress of other internal research and development projects;
 
     - the need for leasehold improvements to facilities and the purchase of
       additional capital equipment;
 
     - the availability of government research grants; and
 
     - the timing of revenue from AIDSVAX is delayed.
 
                                       15
<PAGE>   20
 
RESULTS OF OPERATIONS
 
  THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
 
  Research and development expense
 
     Research and development expense increased 324% from $716,000 for the three
months ended March 31, 1998 to $3,038,000 for the three months ended March 31,
1999. This increase was primarily due to the ramping up of our North American
and Thai Phase III clinical trials, including fees paid to third parties
associated with conducting the trials and an increase in our internal staff for
the purposes of working on the trials.
 
  General and administrative expense
 
     General and administrative expense increased 125% from $447,000 for the
three months ended March 31, 1998 to $1,006,000 for the three months ended March
31, 1999. This increase was primarily due to additional personnel, professional
service fees and costs associated with maintaining our larger office facilities.
 
  Total other income (expense), net
 
     Other income (expense), net, consisting primarily of interest income,
decreased slightly from $306,000 for the three months ended March 31, 1998 to
$284,000 for the three months ended March 31, 1999. This was primarily
attributable to lower average balances of cash, cash equivalents and investment
securities.
 
  YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
 
     Our activities in 1998 were focused on preparing for and commencing our
Phase III clinical trials of AIDSVAX, developing data management systems,
continuing research and development of AIDSVAX, and private financing
activities.
 
  Research and development expense
 
     Research and development expense increased 117% from $3,146,000 in 1997 to
$6,831,000 in 1998. This increase was primarily due to additional personnel,
retaining consultants and contracting with clinics to facilitate the North
American Phase III clinical trial that began in June 1998. The increase was
partially offset by decreased vaccine production costs, as no vaccine production
was required in 1998.
 
  General and administrative expense
 
     General and administrative expense increased 318% from $800,000 in 1997 to
$3,345,000 in 1998. This increase was primarily due to an additional $900,000 in
costs associated with efforts to increase public awareness of the North American
Phase III clinical trial, an additional $800,000 in compensation expense
associated with additional personnel and, an additional $345,000 in higher rent
and related insurance costs associated with our move to larger facilities in
September 1998.
 
  Total other income (expense), net
 
     Other income (expense), net, consisting primarily of interest income
increased 14% from $886,000 in 1997 to $1,013,000 in 1998. This increase was due
to higher average balances of cash, cash equivalents, and investment securities
throughout the year resulting from our private placement completed in May 1997.
 
  YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
     Our activities in 1997 were focused on working with Genentech to develop
and produce bivalent vaccine for use in our AIDSVAX clinical trials and our
private financing activities.
 
                                       16
<PAGE>   21
 
  Research and development expense
 
     Research and development expense increased 87% from $1,683,000 in 1996 to
$3,146,000 in 1997. This increase was primarily due to an additional $913,000 in
payments to Genentech for development and production of bivalent vaccine, an
additional $319,000 in compensation expense as we added clinical and data
management personnel in preparation of human clinical trials, and an additional
$155,000 in costs associated with Phase I and Phase II clinical trials for our
bivalent AIDSVAX vaccine.
 
  General and administrative expense
 
     General and administrative expense increased 116% from $371,000 in 1996 to
$800,000 in 1997. This increase was primarily due to higher compensation expense
associated with additional personnel necessary to support operations.
 
  Total other income (expense), net
 
     Other income (expense), net in 1996 of ($28,000) represents interest
expense on outstanding long term debt. In 1997, we earned other income
(expense), net of $886,000, which represents primarily income earned on
investments of cash, cash equivalents and investment securities.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash, cash equivalents and investment securities were $20,607,000 at March
31, 1999. We have financed our operations since inception through capital
commitments from Genentech and private placements of equity securities. In the
quarter ended March 31, 1999, we received net proceeds of $5,273,000 from
private financing activities. In 1998, we received net proceeds of $8,604,000
from private financing activities. In 1997, we received net proceeds of
$25,001,000 from private financing activities. To date, inflation has not had a
material effect on our business.
 
     Since our inception, investing activities, other than purchases and sales
of investment securities, have consisted entirely of equipment acquisitions. At
March 31, 1999, our investment in equipment and leasehold improvements was
$1,508,000, and we had committed to the expenditure of more than $1,400,000 for
leasehold improvements and equipment to develop laboratory space. Net cash used
in the three months ended March 31, 1999 for operating activities was
$3,999,000. Net cash used in 1998 for operating activities was $11,810,000.
Expenditures in both periods were a result of increased research and development
costs and general and administrative expenses.
 
     We anticipate that the net proceeds from this offering and other sources of
capital will enable us to meet our anticipated expenditures over the next three
years, including, among other things:
 
     - expanding our facilities;
 
     - supporting our clinical trial efforts; and
 
     - continuing internal research and development.
 
     At December 31, 1998, we had net operating loss carryforwards of
approximately $14,000,000 to offset any future federal taxable income. If not
utilized, the tax net operating loss carryforwards will begin to expire in 2010.
We also had research and development tax credit carryforwards at December 31,
1998, of approximately $440,000 for federal income tax purposes.
 
YEAR 2000 COMPLIANCE
 
     Many computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000 these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that are not year 2000 compliant may cease to
function. As a result, in less than one year computer systems and software used
by many companies may need to be upgraded to be year 2000 compliant.
 
                                       17
<PAGE>   22
 
     We have completed the process of determining whether there are any critical
areas of our business that are not year 2000 compliant. We presently estimate
that the total cost of addressing any year 2000 problems will be less than
$5,000. In arriving at this conclusion, we assumed that the year 2000
assessment, remediation and contingency plans of our third party suppliers will
be fulfilled in a timely manner and without significant cost to us.
 
     We have contacted Genentech, our only material third party supplier as part
of our year 2000 assessment to determine whether their year 2000 compliance
might have a material adverse effect on us. Based on our discussions with
Genentech, we do not believe that their year 2000 compliance will have a
material adverse effect on us.
 
                                       18
<PAGE>   23
 
                                    BUSINESS
 
     We were formed in November 1995 to complete the development of, and
commercialize, AIDSVAX, a preventive HIV vaccine. The original AIDSVAX
technology was developed by Genentech and then licensed exclusively to us. We
are currently testing AIDSVAX in humans in two large-scale Phase III clinical
trials. These are the first Phase III clinical trials ever conducted for an HIV
vaccine. If the Phase III clinical trials are considered successful, we plan to
apply to the FDA and foreign regulatory authorities for licenses to manufacture
and sell AIDSVAX in the United States and abroad.
 
     Our vaccine is designed to prevent infection by HIV, rather than treat
established infection. AIDSVAX contains synthetic copies of the proteins from
the surface of HIV. Since the vaccine contains no genetic material, vaccination
with AIDSVAX is incapable of causing HIV infection. Instead, humans vaccinated
with AIDSVAX form antibodies against HIV. Our laboratory tests demonstrate that
these antibodies bind to the virus and neutralize its infectivity. Vaccination
with AIDSVAX stimulates immune memory, training the immune system to mobilize
rapidly upon exposure to HIV.
 
     We are conducting two Phase III clinical trials of AIDSVAX to determine if
AIDSVAX will prevent infection by HIV. Our North American Phase III clinical
trial of AIDSVAX is being conducted in 56 clinics across the United States, as
well as in one clinic in Puerto Rico, one clinic in Canada and one clinic in The
Netherlands. This trial is designed for 5,400 volunteers. In Thailand, we are
conducting a second Phase III clinical trial designed for 2,500 volunteers in 17
clinical sites in Bangkok. Based on meetings and documented discussions with the
FDA and its Vaccines and Related Biological Products Advisory Committee, we
believe that the minimum threshold for regulatory approval is a 30% reduction,
at statistical significance, of HIV infection in volunteers vaccinated with
AIDSVAX.
 
     Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX. We intend to use Genentech as our partner for
manufacturing and distribution. Genentech has exclusive options to manufacture
and market AIDSVAX products. If Genentech does not exercise its options, we have
the right to pursue third party arrangements, with Genentech providing the
transfer of technology necessary for manufacturing the vaccine.
 
VACCINES
 
     Vaccines are preventive, not curative. As a result, vaccines are
particularly suited to address epidemics, even those the magnitude of HIV/AIDS.
 
     Vaccines prevent infection by activating the immune system to neutralize
infectious viruses. The immune system's initial response to a virus is to
produce antibodies. The antibodies bind to the virus and prevent it from
entering cells. If a virus cannot enter a cell, it is unable to multiply and
dies within a few hours in the host. This protection against infection is called
neutralization.
 
     Most virus infections cause lifelong immunity after natural infection. This
is because the immune system remembers that it has seen the virus before. Upon a
subsequent encounter, it mounts such a rapid immune response that it kills the
virus before it can establish a productive infection.
 
     Vaccines also induce long term memory against viruses. The immune system is
trained by vaccination with viral proteins or live viruses to rapidly respond to
and prevent subsequent viral infection.
 
HIV AND AIDS
 
     HIV is the virus that causes AIDS, a lethal disease characterized by the
gradual deterioration of the human immune system. Although the disease is
manifested in many ways, the problem common to all patients is the destruction
of essential immune cells known as T lymphocytes, or T cells. Destruction of
these T cells by HIV makes the body particularly vulnerable to opportunistic
infections and cancers that typify AIDS and ultimately cause death. Blocking HIV
infection would prevent AIDS.
 
                                       19
<PAGE>   24
 
     HIV is transmitted by three predominant means. One is sexual contact. The
second is exposure to blood from an infected person, such as sharing needles in
drug use. The third is transmission from infected mothers to their newborns.
 
     The HIV/AIDS epidemic is one of the largest epidemics in human history. Its
spread across the world has been documented by UNAIDS and the World Health
Organization. All statistics presented below are from their 1998 reports.
 
     - in 1998, 1.1% of the world's adult population was living with HIV/AIDS;
 
     - approximately 16,000 new infections occur each day worldwide;
 
     - in Sub Saharan Africa, 8.0% of the adult population is infected with HIV;
       and
 
     - in several African countries, HIV has infected between 20% and 26% of the
       adult population.
 
     In Thailand, initial infections with HIV were not reported until the
mid-1980s. It is now estimated that almost 800,000 people (2.3% of the country's
adult population) have already been infected. HIV infection has now penetrated
China, India and Indonesia, some of the most populated areas of the world. AIDS
is currently one of the top five fatal diseases worldwide.
 
     An estimated 860,000 people in North America are currently infected with
HIV. In North America, 44,000 new infections occur each year. According to an
earlier independent report, AIDS is one of the leading causes of death in adults
ages 25 to 44 in the United States.
 
     Table 1 presents the UNAIDS/WHO estimates on total population, adults, and
estimated number of HIV infections throughout the world. These statistics lead
us to believe that a market for an HIV vaccine could reach three billion people.
Should this market include pediatric use, the number could exceed four billion.
 
                  TABLE 1. REPORT ON GLOBAL HIV/AIDS EPIDEMIC
 
<TABLE>
<CAPTION>
                                                                        POPULATION
                                                         ----------------------------------------
                                                                        ADULTS      ESTIMATED HIV
                                                         1997 TOTAL      15-49        INFECTION
                                                         ----------    ---------    -------------
                                                                       (THOUSANDS)
<S>                                                      <C>           <C>          <C>
GEOGRAPHICAL AREA
North America..........................................    302,000       156,000          860
Latin America..........................................    455,000       241,000        1,300
Western Europe.........................................    400,000       201,000          480
Eastern Europe & Central Asia..........................    373,000       193,000          190
East Asia & Pacific....................................  1,452,000       815,000          420
South & Southeast Asia.................................  1,860,000       955,000        5,800
North Africa & Middle East.............................    322,000       164,000          210
Sub Saharan Africa.....................................    593,000       268,000       21,000
                                                         ---------     ---------       ------
WORLD TOTAL............................................  5,757,000     2,993,000       30,260
</TABLE>
 
---------------
Source: "The Report on Global HIV Epidemic," UNAIDS, the Joint United Nations
        Programme on HIV/AIDS and the World Health Organization, June 1998.
 
     Progress has recently been made in treating HIV infection. Current
therapies, combining the use of reverse transcriptase inhibitors with protease
inhibitors, slow multiplication of the virus and delay onset of AIDS. They do
not cure HIV infection or AIDS. Costs of these drugs generally exceed $15,000
per year per patient. Considering costs, difficulties in compliance with complex
drug regimens and the development of resistance to these drugs, we believe such
therapies will be available only to a small fraction of the
 
                                       20
<PAGE>   25
 
HIV-infected population. Thus, we believe they will probably have a minimal
impact on the worldwide epidemic.
 
THE HIV INFECTION PROCESS
 
     A virus cannot replicate without entering a host cell. To make new
infectious virus particles, a virus must enter a cell and overtake its metabolic
machinery. If a virus cannot gain entry into a cell, it is incapable of
surviving for more than a few hours in the body.
 
     Viruses are varied in their structure and use different ways to enter
cells. HIV is a spherical virus that maintains its genetic information inside
its protein core. This core is surrounded by an outer coat called the envelope
(Figure 1). The envelope has protein projections, called glycoproteins, that
extend out from its surface. Glycoproteins enable HIV to bind to, and
subsequently enter, human cells. The principal glycoprotein on the envelope of
HIV is called gp120. To present the proper orientation for infection, the gp120
proteins are organized on the virus surface in clusters of three.
 
                  FIGURE 1. DIAGRAMMATIC REPRESENTATION OF HIV
 
               [GRAPHIC DEPICTING HIV VIRUS WITH GP120 PROTEINS]
 
                                       21
<PAGE>   26
 
     HIV uses gp120 to bind to the surface of cells through a specific sequence
of interactions between the virus and its target cell (Figure 2). This involves
a two-step "lock and key" mechanism. The first step in this process involves the
attachment of gp120 onto a part of the target cell's surface called the CD4
receptor (Panel 2, below). A second step occurs soon thereafter, as the gp120
protein changes shape and then interacts with another target cell molecule
called the chemokine receptor (Panel 3). When this two-step process has been
completed, the virus gains entry by fusing through the target cell membrane
(Panel 4).
 
                      FIGURE 2. INFECTION OF CELLS BY HIV
       [FOUR GRAPHICS DEPICTING THE STAGES OF INFECTION OF CELLS BY HIV]
 
     Once inside the cell, the viral envelope opens and the core of the virus is
released. The release of the viral core into the cell initiates a replication
cycle that produces thousands of new virus particles per infected cell. As it
multiplies, HIV kills infected T cells and releases new infectious virus into
fluid or blood surrounding the cell. This cycle of: (1) T cell infection; (2)
viral multiplication; (3) T cell death; and (4) re-infection of new T cells
leads to the destruction of an essential line of immunologic defense.
Substantial reduction of T cells ultimately causes increased susceptibility to
the opportunistic infections and cancers that are characteristic of AIDS.
 
     In addition to T cells, HIV also infects, and may reside in, blood
scavenger cells called macrophages. While infection of macrophages is not a
primary cause of AIDS, it is important in the biology of HIV and in our strategy
to prevent infection by the virus.
 
GENETIC VARIATION IN HIV
 
     AIDS is a single disease throughout the world. At the beginning of the
epidemic, probably all HIV was limited to Africa. HIV, like any other virus,
underwent mutation to create distinct subtypes. People infected with a single
subtype of HIV then exported their infection to other places, such that
different subtypes became predominant in different geographical areas.
Subsequently, HIV underwent further mutation to create individual strains of
each subtype.
 
                                       22
<PAGE>   27
 
     Although the potential genetic variation in HIV might appear limitless,
only a small number of mutations confer advantage to the virus. As a result,
there are a limited number of viral subtypes and strains. We believe these fall
into particular patterns providing a logical basis to formulating a vaccine for
HIV. We also believe that the major subtypes of gp120 have been identified.
Although minor subtypes are identified periodically, no new major subtypes have
been identified in the last 15 years.
 
     SUBTYPES. There are five major subtypes of HIV. These are labeled "A"
through "E," according to their order of discovery. The major difference between
each subtype is a genetic variation in a region of the gp120 protein known as
the chemokine-binding site.
 
     The major subtypes of HIV tend to be distributed along geographical lines.
This is consistent with the general understanding of how HIV has spread
throughout the world. Virtually all HIV in the Americas, Europe, the Caribbean
and Australia is subtype B. The vast majority of HIV in Thailand and in the
Pacific Rim countries is subtype E. Subtype C virus has emerged as the most
rapidly expanding HIV in Africa, China and India. The remaining subtypes A and D
occur primarily in Africa and in limited areas around the world.
 
     STRAINS. Each subtype of HIV is further subdivided into strains. Four
strains arise from two mutations in specific regions of the gp120 protein: a
subregion in the chemokine-binding site and a subregion in the CD4-binding site.
These strains are of key importance in that they have different patterns of
infection and they each react with different antibodies.
 
     - Chemokine-binding site. HIV has mutated at the chemokine-binding site to
       yield two distinct strains. Each strain binds to a chemokine receptor on
       a target cell. The gp120 protein of T-tropic strains binds to a chemokine
       receptor on T cells. The gp120 protein of M-tropic strains binds to a
       chemokine receptor found on macrophages, as well as on T cells.
 
     - CD4-binding site. HIV has also mutated at the CD4-binding site to yield
       two additional strains. Each of these strains binds to a counterpart CD4
       receptor which occurs on human T cells. The gp120 protein of one viral
       strain binds to the CD4(a) receptor on T cells, while the gp120 protein
       of the other strain binds to the alternative form of the CD4 receptor,
       CD4(b), which is also on T cells.
 
     SUBTYPE/STRAIN COMBINATIONS. In summary, there are five major worldwide
subtypes of HIV (A through E). Each subtype has two different strains that bind
to chemokine receptors on different cells (T cells and macrophages). These
strains are further subdivided by two variations in the CD4-binding site on T
cells. Each of these strains requires different antibodies for neutralization.
 
     As shown in Figure 3, a single subtype of HIV (e.g. subtype B) may have as
many as four different strains. We believe other subtypes of HIV have similar
types of variations at their receptor-binding sites.
 
     FIGURE 3. GENETIC VARIATION IN SUBTYPE B HIV THAT INFLUENCE INFECTION
 
                     [Graphic depicting subtype B strains]
 
                                       23
<PAGE>   28
 
     To construct a successful vaccine, we need to consider the entire range of
variation in gp120 and assure that we cover each of the sites on the gp120
protein that are open to attack by antibodies. Fortunately, as indicated above,
most of the variable sites on gp120 have only one or two principal forms. By
careful examination, we have been able to identify pairs of HIV viruses whose
gp120 proteins, when combined together in a vaccine, enhance the overall
antibody response. We believe this antibody response covers virtually the entire
range of HIV genetic variations currently known in North America and in
countries of South Asia and the Pacific Rim.
 
THE DESIGN OF AIDSVAX
 
     AIDSVAX is designed to stimulate antibodies to cell receptor-binding sites
on gp120. Figure 4 shows how we believe antibodies block the HIV infection
process. As depicted in Panels 2 and 3 below, there are several sites on gp120
that bind to individual cell receptors. The attachment of antibodies to these
specific gp120 sites blocks the binding of the virus to these receptors on the
cell surface (Panels 3 and 4). The result is that HIV cannot attach to the cell
surface and its infectivity is neutralized.
 
            FIGURE 4. DEPICTION OF ANTIBODIES BLOCKING HIV INFECTION
   [Four graphics depicting the stages of antibodies blocking HIV infection]
 
     In 1992, Genentech genetically engineered a version of the gp120 protein.
Antibodies to this gp120 protein bound to a neutralizing site found on 65% of
subtype B viruses. This virus was labeled B(MN) and was believed to represent
the majority of HIV in the United States.
 
     Subsequently, synthetic gp120 of HIV B(MN) was incorporated into a
monovalent AIDSVAX formulation. Genentech used this AIDSVAX B formulation to
vaccinate humans in Phase I and Phase II clinical trials. Antibodies obtained
from 100% of those vaccinated with AIDSVAX B neutralized the B(MN) virus in
laboratory tests. Further tests demonstrated that these antibodies bound to the
gp120 protein of all HIV subtype B viruses tested. However, in laboratory tests
and Phase II clinical trials, antibodies to B(MN) neutralized, to a greater
extent, HIV of T-tropic strains as compared to HIV of M-tropic strains.
 
                                       24
<PAGE>   29
 
     To improve the breadth of the immune response, we identified a second
virus, B(GNE8), from the M-tropic strain, and a synthetic version of its gp120
protein was added to the vaccine. The resulting bivalent vaccine, AIDSVAX B/B9,
considerably expanded the vaccine's breadth of neutralization. While the
monovalent vaccine could stimulate the production of four different types of
antibodies that reacted with binding-sites to cell receptors, the bivalent
vaccine could stimulate the production of seven. We believe that these seven
antibodies cover virtually all known strains of HIV in North America.
 
     As a general strategy, we plan to develop AIDSVAX formulations that will
stimulate antibodies against multiple binding sites on gp120. Our goal is to
expand the range of antibodies that are stimulated by a vaccine to neutralize a
broader group of HIV. A practical application of this strategy has been the
conversion of AIDSVAX from a monovalent to a bivalent formulation.
 
STATISTICAL MODEL OF MONOVALENT AND BIVALENT AIDSVAX
 
     We generated a statistical model based on the known distribution of the
four receptor-binding sites on gp120 and their frequency in different HIV
strains in the United States (Figure 5). A comparison was then made between the
neutralizing antibodies which could be stimulated by vaccination with either a
monovalent or bivalent formulation of AIDSVAX.
 
        FIGURE 5. RELATIVE ADVANTAGE OF BIVALENT VS. MONOVALENT VACCINES
[GRAPHIC DEPICTING NEUTRALIZATION OF MONOVALENT VACCINES (B(MN) AND B(GNE8)) AND
                     BIVALENT VACCINE (B(MN) PLUS B(GNE8))]
 
     Each pie chart in Figure 5 represents the statistical equivalent of 100% of
currently known HIV (i.e., the virus population) in the United States. Each
chart also reflects the calculated frequency at which antibodies stimulated by
the monovalent or bivalent vaccines would bind with HIV in this virus
population. According to this statistical model, the percentage of HIV in the
virus population that would fail to bind antibody is depicted by the white area.
The percentage of HIV which would bind one neutralizing antibody is lightly
shaded, while viruses which would bind two, three or four different neutralizing
antibodies are shown in darker shaded areas.
 
                                       25
<PAGE>   30
 
     This analysis indicates that the monovalent B(MN) vaccine would fail to
stimulate antibodies against 14% of HIV in the statistical virus population. The
bivalent vaccine, which combines the gp120 proteins from B(MN) and B(GNE8),
covers more than 99% of the statistical virus population, with at least two
different neutralizing antibodies binding to each virus particle. According to
this model, over 50% of the HIV viruses would react with four neutralizing
antibodies, each antibody stimulated against different cell-binding sites on
gp120 proteins.
 
     While the statistical model indicates that bivalent AIDSVAX would induce a
broader range of antibodies than monovalent AIDSVAX, there can be no assurance
that the stastical model will predict the actual efficacy of AIDSVAX in human
trials.
 
FORMULATIONS OF AIDSVAX
 
     AIDSVAX consists of two biologically active ingredients: (1) the antigens,
which are synthetic gp120 proteins, to which neutralizing antibodies are
directed, and (2) the adjuvant, which is aluminum hydroxide, or alum, in which
the antigens are suspended. Alum activates the immune response by attracting
immune cells into the region where the vaccine is injected. Since the vaccine
contains only a synthetic fragment of the virus and no genetic material, it is
incapable of causing HIV infection.
 
     Three different formulations of the AIDSVAX vaccine have been developed and
clinically tested in Phase I/II trials. These include: monovalent AIDSVAX B for
HIV infections in North America and Europe bivalent AIDSVAX B/B' for HIV
infections in North America and Europe, and bivalent AIDSVAX B/E for HIV
infections in Southeast Asia.
 
INITIAL TESTING OF AIDSVAX IN CHIMPANZEES
 
     The chimpanzee is the only laboratory animal susceptible to HIV infection.
In the initial protection trials conducted by Genentech, chimpanzees were
vaccinated with three doses of monovalent AIDSVAX B. The vaccinated animals,
along with unvaccinated control animals, were then injected intravenously with
high doses of infectious HIV. None of the AIDSVAX vaccinated animals was
infected. All of the unvaccinated control chimpanzees became infected with HIV.
 
     In subsequent trials, chimpanzees were vaccinated with AIDSVAX B(MN) and
then infected with a different strain of HIV known as B(SF2). Despite this
difference, vaccination with AIDSVAX B(MN) conferred immunity and protection
against infection with the B(SF2) strain, while vaccination of control animals
with a placebo had no protective effect. The cross-protection observed in this
experiment documented that AIDSVAX could successfully protect animals from
infectious HIV having a genetic composition distinctly different from the virus
used to make the vaccine. Based on the results of the chimpanzee trials,
Genentech sought and received regulatory approval to commence human clinical
trials to test the safety and efficacy of AIDSVAX in humans.
 
HUMAN CLINICAL TRIALS
 
     Human clinical trials for vaccines involve three steps:
 
        - Phase I -- tests for dosage and safety;
 
        - Phase II -- larger-scale tests for safety, as well as a determination
          of whether the vaccine stimulates antibodies and immune memory; and
 
        - Phase III -- multi-center, placebo-controlled, double-blind tests to
          determine protection conferred by vaccination. These efficacy tests
          are performed in volunteers who have a high risk of HIV infection.
 
PHASE I TRIALS -- DOSAGE AND SAFETY, MONOVALENT AIDSVAX B
 
     Phase I trials with monovalent AIDSVAX B vaccine were conducted by
Genentech. AIDSVAX B was clinically evaluated in 671 HIV-negative volunteers and
662 HIV-positive volunteers. None of the
                                       26
<PAGE>   31
 
vaccines had serious side effects. Some vaccinees occasionally experienced pain
at the injection site, as is common with many vaccines.
 
     AIDSVAX B was tested at three doses: 100 eg, 300 eg and 600 eg of gp120.
The 300 eg dose was consistently found to be most effective, stimulating a
higher antibody response without serious side effects.
 
     The clinical trial results also indicated that monovalent AIDSVAX B, at all
three doses tested, did not alter the progression of ongoing HIV infection. We
intend to apply to the FDA for broad use of the vaccine in high-risk groups
without prescreening for HIV infection.
 
PHASE II TRIALS -- ANTIBODY STIMULATION, MONOVALENT AIDSVAX B
 
     One hundred forty HIV-negative volunteers were vaccinated and boosted three
times with monovalent AIDSVAX B vaccine (given at time 0, 1 month and 6 months
with an additional booster at 12 or 15 months). Antibodies stimulated by
vaccination with AIDSVAX B were measured for their ability to neutralize HIV in
culture tests. All of the vaccinated volunteers produced antibody in their blood
that neutralized infectivity of HIV B(MN). These neutralization tests were
considered of key importance since they measured the actual biological activity
of the vaccine-stimulated antibodies.
 
     Memory of the immune response to HIV in the same volunteers was measured by
examination of neutralizing antibody levels stimulated by sequential booster
shots. All vaccine recipients produced high levels of neutralizing antibody with
boosting. These antibody levels gradually declined with time. Each booster shot,
however, resulted in a rapid antibody response of even higher concentration,
demonstrating a memory recall of the antibody response. This is strong evidence
of immune memory being stimulated by the vaccine. We believe that such memory
will be key for protection, enabling the educated immune system to ward off HIV
infection before it establishes itself.
 
PHASE I/II TRIALS -- BIVALENT AIDSVAX
 
     We believe that, since an antibody to a single receptor-binding site can
cause neutralization, antibodies to multiple receptor-binding sites will result
in yet broader neutralization. On this basis we developed and tested two
formulations of bivalent AIDSVAX.
 
     We conducted two Phase II trials in the United States and Thailand in 214
HIV-negative volunteers. The trials used two bivalent formulations of AIDSVAX.
The volunteers were vaccinated and then given one booster one month later. The
vaccine tested in the United States was AIDSVAX B/B'. The vaccine tested in
Thailand was AIDSVAX B/E. Each of the vaccines was selected for the known
prevalence of these virus subtypes in the particular countries tested. The
trials were also designed to compare the results of bivalent AIDSVAX to those of
monovalent AIDSVAX. Four factors were monitored:
 
     - safety;
 
     - dosage;
 
     - antibody stimulation; and
 
     - production of antibodies that would neutralize strains used in bivalent
       AIDSVAX.
 
     The vaccine did not cause any serious side effects. Vaccinees occasionally
experienced pain at the injection site, as is common with many vaccines. In a
dose response study, the bivalent AIDSVAX demonstrated the same results as those
observed with the monovalent vaccine.
 
     The Phase II studies also demonstrated the stimulation of antibodies to
receptor-binding sites on gp120 proteins that were contained in the respective
vaccines. AIDSVAX B/B' stimulated antibodies to M-tropic and T-tropic HIV found
in the United States. AIDSVAX B/E stimulated antibodies to M-tropic and T-tropic
HIV found in Thailand. In contrast, the monovalent vaccine stimulated a narrower
range of antibodies primarily to T-tropic strains.
 
                                       27
<PAGE>   32
 
     We believe these findings support our hypothesis that a combination of
gp120 proteins in the bivalent vaccine would stimulate antibodies to a broad
range of HIV strains.
 
PHASE III CLINICAL TRIAL FOR AIDSVAX
 
     In May 1998, the FDA informed us that the data from our Phase I/II studies
were acceptable and that we could proceed to Phase III clinical trials
principally in North America. The first volunteers in the Phase III clinical
trial were vaccinated in June 1998.
 
     The Thai FDA is the governmental body involved in final approval to
manufacture and market medical products. As part of the Thai FDA review, the
Thai Ministry of Public Health has several subcommittees involved in making key
decisions. In the area of HIV/AIDS, this includes the Technical Subcommittee on
AIDS Vaccine, the Ethical Review Committee of the Research Committee, Ministry
of Public Health, and Institutional Review Boards from the participating
institutions in the clinical trial.
 
     In May 1998, we outlined our plans for Phase III clinical trials in
Thailand and in February 1999, we received an import license from the Thai FDA
with approval to begin Phase III clinical trials. In March 1999, the first
volunteers in Bangkok were vaccinated, initiating the Phase III clinical trial.
 
     Based on discussions with the FDA and its Vaccine Advisory Boards and
Related Biological Products Advisory Committee, we believe that the minimum
threshold for regulatory approval is 30% reduction, at statistical significance,
of HIV infection in volunteers vaccinated with AIDSVAX.
 
  Trial Design
 
     We are currently conducting two large, placebo-controlled, double-blind,
Phase III clinical trials, one principally in North America and the other in
Thailand. The test group of volunteers receives AIDSVAX while the placebo group
receives a comparable-appearing placebo containing alum alone. All vials of
vaccine and placebo are coded. During the trials, neither volunteers nor
researchers know which volunteers are given the vaccine or placebo until the
Phase III clinical trials are completed or stopped by the independent review
board. Each volunteer is vaccinated a total of seven times (six boosters) during
a 30-month period. The purpose of the six boosters, one each six months, is to
stimulate high antibody levels throughout the entire trial period. During each
visit, the volunteers receive counseling on how to avoid the risk of HIV
infection. Follow-up with volunteers will continue for at least six months after
the last vaccination is administered.
 
     Volunteers in North America consist of HIV-negative homosexual men and
HIV-negative women who have HIV-infected sexual partners or high risk sexual
behavior. Volunteers in Thailand consist of HIV-negative intravenous drug users
with a high risk for blood-borne transmission of HIV. In both North America and
Thailand, the volunteers are recruited, vaccinated and monitored by clinics with
HIV expertise and experience with these particular population groups.
 
     The size of each Phase III clinical trial was established by a statistical
model that included: (1) the probability of measuring a protective endpoint of
30% inhibition of HIV infection; (2) the rate of infection of the volunteer
group; and (3) assumptions concerning the rate of retention of the volunteers in
the trial for a 36 month clinical observation period.
 
     Within these parameters, the clinical trial in North America is designed
for 5,400 volunteers, randomized 2:1 for vaccine:placebo recipients. The trial
in Thailand is designed for 2,500 volunteers, randomized 1:1 for vaccine:placebo
recipients. The trial in North America is occurring in 56 clinical sites across
the United States. It is also being conducted in one clinic in Puerto Rico, one
clinic in Canada and one clinic in The Netherlands. The trial in Thailand is
occurring in 17 methadone clinics under direction of the Bangkok Metropolitan
Administration.
 
     Each Phase III clinical trial is conducted in two overlapping steps: (1)
recruitment of volunteers during an estimated 12 to 14 month period; and (2) a
36 month clinical observation period. For each individual, the 36 month
observation period begins on the day of their first vaccination. As a result,
the
 
                                       28
<PAGE>   33
 
entire clinical trial will be completed upon recruitment of the volunteers and
completion of their collective 36 month observation periods.
 
     As part of the study design, an interim efficacy analysis will be performed
in each clinical trial. In the Thai trial, the interim analysis will be
conducted 18 months after recruitment has been completed. In our North American
trial, the interim analysis will be conducted 24 months after recruitment has
been completed (Figure 6).
 
     FIGURE 6. DESIGN OF THE PHASE III CLINICAL TRIALS OF BIVALENT AIDSVAX
 
            [GRAPHIC DEPICTING TIMING OF PHASE III CLINICAL TRIALS]
 
  Enlistment of Clinical Sites and Volunteers
 
     We enlist clinical sites based on their ability to perform clinical trials,
and to recruit the appropriate type and number of volunteers for the Phase III
clinical trials. Our North American trial calls for approximately 1,700
HIV-negative volunteers to be recruited from an already established group of
at-risk individuals at 12 clinical centers. These centers, currently sponsored
by the National Institutes of Health as part of a vaccine preparedness trial,
have over the past four years established a system for the recruitment of
at-risk volunteers. The trial design further calls for the remaining 3,700
HIV-negative volunteers to be recruited by the 47 additional clinical sites.
Based on experience at the 12 clinical centers, we are assuming an incidence of
1.5% HIV infection per year, and a retention rate of at least 80% for volunteers
for the entire 36 month observation period.
 
     In Thailand, a group of injection drug users is being recruited through a
combined effort of the Bangkok Metropolitan Administration, Mahidol University
and the Centers for Disease Control and Prevention. The trial design calls for
an estimated 600 HIV-negative volunteers to be recruited from an already
established group and for the remaining 1,900 HIV-negative volunteers to be
recruited from injection drug users in the Bangkok population. Based on prior
experience, we are assuming a 6% to
 
                                       29
<PAGE>   34
 
8% incidence of HIV in these groups, with a retention rate of over 75% during
the 36 month observation period.
 
  Conduct of the Phase III Clinical Trials
 
     We have a clinical team of 24 full-time employees who assist and monitor
the 59 clinical sites that are engaged in the North American AIDSVAX trials.
This clinical team organizes and monitors: (1) the clinical testing sites; (2)
data management; (3) the central contract laboratory for HIV testing; (4) sample
handling and shipping; and (5) biostatistics. Audit and monitoring functions are
conducted under contract to a clinical research organization, which audits the
clinical sites for compliance with the Phase III procedures, data recording,
medical records and the use of good clinical practice, as defined by the FDA.
 
     In Thailand, we have employed or have on contract a full-time staff of
three. Our Bangkok office is directed by a project manager and a Thai physician
who provide interface between us and Thai institutions involved in the Phase III
clinical trials. In addition, through a grant to the Bangkok Municipal
Authority, we support a nurse, clerk and social worker at each of the 17
clinical sites, for a total of 51 contract staff.
 
     Each clinical site has agreed to conduct its activities according to the
United States and Thai FDA-reviewed Phase III protocol. The protocol sets
standard procedures for all sites and laboratories. Following each visit of
volunteers to the clinical site, data are recorded in both the volunteers'
permanent medical chart, as well as on a case report form, which is forwarded to
us. The trial design calls for over 500,000 case report forms to be gathered and
entered into the database for the North American Phase III clinical trial alone.
 
     The Phase III protocol also requires clinical sites to report any serious
adverse event to us within 24-hours. Any serious adverse events are to be
immediately examined in detail by our clinical monitors. If deemed a serious
event related to the vaccine, the event is to be promptly reported to the FDA.
The protocol requires all other adverse events to be recorded on the case report
forms and provided to the FDA for review on a periodic basis.
 
  Interim Analysis and Completion of the Phase III Clinical Trials
 
     A single independent data and safety monitoring board oversees the clinical
trials in North America and Thailand. The ten-person monitoring board consists
of prominent clinicians, AIDS specialists, vaccinologists and statisticians. The
board contains seven members from the United States and three from Thailand. A
former Deputy Director of the Centers for Disease Control and Prevention serves
as Director of the monitoring board.
 
     The monitoring board will periodically evaluate the safety of the trial at
6, 12, 24 and 36 months. The initial six-month safety review was conducted in
March 1999. No serious adverse events related to the vaccine were observed.
 
     If efficacy is observed at the time of a scheduled interim efficacy
analysis, the monitoring board will recommend termination of the trial and
vaccination of the placebo group in order to conform with ethical requirements.
If the interim efficacy analysis does not demonstrate sufficient statistical
power to halt the trial, it will continue until its scheduled completion.
 
     Following the close of the Phase III clinical trials, either at the time of
the interim efficacy analysis or at the conclusion of the complete trial, the
code for vaccine/placebo will be released. Analysis of the database will be
performed independently by the external statistician. In addition to examining
the data, the external statistician will prepare the final report which will be
entered into the biologic license application.
 
                                       30
<PAGE>   35
 
  Determination of Efficacy
 
     The primary endpoint of the Phase III clinical trials will be to determine
the quantitative effect of AIDSVAX in high risk volunteers. Based on meetings
and documented discussions with the FDA, we believe that the threshold of
success is a 30% reduction of infection at statistical significance.
 
     To determine efficacy, we will compare the rate of infection in the placebo
group and the vaccine group. An example of how efficacy is calculated is as
follows: if in Thailand the placebo group has 100 HIV infections after 36
months, while the vaccine group has 50 HIV infections during the same period,
the protection conferred by the vaccine would be 50%. In the North American
trial, the determination is similar, although the calculation is adjusted for
the 2:1 ratio of vaccine:placebo.
 
     A secondary endpoint of the Phase III clinical trials will be to determine
qualitative effects of AIDSVAX on potential HIV infections. This is performed in
case the vaccine induces meaningful immunity, but the immune response is not of
sufficient strength to fully prevent infection. For this purpose, multiple blood
samples are drawn from each volunteer throughout the Phase III clinical trials.
This allows us to determine more precisely the time of infection. Each of the
blood samples also can be examined for levels of circulating virus, or viral
load. From this, we can determine if vaccinated individuals have suppressed
their HIV infections relative to those in the placebo group.
 
     If the infection is transient, or if the level of HIV is maintained in
vaccine recipients at low levels, this might indicate that the vaccine is
slowing the progression of HIV infection. In therapeutic studies it is known
that suppression of viral load correlates with an extension of life. Therefore,
should we find that AIDSVAX causes a qualitative reduction in HIV infection, we
might submit this data to support our primary regulatory application or, if
justified, as a stand-alone submission.
 
     In addition to HIV antibody testing of all blood samples, a subset of
volunteers, 5% of the total, will be monitored throughout the trial period with
a variety of immunological tests. These tests will be performed to determine
details of the immune response, with the goal of identifying an immune correlate
of protection against infection. Such a correlate might include, for example, a
determination of the minimum antibody level required to obtain protection. We
believe the finding of a correlate of protection both supports the scientific
rationale of the vaccine and provides a measurement by which the vaccine may be
improved. We believe finding a correlate of protection would be viewed favorably
in the review of our regulatory applications submitted to the FDA.
 
                                       31
<PAGE>   36
 
THE MARKET FOR AIDSVAX
 
     We have developed formulations of AIDSVAX which focus on HIV found in major
regions of the world. Our first bivalent vaccine, AIDSVAX B/B9, is directed
against the predominant HIV subtype in the Americas, Europe, the Caribbean and
Australia. Our second bivalent vaccine, AIDSVAX B/E, is directed against the
predominant HIV subtypes in Southeast Asia, the Pacific Rim, Indonesia and
southern portions of China (Figure 7). Based on the populations of these
regions, the market for the two current formulations of AIDSVAX could cover
approximately half of the world's population, or nearly three billion people.
 
   FIGURE 7. POTENTIAL MARKETS FOR THE AIDSVAX B/B' AND AIDSVAX B/E VACCINES
 [GRAPHIC DEPICTING MAP OF THE WORLD AND WORLDWIDE MARKETS FOR AIDSVAX B/B' AND
                                  AIDSVAX B/E]
 
     We also have plans to develop two additional AIDSVAX vaccines -- one for
subtype C virus, which would be directed against viruses in China, India and
Africa, and one for subtype A and D viruses, which are commonly found in Sub
Saharan Africa and parts of South America. We believe that four vaccines
directed against the A, B, C, D and E subtypes of HIV would effectively address
the worldwide spread of the HIV/AIDS epidemic.
 
  Influence of Vaccine Improvements
 
     Our ability to address geographically defined markets is enhanced by our
ability to rapidly develop new formulations of AIDSVAX. This process provides
for a continued basis of product improvement. We have accomplished this with our
two bivalent formulations of AIDSVAX. The change from a monovalent to a bivalent
formulation was accomplished in less than 24 months.
 
     With successive formulations of AIDSVAX, we expect to improve product
efficacy, as well as the breadth of protection against different HIV subtypes.
In addition, we will seek to create vaccines that require fewer booster shots
and that can be used over larger areas of the world. Thus, we expect that an
initial vaccine will be gradually enhanced, resulting in corresponding increases
in the size of the market for the vaccine.
 
     On the basis of our ongoing discussions with the FDA, we believe that
improvements will be accomplished as amendments to our initial regulatory
license, rather than as applications for entirely new
 
                                       32
<PAGE>   37
 
products. This approach, if successful, would result in considerable savings of
time and cost associated with future product development.
 
  Comparison to Other Vaccines
 
     We believe that hepatitis B vaccine serves as a useful model to predict
demand for a prospective HIV vaccine. Hepatitis B is one of the most recent
vaccines to be introduced on a worldwide basis. The pattern of infection and the
at-risk groups with hepatitis B are comparable to those with HIV. Hepatitis B
and HIV are transmitted by sexual contact and blood products. In the United
States, the highest risk groups for hepatitis B and HIV are injection drug users
and homosexual men.
 
     When initially introduced, the hepatitis B vaccine was used primarily by
those with occupational risk of infection due to exposure to blood products. The
average price of the initial vaccine was $200 per vaccine recipient. Within this
population, the vaccine had a market of $100 million to $200 million per year.
As demand for the vaccine increased, the price per dose dropped, further fueling
demand. Recently, hepatitis B vaccine was recommended for standard pediatric use
in the United States. The price of the vaccine is now approximately $15 per
dose. The worldwide market for hepatitis B vaccine currently exceeds $1 billion
annually. By the year 2002, it is likely that use of hepatitis B vaccine will
exceed 300 million doses annually.
 
     We believe that, given the relative healthcare needs, the market for an HIV
vaccine will be considerably larger than the market for hepatitis B vaccine.
Further, we believe that adoption of an HIV vaccine will occur more rapidly,
both domestically and worldwide. This conclusion is supported by a UNAIDS study,
which predicts that, within a decade, the worldwide need for HIV vaccine will
exceed 650 million doses annually.
 
SALES AND MARKETING
 
     We intend to rely on third parties for sales and marketing of AIDSVAX. We
believe that our resources are better utilized developing new formulations of
AIDSVAX, rather than developing and maintaining a sales and marketing
organization. Genentech currently has an option to obtain an exclusive worldwide
license to use, market and sell AIDSVAX. If AIDSVAX is approved for sale and
Genentech does not exercise its option to market AIDSVAX, we intend to enter
into agreements for marketing and distribution with other partners and will pay
a predetermined royalty to Genentech.
 
     We anticipate that AIDSVAX will be sold by Genentech or a licensed third
party through existing vaccine distribution channels in the United States and
the rest of the world. This would result in several tiers of pricing that range
from private reimbursement in the United States to government reimbursement in
Europe to purchase by the World Health Organization for distribution to nations
with underdeveloped economies. In the United States, vaccine distribution is
further divided among pediatricians, general practitioners and the public health
service (as provided by the Centers for Disease Control and Prevention).
 
     Currently 83% of children worldwide receive the basic schedule of pediatric
vaccines through a network of for-profit and non-profit institutions. We expect
that an efficacious HIV vaccine will also be broadly distributed worldwide in a
similar manner.
 
     Apart from distribution, a number of variables will influence price,
including: (1) efficacy of the vaccine; (2) safety; (3) manufacturing cost; (4)
recommendations from expert medical panels; (5) the perceived need in a
particular population; and (6) in some cases, government regulations requiring
vaccination. Due to these and other factors, we have not yet determined a
pricing schedule for AIDSVAX.
 
     Several non-profit and government organizations have begun efforts to
prepare for the eventual distribution of an HIV vaccine. For example, the State
of California placed an open purchase order for one million doses of HIV vaccine
if and when developed. In addition, the International AIDS Vaccine Initiative
has started a campaign to fund the development and purchase of an HIV vaccine
for the
 
                                       33
<PAGE>   38
 
developing world. In meetings with us, the World Bank has indicated that it is
exploring the potential for low-interest loans to support the purchase of
vaccines in the developing world.
 
MANUFACTURING
 
     We do not have any manufacturing facilities of our own. We intend to rely
on third parties to manufacture AIDSVAX. We believe that our resources are
better utilized developing new vaccines, rather than entering into the capital
intensive business of manufacturing.
 
     Our license agreement with Genentech gives Genentech an option to
manufacture any AIDSVAX formulation supplied beyond those it has already agreed
to supply. If Genentech does not exercise its option to manufacture AIDSVAX, the
license agreement allows us to enter into manufacturing agreements with third
parties and pay a predetermined royalty to Genentech. If we utilize a third
party, the license agreement provides that Genentech must transfer the required
manufacturing technology and know-how to the third party.
 
     Genentech has developed a proprietary method for producing synthetic gp120
protein. This method has enabled Genentech to clone and express gp120 genes from
two dozen HIV strains. Utilizing genetic engineering, a fragment of coding
information from HIV, consisting of the gp120 gene, is cloned from HIV into
mammalian cells. We have an exclusive license from Genentech to all of these
genes and the technical know-how to produce the synthetic gp120 proteins.
 
     Specifically, for any formulation of AIDSVAX, the gp120 gene is inserted
into Chinese hamster ovary cells which act as cellular factories that can
produce commercial quantities (i.e., kilograms) of gp120 protein. The production
of gp120 in Chinese hamster ovary cells assures both genetic consistency and
structural integrity of the synthetic product. As a result, the synthetic form
is virtually identical to the natural form of gp120 that occurs in HIV viral
particles. Since only a fragment of HIV is used in this process, there is no
production of infectious HIV, and the final product is incapable of causing
infection or disease. In addition, Genentech's proprietary purification system
provides us with gp120 protein that has purity exceeding 99.9%, which markedly
decreases the likelihood of vaccine side effects caused by contaminating
substances.
 
LICENSE AND SERVICES AGREEMENTS WITH GENENTECH
 
     We have entered into a license agreement with Genentech which in part
defines the working relationship between the companies. Genentech has granted us
an exclusive license to all patents and proprietary know-how that Genentech is
free to license or sublicense. Such licensed technology relates to the
development of a vaccine based on, containing, incorporating or using the
recombinant gp120 subunit protein developed by Genentech for use to prevent, but
not treat, HIV infection and/or AIDS. Certain of the licensed technology is
sublicensed to us under licenses from third parties to Genentech. We, as the
exclusive licensee of Genentech, have assumed all of Genentech's obligations
under these third-party license agreements. The initial term of the license
agreement is 15 years from the commercial introduction date of a licensed
product and will be determined on a country-by-country, product-by-product
basis.
 
     In addition to granting us rights to use Genentech's gp120 technology and
certain adjuvant technology for developing a licensed product, the license
agreement provides for Genentech to have rights to elect to manufacture and
supply AIDSVAX for clinical testing and commercial sale. In addition to its
rights to elect to manufacture vaccine, Genentech supplied us, cost-free, with
its stock (approximately 300,000 doses) of the B(MN) gp120 protein for testing
in our Phase III clinical trials. We will use the B(MN) gp120 protein following
successful completion of formulation with alum, vialing and quality
assurance/control testing, for which we will bear Genentech's costs and
expenses. Genentech also supplied us with agreed-upon amounts of up to two
additional gp120 proteins, B(GNE8) and E(244) for use in combination with the
currently manufactured B(MN) gp120 for clinical trials. For the additional
antigens, we paid Genentech its fully burdened manufacturing costs.
 
                                       34
<PAGE>   39
 
     The license agreement provides for flexibility related to manufacturing.
Should Genentech elect not to manufacture any vaccine supplies beyond those it
has already agreed to supply, we may elect to use a third party for our
manufacturing requirements. If we utilize a third party, Genentech must transfer
the required manufacturing technology and know-how to the third party.
 
     Genentech also has an option, exercisable for 90 days after we make our
first filing with the FDA for market approval of a licensed product, to obtain
an exclusive worldwide license to use, market and sell licensed products. If
Genentech exercises the marketing option: (1) Genentech is required to pay us a
fee equal to 33% of our total development costs (including clinical testing) to
date for the licensed product; (2) we and Genentech will share net profits from
sales of the licensed products, 30% and 70%, respectively, for sales within the
United States and 70% and 30%, respectively, for sales outside the United
States; (3) future developmental costs (e.g., clinical trials) will be
apportioned between the parties based on their respective profit share in a
particular country; and (4) the parties will establish a committee with an equal
number of representatives from each company to oversee the development and
commercialization of additional licensed products. In the event that Genentech
does not exercise the marketing option, then, in lieu of sharing net profits
from the licensed products, we will pay Genentech a royalty on all sales of
licensed products equal to: (1) 25% of our net sales and our sublicensees' net
sales of the licensed products worldwide, so long as any commercial vaccine
component has been manufactured and supplied by Genentech; or otherwise (2) 15%
of our total net sales and our sublicensees' net sales of the licensed products
worldwide.
 
     Under the license agreement, we are required to use due diligence in
developing, seeking regulatory approval for, marketing and commercializing
licensed products. Development and commercialization of licensed products will
be our sole business goal. In connection with reaching this goal, we are
required to achieve the filing of the first market approval for a licensed
product with the FDA no later than the fifth anniversary of the closing of our
1997 private placement. If we are unable to meet this milestone due to certain
agreed-upon events or circumstances, we may request an extension from Genentech
and we and Genentech can agree to a new date for the milestone, subject to a
two-year limit on such extensions. If we are unable to meet a milestone for any
reason other than the agreed-upon events or circumstances, any extension granted
will be at Genentech's sole discretion. If we fail to exercise our due
diligence, Genentech has the right to convert our exclusive license to a
non-exclusive license, and may be entitled to terminate the license.
 
     Either party may terminate the license agreement upon the other party's
default or bankruptcy. In addition, Genentech may terminate the license
agreement if we fail to: (1) maintain a tangible net worth of at least $1
million; or (2) to meet a due diligence milestone (see above) within two years
of the date originally set for such milestone, unless Genentech waives such
two-year limit in its sole discretion.
 
     We have also entered into a services agreement with Genentech pursuant to
which Genentech has agreed to provide us with administrative, research, process
science, manufacturing, clinical and regulatory support, primarily by making the
services of certain Genentech personnel available to us. We will reimburse
Genentech for all of Genentech's costs and expenses relating to the provision of
these services. Either party may terminate the services agreement upon a breach
which continues uncured for more than 60 days or upon the occurrence of
bankruptcy or similar events. In addition, the services agreement will
automatically terminate upon any termination of the license agreement. The term
of the services agreement was recently extended until December 31, 2000.
 
LICENSED PATENTS
 
     Under the license agreement, we have licensed or sublicensed from Genentech
exclusive rights to a portfolio of six issued United States patents and eight
pending United States patent applications. The licensed portfolio also includes
46 granted foreign patents and 36 pending foreign applications arising from the
United States patents and applications. The technology claimed in these patents
and applications involves a range of HIV vaccine product development activities,
including the cloning and expression of recombinant virus glycoproteins for use
as vaccine products and sustained release formulations of HIV gp120. Also
claimed by patent filings are specific compositions of matter for the components
of our
 
                                       35
<PAGE>   40
 
vaccine products, and proprietary production, recovery and purification process
technology. Together, these filings provide intellectual property that we
believe will enhance the value of our products.
 
     Under the license agreement, Genentech has retained title to the licensed
patents and patent applications and other licensed technology, while we will
retain title to any improvements developed by us. Both parties will jointly own
any improvements to the licensed patents and patent applications or other
licensed technology developed or invented jointly. Genentech will remain
responsible for the filing, prosecution and maintenance of all licensed patent
rights, in consultation with us, at our expense.
 
     We have been informed that Chiron Corporation has filed oppositions against
two of Genentech's European patents that are licensed to us. Genentech, with our
assistance, has filed responses to both oppositions, but the outcome of each
opposition has yet to be determined. We have also been informed by the United
States Department of Health that we may need to obtain a license under one or
more of its United States and foreign patents involving molecular clones of
HIV-1 viral strains MN-STI and BA-L. We are currently exploring the advisability
of obtaining such a license. In the interim, we have recently filed an
opposition to a European equivalent of the United States Department of Health
patent and are awaiting the outcome of the opposition.
 
GOVERNMENT COLLABORATIONS
 
     We have collaborative activities with two federal government agencies:
(1) The Centers for Disease Control and Prevention; and (2) National Institute
of Allergy and Infectious Diseases.
 
     Our collaboration with the Centers for Disease Control and Prevention is
conducted in both the United States and Thailand. In the United States, the
Centers for Disease Control have proposed to co-sponsor our Phase III clinical
trial, starting in the Fall of 1999. The Centers for Disease Control will fund
$8.0 million over four years to support our Phase III clinical trial sites, as
well as to provide funds for new research into our HIV vaccine trials. In
Thailand, the Centers for Disease Control are assisting in the measurement of
viral loads in vaccinees and placebos, as well as examining HIV subtypes and
strains in the at-risk population.
 
     The National Institute of Allergy and Infectious Disease is forming a
collaboration with us to obtain and store clinical specimens from our North
American Phase III clinical trial. It will provide $4.6 million of funding for
this program. We also have an ongoing collaboration with the AIDS Vaccine
Evaluation Group, a clinical consortium financed by the National Institute of
Allergy and Infectious Disease. In this collaboration we are providing AIDSVAX
to clinical sites for Phase I/II clinical trials of new combination vaccines.
 
COMMERCIAL RELATIONSHIP WITH PASTEUR MERIEUX CONNAUGHT
 
     On April 10, 1998, we signed a non-binding letter of intent with Pasteur
Merieux Connaught to co-develop an alternative vaccine regimen, called the
prime/boost. The letter of intent has recently been extended through November
1999. The prime/boost utilizes two independent vaccines administered
sequentially. A Pasteur Merieux Connaught vaccine would be administered
initially, followed by a bivalent gp120 vaccine. Should it prove efficacious,
the alternative vaccine regimen would be developed, clinically tested, and if
approved by regulatory agencies, marketed by Pasteur Merieux Connaught. We would
serve as a scientific co-developer and a source for bivalent formulations of
AIDSVAX, a critical component of the regimen. We would share significantly in
profits made from the sale of both vaccine components -- the Pasteur Merieux
Connaught vaccine, as well as AIDSVAX.
 
     Phase I human trials of the initial Pasteur Merieux Connaught prime/boost
vaccine regimen have been conducted by the AIDS Vaccine Evaluation Group, an
NIH-sponsored clinical consortium. In early studies of the Pasteur Merieux
Connaught product, the combination vaccine incorporated monovalent gp120
provided by Chiron Vaccines as the boost. Subsequently, Pasteur Merieux
Connaught and the AIDS Vaccine Evaluation Group altered their plans and
requested us to provide our formulations of
 
                                       36
<PAGE>   41
 
bivalent gp120 as a replacement for the Chiron product. From this request arose
the letter of intent and a plan to co-develop a new vaccine regimen.
 
     Currently, we and Pasteur Merieux Connaught are planning collaborative
studies with our respective vaccines. During this time we are also negotiating a
long-term co-development agreement with Pasteur Merieux Connaught. Should an
agreement be reached on final terms, we will supply 100% of Pasteur Merieux
Connaught's requirements for our bivalent gp120. Pasteur Merieux Connaught would
pay our fully burdened costs plus 10% for all vaccines purchased from us. In
addition, Pasteur Merieux Connaught would pay a royalty to us from Pasteur
Merieux Connaught's sales of both vaccines in the regimen.
 
     Genentech holds exclusive options for the manufacture and marketing of
AIDSVAX. The non-binding letter of intent with Pasteur Merieux Connaught has
certain conflicts with our license agreement with Genentech. This conflict will
require resolution between us and Genentech. The issue is now under discussion,
and we will resolve it prior to our entering a final business agreement with
Pasteur Merieux Connaught. Upon resolution of the business issues with Genentech
and the Pasteur Merieux Connaught agreement, Genentech will then join us in
negotiations with Pasteur Merieux Connaught.
 
COMPETITION
 
     We estimate that approximately 30 other companies have been engaged in
research to produce an HIV vaccine. Only AIDSVAX and a vaccine once developed by
our former competitor, Chiron Vaccines, have progressed to, and completed, Phase
II testing. Chiron Vaccines has since abandoned that particular vaccine effort.
Subsequently, a combination vaccine developed by Chiron Vaccines and Pasteur
Merieux Connaught, also competitors of ours, entered Phase I/II testing in 1997.
That vaccine effort, too, has since been terminated.
 
     Two other notable efforts at producing HIV vaccines have failed as well. A
collaboration between Merck & Co., Inc. and Repligen Corporation was terminated
because their vaccine failed to protect chimpanzees from live HIV infection.
Similarly, MicroGeneSys, Inc. designed a vaccine that failed in early stage
human testing. It appears that the principal differences between these vaccines
and ours has been the choice of viral protein as antigen or the methods used for
manufacturing.
 
     We believe that we now lead all competitors worldwide in the development of
an HIV preventive vaccine. Of the two HIV vaccines that have reached human
clinical trials, we have full control of the leading product (AIDSVAX) and plan
to become a partner in the second (the Pasteur Merieux Connaught/VaxGen
combination regimen).
 
GOVERNMENT REGULATION
 
     AIDSVAX is subject to federal regulation, by the federal government,
principally by the FDA under the Food, Drug & Cosmetic Act and other laws,
including the Public Health Services Act, and by state and local governments.
Such regulations govern or influence, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of such products.
 
     AIDSVAX is classified by the FDA as a biologic product. The steps
ordinarily required before a biological product may be marketed in the United
States include: (1) preclinical testing; (2) the submission to the FDA of an
Investigative New Drug Application, which must become effective before clinical
trials may commence; (3) adequate and well-contained clinical trials to
establish the safety and efficacy of the biological; (4) the submission to the
FDA of a Biologics License Application; and (5) FDA approval of the application,
including approval of all product labeling.
 
     Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests together with manufacturing
information and analytical data are submitted to the FDA as part of the
Investigative New Drug Application and are reviewed by the FDA before the
commencement of clinical trials. Unless the FDA objects to an Investigative New
Drug
 
                                       37
<PAGE>   42
 
Application, the Investigative New Drug Application will become effective 30
days following its receipt by the FDA.
 
     Clinical trials involve the administration of the investigational product
to humans under the supervision of a qualified principal investigator. Clinical
trials are conducted in accordance with Good Clinical Practices under protocols
submitted to the FDA as part of the Investigative New Drug Application. In
addition, each clinical trial is approved and conducted under the auspices of an
institutional review board and with patient informed consent. The institutional
review board will consider, among other things, ethical factors, the safety of
human subjects and possibility of liability of the institutions conducting the
trial.
 
     Clinical trials are conducted in three sequential phases; however, the
phases may overlap. The goal of a Phase I clinical trial is to establish initial
data about safety and tolerance of the biologic agent in humans. In Phase II
clinical trials, evidence is sought about the desired immune response of a
biological agent in a limited number of patients. Additional safety data are
also gathered from these studies. The Phase III clinical trial program consists
of expanded, large-scale, multi-center studies of persons who are susceptible to
the targeted disease. The goal of these studies is to obtain definitive
statistical evidence of the efficacy and safety of the proposed product and
dosage regimen. Our Phase III clinical trials of AIDSVAX are being conducted on
persons at risk for HIV infection but who test HIV negative prior to enrollment
in the trial.
 
     All data obtained from this comprehensive program are submitted in a
biologics license application to the FDA for review and approval for the
manufacture, marketing and commercial shipments of AIDSVAX. FDA approval of the
biologics license application is required before marketing may begin in the
United States. Similar types of regulatory processes will be encountered as
efforts are made to market the vaccine internationally. We will be required to
assure product performance and manufacturing processes from one country to
another.
 
     For commercialization of AIDSVAX, our manufacturing processes and the
manufacturing facility must receive FDA approval for sale within the United
States. If Genentech does not exercise its option to manufacture AIDSVAX, we
must pursue third party manufacturing arrangements. For marketing outside the
United States, we will be subject to the regulatory requirements of other
countries, which vary from country to country. The regulatory approval process
in other countries includes requirements similar to those associated with the
FDA approval described above.
 
EMPLOYEES
 
     As of April 15, 1999, we had 52 employees. None of our employees is subject
to a collective bargaining agreement, and we believe that our relations with our
employees are good. Five employees are bound by employment agreements with us
that provide for employment of three years or more.
 
FACILITIES
 
     Our executive offices are located in Brisbane, California, in an office
building in which we lease approximately 16,000 square feet. The lease agreement
terminates in July 2005, and we have an option to renew for a successive
five-year period. For fiscal year 1999, our monthly rent is $45,785. We also
lease approximately 10,000 square feet of laboratory space in South San
Francisco under a lease agreement that terminates in March 2006. We have an
option to renew for a successive five-year period. For fiscal year 1999, our
monthly rent is $17,854. We believe that our facilities are sufficient to
support our operations for at least the next 24 months.
 
     In Thailand, we lease office space at Mahidol University and at Taksin
Hospital in Bangkok. We will lease this space through the duration of the Thai
Phase III clinical trials.
 
LEGAL PROCEEDINGS
 
     We are not currently subject to any material legal proceedings or claims.
                                       38
<PAGE>   43
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS, DIRECTOR NOMINEES AND DIRECTORS
 
<TABLE>
<CAPTION>
                 NAME                    AGE                          POSITION
                 ----                    ---                          --------
<S>                                      <C>    <C>
Robert C. Nowinski(1)(4)...............  52     Chairman, Chief Executive Officer
Donald P. Francis(1)(4)................  56     President, Director
Phillip W. Berman(4)...................  49     Senior Vice President, Research &
                                                Development -- Director
John G. Curd...........................  53     Senior Vice President, Medical Affairs
Carter A. Lee..........................  46     Senior Vice President, Finance & Administration
Stephen C. Francis(3)(4)...............  58     Director
Roberta R. Katz(5).....................  51     Director Nominee
William D. Young(1)(2)(3)..............  54     Director
</TABLE>
 
---------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Genentech Contract Committee
(5) Ms. Katz is a director nominee who has agreed to join the board of directors
    shortly after consummation of the offering. We anticipate Ms. Katz will
    become a member of the Compensation, Audit and Genentech Contract
    Committees.
 
     ROBERT C. NOWINSKI, PH.D. Dr. Nowinski co-founded VaxGen in November 1995
and has served as a director and Chairman of the Board since inception and our
Chief Executive Officer since April 1999. In 1991, Dr. Nowinski founded
PathoGenesis, Inc., a publicly-held biotechnology company and served as Chairman
of the Board until 1995. In 1989, Dr. Nowinski founded ICOS Corporation, a
publicly-held biotechnology company, where, from 1989 through 1991, Dr. Nowinski
served as Chief Executive Officer and President. In 1981, Dr. Nowinski founded
Genetic Systems Corporation, a publicly-held biotechnology company, where, from
1981 to 1985, Dr. Nowinski held various executive positions including Chairman
of the Board, Chief Executive Officer, President and Scientific Director.
Following the merger of Genetic Systems Corporation with Bristol-Meyers Company,
from 1988 to 1989, Dr. Nowinski served as Vice-President of New Technology for
Bristol-Meyers Company at its headquarters in New York. Prior to such time, Dr.
Nowinski was a Professor of Microbiology and Immunology at the University of
Washington and Head of the Virology Program at the Fred Hutchinson Cancer
Research Center in Seattle, Washington. During his academic career, Dr. Nowinski
authored over 100 scientific publications. Dr. Nowinski received a B.S. from
Beloit College and a Ph.D. in immunology from Cornell University Sloan-Kettering
Division.
 
     DONALD P. FRANCIS, M.D., D.SC. Dr. Francis co-founded VaxGen in November
1995 and has served as our President and as a director since inception. From
1993 to 1995, Dr. Francis directed HIV vaccine clinical research at Genentech.
Prior to joining Genentech, Dr. Francis served from 1973 to 1993 in various
positions at the Centers for Disease Control. During this period, Dr. Francis
established and directed the HIV laboratory for the Centers for Disease Control
and served as an Assistant Director, Viral Diseases Program. At that time, he
was also a principal investigator in one of the two Phase III clinical trials
that led to licensure of the hepatitis B vaccine in the United States. In 1976,
Dr. Francis was the lead epidemiologist on the first clinical team to encounter
and control Ebola virus. Prior to such time, Dr. Francis had a central role in
the World Health Organization's smallpox eradication program, which eradicated
smallpox from the world. Dr. Francis received an M.D. from Northwestern
University and completed his training in pediatrics at Los Angeles County/USC
Medical Center. Dr. Francis received a doctorate in virology from the Harvard
School of Public Health. Dr. Francis is the brother of Stephen Francis.
 
     PHILLIP W. BERMAN, PH.D. Dr. Berman has served as our Senior Vice
President, Research & Development since April 1999. Dr. Berman served as our
Vice President of Research & Development from November 1997 to April 1999, and
has served as a director since October 1997. From 1982 to 1997,
 
                                       39
<PAGE>   44
 
Dr. Berman served in various capacities with Genentech, including Senior
Scientist, Molecular Biology Department, and Staff Scientist, Department of
Immunology and also Department of Process Sciences. Since 1984, Dr. Berman has
had research responsibilities in Genentech's AIDS Vaccine Project and is an
inventor of AIDSVAX. Dr. Berman received an A.B. in biology from the University
of California, Berkeley, a Ph.D. in biochemistry from Dartmouth College and
performed post doctoral research at the Neurobiology Laboratory of the Salk
Institute and the Department of Biochemistry and Biophysics at the University of
California, San Francisco.
 
     JOHN G. CURD, M.D. Dr. Curd has served as our Senior Vice President,
Medical Affairs, since April, 1999. From 1991 to April 1999, Dr. Curd held
various positions at Genentech, including Director,
Immunology/Oncology/Infectious Disease, Senior Director and Head of Clinical
Science and Vice President of Clinical Development. From 1978 to 1991, Dr. Curd
held several research and clinical positions at The Scripps Clinic, a
world-renowned research foundation and medical clinic, including Head, Division
of Rheumatology and Vice Chairman, Department of Medicine. He received a B.A.
from Princeton University and an M.D. from Harvard Medical School.
 
     CARTER A. LEE Mr. Lee has served as General Manager and Senior Vice
President, Finance & Administration since September 1998. From 1991 to 1997, Mr.
Lee served as Senior Vice President and Chief Financial Officer of Diefenbach
Elkins International, Inc., a corporate branding consultancy. From 1990 to 1991,
Mr. Lee served as Vice President, Finance & Administration of EDAW, Inc., a
landscape architecture and planning firm. From 1987 to 1990, Mr. Lee served as
Vice President and Corporate Controller of Landor Associates, a strategic design
consulting firm. Prior to such time, Mr. Lee served in various positions at
Coopers & Lybrand, including Senior Accountant and Supervising Consultant. Mr.
Lee received a B.A. from the University of California, Berkeley, and an M.B.A.
from California State University, Hayward.
 
     STEPHEN C. FRANCIS Mr. Francis has served as a director since October 1996.
Mr. Francis has served as Vice-Chairman and Chief Risk Oversight Officer at
Fischer, Francis, Trees & Watts, an investment management firm which he
co-founded in 1972. Mr. Francis is a member and former chairman of the Treasury
Borrowing Committee, which advises the United States Treasury, and is a member
of the Stanford University Graduate School of Business Advisory Council. Mr.
Francis received an A.B. from Dartmouth College and an M.B.A. from Stanford
University. Mr. Francis is the brother of Donald Francis.
 
     ROBERTA R. KATZ Ms. Katz is a director nominee who will be elected shortly
after consummation of the offering. Commencing in June 1999, Ms. Katz will
become the Chief Executive Officer of The Technology Network. Ms. Katz joined
Netscape Communications Corporation in May 1995 as Vice President, General
Counsel and Secretary. From January 1996 to April 1999, Ms. Katz served as
Senior Vice President, General Counsel and Secretary of Netscape, where she was
a member of the team that negotiated the Netscape/America Online merger. From
March 1993 until joining Netscape, Ms. Katz served as Senior Vice President and
General Counsel of McCaw Cellular Communications, where she was a member of the
team that negotiated the AT&T/McCaw merger. In addition, from March 1992 until
joining Netscape, Ms. Katz served as Senior Vice President and General Counsel
of LIN Broadcasting Company, a subsidiary of McCaw. In March 1998, Ms. Katz was
named as one of the 50 Most Influential Women Attorneys in America by the
National Law Journal. She is an author of Justice Matters: Rescuing the Legal
System for the 21st Century. Ms. Katz received a B.A. from Stanford University,
a Ph.D. in anthropology from Columbia University and a J.D. from the University
of Washington School of Law.
 
     WILLIAM D. YOUNG Mr. Young has served as a director since November 1995.
Since 1980, Mr. Young has served in various positions at Genentech, most
recently as the Chief Operating Officer. Prior to such time, Mr. Young served in
various positions at Eli Lilly and Co. for 14 years in the United States and
Puerto Rico. In 1993, Mr. Young was elected to the United States National
Academy of Engineering. Mr. Young serves on the board of directors of Energy
Biosystems Corporation, a public company applying biotechnological advances to
the field of energy utilization and environmental control. Mr. Young received a
B.S. in chemical engineering from Purdue University and an M.B.A. from Indiana
University.
 
                                       40
<PAGE>   45
 
BOARD OF DIRECTORS AND OFFICERS
 
     The size of the board of directors is currently set at six members.
Directors hold office until the next annual meeting at which time their terms
expire and their successors are elected. Officers are appointed by the board of
directors for one year terms.
 
AUDIT COMMITTEE
 
     The audit committee makes recommendations to the board of directors about
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors, and evaluates our
internal controls. The audit committee consists of Mr. Stephen Francis and Mr.
William Young. Upon joining the board of directors, Ms. Katz will become a
member of this committee.
 
COMPENSATION COMMITTEE
 
     The compensation committee reviews and approves the compensation and
benefits for our executive officers, administers our stock option plans and
makes recommendations to the board of directors about compensation matters. The
compensation committee consists of Mr. William Young. Upon joining the board of
directors, Ms. Katz will become a member of this committee.
 
EXECUTIVE COMMITTEE
 
     The executive committee may act on behalf of the board of directors on all
matters except those concerning filling vacancies on the board, executive
compensation, audits or individual contracts or financial obligations exceeding
$3,000,000. The executive committee consists of Dr. Robert Nowinski, Dr. Donald
Francis and Mr. William Young.
 
GENENTECH CONTRACT COMMITTEE
 
     The Genentech contract committee considers matters relating to agreements
with Genentech. The Genentech contract committee consists of Dr. Robert
Nowinski, Dr. Donald Francis, Dr. Phillip Berman and Mr. Stephen Francis. Upon
joining the board of directors, Ms. Katz will become a member of this committee.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Decisions about executive compensation are made by the compensation
committee. No member of the compensation committee or executive officer of our
company has an interlocking relationship with executive officers or directors of
another company.
 
                                       41
<PAGE>   46
 
EXECUTIVE COMPENSATION
 
     The following table depicts amounts paid during the last fiscal year as
compensation to our chief executive officer and our three most highly
compensated executive officers (other than the chief executive officer) who were
serving as executive officers at the end of fiscal 1998.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                               ANNUAL COMPENSATION          LONG-TERM COMPENSATION
                                              ---------------------    --------------------------------
        NAME AND PRINCIPAL POSITION           SALARY($)    BONUS($)    SECURITIES UNDERLYING OPTIONS(#)
        ---------------------------           ---------    --------    --------------------------------
<S>                                           <C>          <C>         <C>
Robert C. Nowinski, Chairman(1).............  $250,000     $    --                  60,000
Donald P. Francis, President................   250,000      75,000                  15,000
Phillip W. Berman, Vice President, Research
  & Development(2)..........................   175,000      35,000                  15,000
Robert F. Pacquer, Vice President,
  Finance(3)................................   150,730          --                 200,000
</TABLE>
 
---------------
(1) Dr. Nowinski was appointed Chief Executive Officer on April 22, 1999.
(2) Dr. Berman was appointed Senior Vice President, Research & Development on
    April 22, 1999.
(3) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
 
     The following table depicts stock option plan activity during the fiscal
year ended December 31, 1998.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                                  POTENTIAL REALIZABLE
                                                        INDIVIDUAL GRANTS                                 VALUE
                                   ------------------------------------------------------------     AT ASSUMED ANNUAL
                                                         % OF TOTAL                                     RATES OF
                                       NUMBER OF          OPTIONS       EXERCISE                       STOCK PRICE
                                       SECURITIES        GRANTED TO        OR                         APPRECIATION
                                       UNDERLYING        EMPLOYEES        BASE                       FOR OPTION TERM
                                        OPTIONS              IN           PRICE      EXPIRATION   ---------------------
              NAME                     GRANTED(#)           1998         ($/SH)         DATE       5%($)       10%($)
              ----                 ------------------   ------------   -----------   ----------   --------   ----------
<S>                                <C>                  <C>            <C>           <C>          <C>        <C>
Robert C. Nowinski...............            --               --            --             --          --           --
Donald P. Francis................            --               --            --             --          --           --
Phillip W. Berman................            --               --            --             --          --           --
Robert F. Pacquer(1).............       200,000(2)          45.7          7.00         1/2/08     880,000    2,231,000
</TABLE>
 
---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
(2) Under the terms of Mr. Pacquer's employment agreement, he received an option
    to purchase 200,000 shares. Under the terms of Mr. Pacquer's resignation,
    this amount was reduced as follows: (a) as of March 15, 1999, 77,500 of Mr.
    Pacquer's options were exercisable until March 31, 2000; and (b) if we
    complete our initial public offering by September 1, 1999, an additional
    10,000 shares will become exercisable until March 31, 2000. The balance of
    Mr. Pacquer's options have terminated.
 
                         FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES
                                                          UNDERLYING                 VALUE OF UNEXERCISED
                                                          UNEXERCISED                IN-THE-MONEY OPTIONS
                                                  OPTIONS AT FISCAL YEAR-END                  AT
                                                              (#)                     FISCAL YEAR-END ($)
                     NAME                          EXERCISABLE/UNEXERCISABLE       EXERCISABLE/UNEXERCISABLE
                     ----                       -------------------------------    -------------------------
<S>                                             <C>                                <C>
Robert C. Nowinski............................           --/--                             --/--
Donald P. Francis.............................           --/--                             --/--
Phillip W. Berman.............................      50,000/150,000                    125,000/375,000
Robert F. Pacquer(1)..........................      50,000/150,000                    125,000/375,000
</TABLE>
 
---------------
(1) Mr. Pacquer resigned from VaxGen as of March 15, 1999.
 
                                       42
<PAGE>   47
 
EMPLOYMENT AGREEMENTS
 
     Dr. Nowinski's employment agreement provides for a base annual salary of
$250,000 through 2002. On April 22, 1999, our board of directors approved an
increase in Dr. Nowinski's annual salary to $300,000. Dr. Nowinski will receive
a performance bonus of 125,000 shares of common stock if either the market value
of our common stock reaches an average of $28.00 per share over a 30-day period
or we are acquired in an acquisition that results in a purchase price of at
least $28.00 per share. In the event of a change of control or termination prior
to the end of the term of his employment agreement, we may be required to pay
all salary due to Dr. Nowinski. Upon termination of employment, Dr. Nowinski has
agreed not to compete with us for one year.
 
     Dr. Francis' employment agreement provides for a base salary of $250,000
through 2002. On April 22, 1999, our board of directors approved an increase in
Dr. Francis' annual salary to $275,000. Dr. Francis may receive an annual bonus
of up to 30% of his base salary as determined in the discretion of the board of
directors. Dr. Francis will also receive a performance bonus of 125,000 shares
of common stock if either the market value of our common stock reaches an
average of $28.00 per share over a 30-day period or we are acquired in an
acquisition that results in a purchase price of at least $28.00 per share. In
the event of a change of control or termination of employment prior to the end
of the five-year term, we may be required to pay all salary due to Dr. Francis.
Upon termination of employment, Dr. Francis has agreed not to compete with us
for one year.
 
     Dr. Berman's employment agreement provides for a base salary of $175,000
through November 2000. On April 22, 1999, our board of directors approved an
increase in Dr. Berman's annual salary to $200,000. Dr. Berman may receive an
annual bonus of up to 20% of his base salary as determined in the discretion of
the board of directors. In the event of a change of control, Dr. Berman may
receive a one-time bonus of 75,757 shares of common stock. In the event of
termination of employment prior to the expiration of the three-year term, we may
be required to pay Dr. Berman's base salary for twelve months following his
termination. Upon termination of employment, Dr. Berman has agreed not to
compete with us for one year.
 
     Dr. Curd's employment agreement provides for an annual base salary of
$225,000 through May 2003. Dr. Curd may also receive an annual bonus of up to
30% of his base salary and up to 10,000 shares of stock options with an exercise
price equal to fair market value, as determined in the discretion of the board
of directors. We have agreed to pay Dr. Curd a bonus of up to $50,000, to be
paid over the period of his four-year contract. We have also agreed to assume
Dr. Curd's loan for $96,822 outstanding with Genentech and accept an
interest-free promissory note from Dr. Curd. Dr. Curd agrees to retire the
outstanding loan by the termination of this agreement. Dr. Curd has received an
option to purchase up to 125,000 shares of common stock that vests over a
four-year period. In the event of a change of control, Dr. Curd may receive a
one-time bonus of 37,500 shares of common stock. In the event of termination
prior to the expiration of the four-year term, we may be required to pay Dr.
Curd's base salary for twelve months following his termination. Upon termination
of employment, Dr. Curd has agreed not to compete with us for one year.
 
     Mr. Lee's employment agreement provides for a base salary of $185,000
through March 2003. Mr. Lee may also receive an annual bonus of up to 20% of his
base salary, and 10,000 shares of stock options (exercise price at market
value), as determined in the discretion of the board of directors. Mr. Lee has
received an option to purchase up to 125,000 shares of common stock that vests
over a four-year period. In the event of a change of control, Mr. Lee may
receive a one-time bonus of 37,500 shares of common stock. In the event of
termination prior to the expiration of the four-year term, we may be required to
pay Mr. Lee's base salary for twelve months following his termination. Upon
termination of employment, Mr. Lee has agreed not to compete with us for one
year.
 
DIRECTOR COMPENSATION
 
     We reimburse directors for out-of-pocket and travel expenses incurred while
attending board of director and committee meetings. Directors are also paid
$1,000 per meeting attended in person and
 
                                       43
<PAGE>   48
 
$500 for participation by conference call. Directors who are not also employees
receive an annual option to purchase up to the lesser of: (1) $20,000 worth of
common stock at an exercise price equal to the fair market value of the stock on
the date of grant; and (2) 2,857 shares of common stock. Employee directors are
also eligible to receive option grants.
 
1996 STOCK OPTION PLAN
 
     We adopted a 1996 stock option plan for our officers, directors, key
employees and consultants. Options to purchase shares of common stock are
authorized to be issued to participants through either incentive stock options
or nonqualified stock options. On April 1, 1999, our shareholders approved an
increase of 1,250,000 in the number of shares reserved for issuance under the
1996 plan, to a total of 1,750,000 shares of common stock reserved for issuance;
options are subject to adjustment. The 1996 plan is administered by our board of
directors but may also be administered by a committee appointed by our board of
directors. The exercise price of options is not less than the fair market value
of the common stock on the date of grant, except that the exercise price of
nonqualified stock options shall not be less than 85% of the fair market value
at the date of the grant. Options granted under the 1996 plan have a maximum
term of ten years. Options vest at a rate of 25% per year over a four-year
period unless otherwise provided by the board of directors. In no event may the
board of directors specify a vesting schedule that permits an option to vest at
a rate less than 20% per year, however. Nonqualified stock options granted to
non-employee directors will vest at the rate of 40% on the date of grant and 60%
on the first anniversary of the date of grant. The 1996 plan expires ten years
from the date of adoption, unless sooner terminated by the board of directors.
As of April 15, 1999, there were a total of 883,100 options outstanding under
the 1996 plan.
 
1998 DIRECTORS STOCK OPTION PLAN
 
     We adopted a 1998 director stock option plan for our non-employee
directors. The plan provides for the issuance of 37,500 shares of common stock
to non-employee directors through annual options. Options are subject to
adjustment. The plan provides for grant of initial options to non-employee
directors on May 6, 1998. Annual option grants will automatically be made to
non-employee directors on the annual meeting date in each subsequent year. The
exercise price of the initial options is $7.00 per share. The exercise price of
the each annual option is the fair market value of our common stock on the
annual grant date. Each initial option is fully vested upon grant. Each annual
option fully vests on the first anniversary of its grant date, subject to
certain meeting attendance requirements. The board of directors may terminate
the 1998 director plan at any time. As of April 15, 1999, there were a total of
8,571 options outstanding under the 1998 director plan.
 
401(K) PLAN
 
     We maintain a 401(k) profit sharing benefit plan intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended. The plan covers
all employees who satisfy certain minimum age eligibility requirements. Under
the profit sharing portion of the plan, we may make an annual contributions for
the benefit of eligible employees in an amount determined by us. Under the
401(k) portion of the plan, eligible employees may make pretax elective
contributions of their compensation, subject to maximum limits on contributions
prescribed by law.
 
                                       44
<PAGE>   49
 
                              CERTAIN TRANSACTIONS
 
     The following is a summary of certain related party transactions since
January 1996 to which we were or are a party or in which certain of our
executive officers, directors or stockholders had or have a direct or indirect
material interest. We believe that each of these agreements was made on terms at
least as fair to us as could have been obtained from unaffiliated third parties.
 
     We issued 1,150,000 shares of common stock to Genentech, 500,000 shares of
common stock to Dr. Donald P. Francis, and 250,000 shares of common stock to Dr.
Robert C. Nowinski on April 10, 1996 for a purchase price of $0.02 per share. We
also issued 133,333 shares of common stock to Dr. Francis, 66,666 shares of
common stock to Dr. Nowinski, and 20,000 shares of common stock to Stephen C.
Francis on October 29, 1996 for a purchase price of $0.02 per share.
 
     We entered into a services agreement dated January 1, 1996 with Genentech
under which Genentech agreed to provide us with administrative and other
services. Under the services agreement Genentech has provided us with expertise
in process sciences, regulatory affairs, virology and the manufacturing of
clinical supplies of AIDSVAX. We paid Genentech $1,442,000, $2,352,000 and
$690,000 in years 1996-1998. The initial services agreement expired December 31,
1998 but was renewed through December 31, 2000.
 
     We entered into a license agreement dated May 1, 1996 with Genentech under
which Genentech granted us an exclusive license to specified patents and
proprietary know-how relating to the development of a vaccine to prevent HIV
infection and/or AIDS. The Genentech license agreement is described in further
detail in "Business -- License and Services Agreement with Genentech."
 
     We entered into a warrant agreement with Genentech on March 15, 1996 under
which Genentech can purchase that number of shares of our common stock necessary
to maintain Genentech's 25% ownership on a fully-diluted basis. The purchase
price for any shares purchased under this agreement would be market price. The
warrant expired January 11, 1999, at the completion of our 1998 private
placement. We have granted Genentech registration rights with respect to all of
its securities. They do not hold any further rights to acquire our common stock.
 
     We entered into a sublease agreement dated September 3, 1997 with Genentech
covering office space located on the premises leased by Genentech in South San
Francisco. We are no longer occupying this space. Under the sublease we paid
Genentech a monthly rental of $5,985.
 
                                       45
<PAGE>   50
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth information about the beneficial ownership
of common stock of:
 
     - each director, director nominee, our chief executive officer and our
       three most highly compensated executive officers;
 
     - directors and executive officers as a group; and
 
     - 5% beneficial owners.
 
     The information is this table is as of April 15, 1999 and as adjusted to
reflect the sale of common stock in the offering.
 
<TABLE>
<CAPTION>
                                                                  BENEFICIALLY OWNED SHARES(1)
                                                             --------------------------------------
                                                              PRIOR TO OFFERING      AFTER OFFERING
                                                             --------------------    --------------
           NAME AND ADDRESS OF BENEFICIAL OWNER               NUMBER      PERCENT       PERCENT
           ------------------------------------              ---------    -------       -------
<S>                                                          <C>          <C>        <C>
Genentech, Inc.............................................  1,522,354     19.8%          14.1%
  1 DNA Way
  South San Francisco, California 94080
Donald P. Francis..........................................    633,333      8.2            5.9
  c/o VaxGen, Inc.
  1000 Marina Boulevard, Suite 200
  Brisbane, California 94005
Robert C. Nowinski.........................................    309,166      4.0            2.9
Phillip W. Berman(2).......................................     50,000        *              *
Stephen C. Francis(3)......................................     42,857        *              *
Roberta R. Katz(4).........................................         --       --             --
William D. Young(5)........................................  1,522,354     19.8           14.1
All executive officers and directors as a group (6
  persons)(6)..............................................  2,557,710     33.1           23.6
</TABLE>
 
---------------
 *  Less than 1%.
 
(1) Includes shares underlying options or warrants exercisable within 60 days of
    April 15, 1999. Except as indicated, persons named in the table have sole
    voting and investment power with respect to all shares of common stock owned
    by them.
 
(2) Includes 50,000 shares issuable on exercise of outstanding options
    exercisable within 60 days of April 15, 1999.
 
(3) Includes 2,857 shares issuable upon exercise of outstanding options
    exercisable within 60 days of April 15, 1999.
 
(4) Ms. Katz is a director nominee who has agreed to join the board of directors
    shortly after consummation of the offering. Ms. Katz will be granted an
    option to purchase up to 20,000 shares of common stock upon her commencement
    of service on the board of directors. The stock option vests over four
    years.
 
(5) Mr. Young is Executive Vice President of Genentech. Mr. Young disclaims any
    beneficial ownership of Genentech shares except to the extent of any
    pecuniary interest therein.
 
(6) Includes an aggregate of 52,857 shares of common stock issuable on exercise
    of outstanding options exercisable within 60 days of April 15, 1999.
 
                                       46
<PAGE>   51
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The following is a description of the material terms of our capital stock
and charter documents. While complete in material respects, this description is
nonetheless a summary and is qualified in each instance by reference to the full
text of these documents.
 
     Our certificate of incorporation authorizes 40,000,000 shares of capital
stock, consisting of 20,000,000 shares of common stock, $0.01 par value, and
20,000,000 shares of preferred stock, $0.01 par value.
 
COMMON STOCK
 
     We have 20,000,000 shares of common stock authorized, of which 7,685,161
shares are outstanding as of April 15, 1999. There are approximately 768
stockholders of record. Holders of common stock are entitled to one vote per
share. There are no cumulative voting or preemptive rights. Holders of common
stock are entitled to receive their share of any dividends declared by the board
of directors. In the event of liquidation, dissolution or winding up, holders of
common stock are entitled to their share of remaining assets following payment
to creditors. All the outstanding shares of common stock are fully paid, validly
issued and non-assessable. As of April 15, 1999, we had outstanding options to
purchase 891,671 shares of common stock.
 
PREFERRED STOCK
 
     The board of directors is authorized to issue 20,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences and
privileges of those shares without further action by stockholders. Any shares of
preferred stock so issued may have priority over the common stock with respect
to dividend, liquidation and other rights. No preferred stock has been issued.
 
WARRANTS
 
     As of April 15, 1999, there are outstanding warrants to purchase 309,825
shares of common stock. All of these warrants are currently exercisable.
 
     In connection with our 1997 financing we granted a contractual right to one
private unaffiliated investor to maintain his proportionate stock ownership
position. This right will expire March 31, 2002.
 
ANTI-TAKEOVER PROVISIONS IN CHARTER DOCUMENTS
 
     Our certificate of incorporation does not provide for cumulative voting in
connection with the election of directors. Genentech is currently our largest
single stockholder, owning approximately 20% of our common stock. Our officers
and directors as a group own approximately 33% of our common stock. While these
percentages will decrease after this offering, Genentech and our officers and
directors acting together could influence the direction and control of our
business.
 
     Our bylaws provide that special meetings of stockholders may be called only
by the board of directors, the Chairman of the Board, the President, or any
holder or holders of at least 10% of our voting stock. The bylaws also provide
that stockholders seeking to bring business before an annual or special meeting
must provide timely notice in writing. To be timely, a stockholder's notice must
be transmitted: (1) not less than 20 days nor more than 60 days before a meeting
to act on a plan of merger or consolidation or a proposed sale, lease, exchange
or other disposition of our assets; or (2) not less than 10 days nor more than
60 days before any other meeting. The bylaws also contain specific requirements
for the form of a stockholder's notice. These provisions have anti-takeover
effects that may deter a change in control of our company even if it is in the
best interest of the stockholders.
 
                                       47
<PAGE>   52
 
REGISTRATION RIGHTS
 
     In connection with our prior private financings, we granted registration
rights with respect to (1) 3,607,047 shares of common stock sold in the 1997
private placement; (2) 1,570,010 shares of common stock sold in the 1998 private
placement; and (3) 372,354 shares of common stock sold to Genentech. These
registration rights generally grant to the holders up to three "piggyback"
registrations and two "demand" registrations, subject to customary cutback
provisions.
 
DELAWARE LAW
 
     VaxGen is subject to Section 203 of the Delaware General Corporation Law,
which prevents an "interested stockholder" (a person who owns or within three
years did own 15% or more of a corporation's outstanding voting stock), from
engaging in a business combination with a publicly-held Delaware corporation for
three years following the date that person became an interested stockholder. An
exception is made where the business combination is approved in a prescribed
manner. A corporation may at its option exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action or
its stockholders. We did not elect to exclude ourselves.
 
DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
 
     Our certificate of incorporation eliminates the personal liability of
directors to us or our stockholders for money damages resulting from breaches of
their fiduciary duty to the fullest extent permitted by Delaware General
Corporation Law. This provision does not eliminate the liability of directors
for (1) acts or omissions not in good faith that involve intentional misconduct
or a knowing violation of law; (2) improper declarations of dividends; (3)
transactions from which a director derived an improper personal benefit; or (4)
breaches of directors' duty of loyalty to us or our stockholders. Our bylaws
contain provisions requiring the indemnification of our directors to the fullest
extent permitted by applicable law. We also have the ability to indemnify
officers, employees and agents to the same extent as directors. Our bylaws also
permit us to secure insurance on behalf of any director, officer, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws permit such indemnification. The
employment agreements of Drs. Nowinski and Francis contain indemnification
provisions. We have entered into an indemnification agreement with Ms. Katz, a
director nominee, under which we have agreed to indemnify Ms. Katz with respect
to any liability in connection with this offering.
 
TRANSFER AGENT
 
     The transfer agent for the common stock is ChaseMellon Shareholder
Services, Seattle, Washington.
 
                                       48
<PAGE>   53
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
 
     After this offering, 10,785,161 shares of common stock will be outstanding
(11,250,161 shares if the underwriters exercise their over-allotment option in
full). Of these shares, the 3,100,000 shares (3,565,000 shares if the
underwriters exercise their over-allotment option in full) sold in this offering
will be freely tradable without restriction under the Securities Act except for
any shares purchased by "affiliates" of the Company as defined in Rule 144 under
the Securities Act. The remaining 7,685,161 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act. The restricted
securities generally may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act.
 
     Our officers and directors and [       ] of our shareholders have entered
into lock-up agreements pursuant to which they have agreed not to offer or sell
any shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Prudential Securities, on behalf
of the underwriters. Prudential Securities may, at any time and without notice,
waive any of the terms of these lock-up agreements specified in the underwriting
agreement. Following the lock-up period, these shares will not be eligible for
sale in the public market without registration under the Securities Act unless
such sales meet the conditions and restrictions of Rule 144 as described below.
 
     In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of: (1)
1% of the then-outstanding shares of common stock; and (2) the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of such sale on Form 144 is filed with
the SEC. Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about the Company. In addition, a person (or persons whose shares are
aggregated) who has not been an affiliate of the Company at any time during the
90 days immediately preceding a sale, and who has beneficially owned the shares
for at least two years, would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitation and other conditions described above.
The foregoing summary of Rule 144 is not intended to be a complete description.
 
     As soon as practicable following the consummation of this offering, the
Company intends to file a registration statement under the Securities Act to
register the shares of common stock available for issuance pursuant to its stock
option plans after the effective date of such registration statement will be
available for sale in the open market subject to the lock-up period and, for
affiliates of the Company, subject to certain conditions and restrictions of
Rule 144.
 
                                       49
<PAGE>   54
 
                                  UNDERWRITING
 
     We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated and Punk, Ziegel & Company
L.P. are acting as representatives. We are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to conditions specified
in the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name:
 
<TABLE>
<CAPTION>
                                                               NUMBER
                                                              OF SHARES
UNDERWRITERS                                                  ---------
<S>                                                           <C>
Prudential Securities Incorporated..........................
Punk, Ziegel & Company L.P..................................
                                                              ---------
Total.......................................................  3,100,000
                                                              =========
</TABLE>
 
     The underwriters may sell more than the total number of shares offered on
the cover page of this prospectus and they have, for a period of 30 days from
the date of this prospectus, an over-allotment option to purchase up to 465,000
additional shares from us. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as per
the table above.
 
     The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $     per share and these dealers may reallow a concession not
in excess of $     per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions. The representatives have informed us that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.
 
     We have agreed to pay the underwriters the following fees, assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
 
<TABLE>
<CAPTION>
                                                                              TOTAL FEES
                                                             ---------------------------------------------
                                                    FEE       WITHOUT EXERCISE OF      FULL EXERCISE OF
                                                 PER SHARE   OVER-ALLOTMENT OPTION   OVER-ALLOTMENT OPTION
                                                 ---------   ---------------------   ---------------------
<S>                                              <C>         <C>                     <C>
Fees paid by us................................    $                 $                       $
</TABLE>
 
     In addition, we estimate that we will spend approximately $          in
expenses for this offering. We have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
 
     We, our officers and directors, and [          ] shareholders of VaxGen
have entered into lock-up agreements, under which we and they agreed not to
offer or sell any shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock for a period of 180 days
from the date of this prospectus without the prior written consent of Prudential
Securities on behalf of the underwriters. Prudential Securities may, at any time
and without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
 
     Prior to this offering, there has been no public market for the common
stock of our Company. The public offering price, negotiated between the Company
and the representatives, is based upon various factors such as our financial and
operating history and condition, its prospects, the prospects for the industry
we are in and prevailing market conditions.
 
                                       50
<PAGE>   55
 
     Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
 
     - Over-allotments involving sales in excess of the offering size, creating
       a short position. Prudential Securities may elect to reduce this short
       position by exercising some or all of the over-allotment option.
 
     - Stabilizing and short covering: stabilizing bids to purchase the shares
       are permitted if they do not exceed a specified maximum price. After the
       distribution of shares has been completed, short covering purchases in
       the open market may also reduce the short position. These activities may
       cause the price of the shares to be higher than would otherwise exist in
       the open market.
 
     - Penalty bids permitting the representatives to reclaim commissions from a
       syndicate member for the shares purchased in the stabilizing or short
       covering transactions.
 
     Such activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, NYSE in the over-the-counter market
or otherwise.
 
     Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
 
     - the Public Offers of Securities Regulations 1995;
 
     - the Financial Services Act 1986; and
 
     - the Financial Services Act 1986 (Investment Advertisements) (Exemptions),
       Order 1996 (as amended).
 
     We have asked the underwriters to reserve shares for sale at the same
offering price directly to our employees and other business affiliates or
related third parties. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase the
reserved shares.
 
                                 LEGAL MATTERS
 
     Graham & James LLP/Riddell Williams P.S., Seattle, Washington, passed on
the validity of the shares. Principals of Graham & James LLP/Riddell Williams
P.S. beneficially own 22,000 shares. Cooley Godward LLP, Kirkland, Washington,
passed on legal matters for the underwriters. The Roman Arch Fund L.P. and The
Roman Arch Fund II L.P., an internal employee private equity fund of Prudential
Securities Incorporated, own an aggregate of 16,000 shares.
 
                                    EXPERTS
 
     The financial statements of VaxGen as of December 31, 1997 and 1998, and
for each of the years in the three-year period ended December 31, 1998 and for
the period from November 27, 1995 (inception) through December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
     We filed a registration statement on Form S-1 with the SEC covering sale of
the common stock, of which this prospectus is a part. This prospectus does not
contain all of the information in the registration statement, portions of which
are omitted as permitted by SEC rules. Statements in this prospectus about
documents filed as exhibits, while complete in material respects, are
nonetheless summaries. Reference is made to each exhibit for a full description.
In each case, summary descriptions are qualified by reference to complete
exhibits. You may read or copy any document filed by us at the SEC's Public
Reference Room located at 450 5th Street, NW, Washington, D.C. 20549. You may
obtain information about the Public Reference Room by calling the SEC for
further information at 1-800-SEC-0330. Our filings are also available at the
SEC's web site at www.sec.gov.
 
                                       51
<PAGE>   56
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Balance Sheets..............................................  F-3
Statements of Operations....................................  F-4
Statements of Stockholders' Equity (Deficit) and
  Comprehensive Loss........................................  F-5
Statements of Cash Flows....................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>
 
                                       F-1
<PAGE>   57
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
VaxGen, Inc.:
 
     We have audited the accompanying balance sheets of VaxGen, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit) and comprehensive loss,
and cash flows for each of the years in the three-year period ended December 31,
1998 and the period from November 27, 1995 (inception) through December 31,
1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VaxGen, Inc. (a development
stage enterprise) as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 and the period from November 27, 1995 (inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
 
Seattle, Washington
February 5, 1999, except as to note 8(b),
 which is as of April 1, 1999
 
                                       F-2
<PAGE>   58
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                                 BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                    ---------------------------     MARCH 31,
                                                       1997            1998            1999
                                                    -----------    ------------    ------------
                                                                                   (UNAUDITED)
<S>                                                 <C>            <C>             <C>
Current assets:
  Cash and cash equivalents.......................  $   641,000    $  6,818,000    $  7,931,000
  Investment securities...........................   23,239,000      12,650,000      12,676,000
  Interest receivable.............................      152,000         112,000         148,000
  Prepaid expenses and other current assets.......      230,000         360,000         294,000
                                                    -----------    ------------    ------------
          Total current assets....................   24,262,000      19,940,000      21,049,000
Property and equipment, net.......................       33,000       1,258,000       1,423,000
Other assets......................................        6,000         274,000         221,000
                                                    -----------    ------------    ------------
          Total assets............................  $24,301,000    $ 21,472,000    $ 22,693,000
                                                    ===========    ============    ============
 
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Payable to Genentech............................  $ 3,792,000    $    260,000    $    500,000
  Accounts payable................................      237,000       1,483,000         248,000
  Accrued liabilities.............................      390,000         331,000         963,000
  Current portion of long-term obligations........           --              --          20,000
                                                    -----------    ------------    ------------
          Total current liabilities...............    4,419,000       2,074,000       1,731,000
                                                    -----------    ------------    ------------
Long-term obligations.............................           --              --          66,000
Stockholders' equity:
  Preferred stock, $0.01 par value. Authorized
     20,000,000 shares; none issued or
     outstanding..................................           --              --              --
  Common stock, $0.01 par value. Authorized
     20,000,000 shares; issued and outstanding
     6,109,401 shares at December 31, 1997,
     7,101,248 shares at December 31, 1998 and
     7,685,161 shares at March 31, 1999...........       61,000          71,000          77,000
  Additional paid-in capital......................   24,985,000      33,619,000      38,886,000
  Accumulated other comprehensive income --
     unrealized gain on investment securities.....        8,000          43,000          28,000
  Deficit accumulated during the development
     stage........................................   (5,172,000)    (14,335,000)    (18,095,000)
                                                    -----------    ------------    ------------
          Total stockholders' equity..............   19,882,000      19,398,000      20,896,000
Commitments and contingencies
                                                    -----------    ------------    ------------
          Total liabilities and stockholders'
            equity................................  $24,301,000    $ 21,472,000    $ 22,693,000
                                                    ===========    ============    ============
</TABLE>
 
See accompanying notes to financial statements.
 
                                       F-3
<PAGE>   59
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                        PERIOD FROM                                PERIOD FROM
                                                                        NOVEMBER 27,                               NOVEMBER 27,
                                                                            1995                                       1995
                                                                        (INCEPTION)          THREE MONTHS          (INCEPTION)
                                      YEAR ENDED DECEMBER 31,             THROUGH           ENDED MARCH 31,          THROUGH
                              ---------------------------------------   DECEMBER 31,   -------------------------    MARCH 31,
                                 1996          1997          1998           1998          1998          1999           1999
                              -----------   -----------   -----------   ------------   -----------   -----------   ------------
                                                                                       (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                           <C>           <C>           <C>           <C>            <C>           <C>           <C>
Operating expenses:
  Research and
    development.............  $(1,683,000)  $(3,146,000)  $(6,831,000)  $(11,663,000)  $  (716,000)  $(3,038,000)  $(14,701,000)
  General and
    administrative..........     (371,000)     (800,000)   (3,345,000)    (4,543,000)     (447,000)   (1,006,000)    (5,549,000)
                              -----------   -----------   -----------   ------------   -----------   -----------   ------------
    Loss from operations....   (2,054,000)   (3,946,000)  (10,176,000)   (16,206,000)   (1,163,000)   (4,044,000)   (20,250,000)
Other income (expense), net:
  Investment income, net....           --       905,000     1,013,000      1,918,000       306,000       285,000      2,203,000
  Interest expense..........      (28,000)      (19,000)           --        (47,000)           --        (1,000)       (48,000)
                              -----------   -----------   -----------   ------------   -----------   -----------   ------------
    Total other income
      (expense), net........      (28,000)      886,000     1,013,000      1,871,000       306,000       284,000      2,155,000
    Net loss................  $(2,082,000)  $(3,060,000)  $(9,163,000)  $(14,335,000)  $  (857,000)  $(3,760,000)  $(18,095,000)
                              ===========   ===========   ===========   ============   ===========   ===========   ============
Basic and diluted loss per
  share.....................  $     (1.90)  $     (0.60)  $     (1.48)                 $     (0.14)  $     (0.49)
                              ===========   ===========   ===========                  ===========   ===========
Weighted average shares used
  in computing basic and
  diluted loss per share....    1,093,000     5,096,000     6,185,000                    6,066,000     7,619,000
                              ===========   ===========   ===========                  ===========   ===========
</TABLE>
 
See accompanying notes to financial statements.
 
                                       F-4
<PAGE>   60
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
 
<TABLE>
<CAPTION>
                                                                           DEFICIT
                                                                         ACCUMULATED      ACCUMULATED
                                      COMMON STOCK        ADDITIONAL      DURING THE         OTHER             TOTAL
                                  --------------------      PAID-IN      DEVELOPMENT     COMPREHENSIVE     STOCKHOLDERS'
                                   SHARES      AMOUNT       CAPITAL         STAGE           INCOME        EQUITY (DEFICIT)
                                  ---------    -------    -----------    ------------    -------------    ----------------
<S>                               <C>          <C>        <C>            <C>             <C>              <C>
Balance at inception (November
  27, 1995).....................         --    $    --    $        --    $         --      $     --         $        --
Net and total comprehensive loss
  for the period from inception
  to December 31, 1995..........         --         --             --         (30,000)           --             (30,000)
                                  ---------    -------    -----------    ------------      --------         -----------
Balance at December 31, 1995....         --         --             --         (30,000)           --             (30,000)
Shares issued at $0.02 per share
  from April through October
  1996:
  Genentech for technology......  1,150,000     11,000         12,000              --            --              23,000
  Other founders for cash.......    980,000     10,000         10,000              --            --              20,000
Net and total comprehensive
  loss..........................         --         --             --      (2,082,000)           --          (2,082,000)
                                  ---------    -------    -----------    ------------      --------         -----------
Balance at December 31, 1996....  2,130,000     21,000         22,000      (2,112,000)           --          (2,069,000)
Sale of shares in private
  placement at $7.00 per share
  from March through June 1997
  for cash, net of issue costs
  of $2,248,000.................  3,607,047     36,000     22,965,000              --            --          23,001,000
Sale of shares to Genentech
  concurrent with private
  placement in March 1997 at
  $7.00 per share for cash......    285,714      3,000      1,997,000              --            --           2,000,000
Genentech exercise of warrants
  at $0.02 per share in October
  1997 for cash.................     86,640      1,000          1,000              --            --               2,000
Comprehensive loss:
  Net loss......................         --         --             --      (3,060,000)           --          (3,060,000)
  Unrealized gain on investment
    securities..................         --         --             --              --         8,000               8,000
                                  ---------    -------    -----------    ------------      --------         -----------
        Total comprehensive
          loss..................         --         --             --              --            --          (3,052,000)
                                  ---------    -------    -----------    ------------      --------         -----------
Balance at December 31, 1997....  6,109,401     61,000     24,985,000      (5,172,000)        8,000          19,882,000
Exercise of employee stock
  options at $7.00 per share in
  June and July 1998 for cash...      5,750         --         40,000              --            --              40,000
Sale of shares in private
  placement in December 1998 at
  $9.50 per share for cash, net
  of issue costs of $764,000....    986,097     10,000      8,594,000              --            --           8,604,000
Comprehensive loss:
  Net loss......................         --         --             --      (9,163,000)           --          (9,163,000)
  Unrealized gain on investment
    securities..................         --         --             --              --        35,000              35,000
                                  ---------    -------    -----------    ------------      --------         -----------
        Total comprehensive
          loss..................         --         --             --              --            --          (9,128,000)
                                  ---------    -------    -----------    ------------      --------         -----------
Balance at December 31, 1998....  7,101,248     71,000     33,619,000     (14,335,000)       43,000          19,398,000
Sale of shares in private
  placement in January 1999 at
  $9.50 per share for cash, net
  of issue costs of $264,000
  (unaudited)...................    583,913      6,000      5,267,000              --            --           5,273,000
Comprehensive loss (unaudited):
  Net loss......................         --         --             --      (3,760,000)           --          (3,760,000)
  Net unrealized loss on
    investment securities.......         --         --             --              --       (15,000)            (15,000)
                                  ---------    -------    -----------    ------------      --------         -----------
        Total comprehensive
          loss..................         --         --             --              --            --          (3,775,000)
                                  ---------    -------    -----------    ------------      --------         -----------
Balance at March 31, 1999
  (unaudited)...................  7,685,161    $77,000    $38,886,000    $(18,095,000)     $ 28,000         $20,896,000
                                  =========    =======    ===========    ============      ========         ===========
</TABLE>
 
See accompanying notes to financial statements.
 
                                       F-5
<PAGE>   61
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                          PERIOD FROM                                PERIOD FROM
                                                                          NOVEMBER 27,                               NOVEMBER 27,
                                                                              1995                                       1995
                                                                          (INCEPTION)          THREE MONTHS          (INCEPTION)
                                       YEAR ENDED DECEMBER 31,              THROUGH           ENDED MARCH 31,          THROUGH
                              -----------------------------------------   DECEMBER 31,   -------------------------    MARCH 31,
                                 1996           1997           1998           1998          1998          1999           1999
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
                                                                                         (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                           <C>           <C>            <C>            <C>            <C>           <C>           <C>
Cash flows from operating
  activities:
  Net loss..................  $(2,082,000)  $ (3,060,000)  $ (9,163,000)  $(14,335,000)  $  (857,000)  $(3,760,000)  $(18,095,000)
  Adjustments to reconcile
    net loss to net cash
    used in operating
    activities:
      Depreciation and
        amortization........        3,000          4,000         92,000         99,000         4,000        80,000        179,000
      Amortization of
        discounts on
        investment
        securities..........           --       (229,000)      (154,000)      (383,000)      (75,000)      (39,000)      (422,000)
      Changes in assets and
        liabilities:
        Interest
          receivable........           --       (152,000)        40,000       (112,000)       (5,000)      (36,000)      (148,000)
        Prepaid expenses and
          other current
          assets............       (2,000)      (228,000)      (130,000)      (360,000)       35,000        66,000       (294,000)
        Other assets........           --         (1,000)      (150,000)      (162,000)           --        53,000       (109,000)
        Payable to
          Genentech.........    1,442,000      2,350,000     (3,532,000)       260,000    (3,608,000)      240,000        500,000
        Accounts payable and
          accrued
          liabilities.......       35,000        566,000      1,187,000      1,814,000     1,644,000      (603,000)     1,211,000
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
        Net cash used in
          operating
          activities........     (604,000)      (750,000)   (11,810,000)   (13,179,000)   (2,862,000)   (3,999,000)   (17,178,000)
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
Cash flows from investing
  activities:
  Purchases of investment
    securities..............           --    (28,957,000)   (25,600,000)   (54,557,000)   (4,996,000)   (3,097,000)   (57,654,000)
  Sales of investment
    securities..............           --      5,955,000     36,378,000     42,333,000     7,883,000     3,095,000     45,428,000
  Purchases of property and
    equipment...............           --        (34,000)    (1,315,000)    (1,349,000)      (44,000)     (159,000)    (1,508,000)
  Long-term lease
    deposits................           --             --       (120,000)      (120,000)           --            --       (120,000)
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
        Net cash provided by
          (used in)
          investing
          activities........           --    (23,036,000)     9,343,000    (13,693,000)    2,843,000      (161,000)   (13,854,000)
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
Cash flows from financing
  activities:
  Stock issuances:
    Issued to Genentech.....       23,000      1,002,000             --      1,025,000            --            --      1,025,000
    Issued to other
      founders..............       15,000          5,000             --         20,000            --            --         20,000
    Private placements......           --     25,249,000      9,368,000     34,617,000            --     5,537,000     40,154,000
    Issuance costs of
      private placements....     (176,000)    (2,072,000)      (764,000)    (3,012,000)           --      (264,000)    (3,276,000)
    Exercise of employee
      stock options.........           --             --         40,000         40,000            --            --         40,000
  Loans from Genentech......      780,000        205,000             --      1,000,000            --            --      1,000,000
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
        Net cash provided by
          financing
          activities........      642,000     24,389,000      8,644,000     33,690,000            --     5,273,000     38,963,000
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
        Increase in cash and
          cash
          equivalents.......       38,000        603,000      6,177,000      6,818,000       (19,000)    1,113,000      7,931,000
Cash and cash equivalents at
  beginning of period.......           --         38,000        641,000             --       641,000     6,818,000             --
                              -----------   ------------   ------------   ------------   -----------   -----------   ------------
Cash and cash equivalents at
  end of period.............  $    38,000   $    641,000   $  6,818,000   $  6,818,000   $   622,000   $ 7,931,000   $  7,931,000
                              ===========   ============   ============   ============   ===========   ===========   ============
Supplemental schedule of
  noncash financing
  activities:
  Issuance of stock through
    conversion of Genentech
    note payable............  $        --   $  1,000,000   $         --   $  1,000,000   $        --   $        --   $  1,000,000
                              ===========   ============   ============   ============   ===========   ===========   ============
  Equipment acquired through
    capital leases
    (unaudited).............  $        --   $         --   $         --   $         --   $        --   $    86,000   $     86,000
                              ===========   ============   ============   ============   ===========   ===========   ============
</TABLE>
 
See accompanying notes to financial statements.
                                       F-6
<PAGE>   62
 
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                         NOTES TO FINANCIAL STATEMENTS
 
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (A) NATURE OF DEVELOPMENT STAGE ACTIVITIES
 
     VaxGen, Inc. ("Company") is a development stage biotechnology company
formed to develop a vaccine (AIDSVAX) intended to eradicate HIV. The Company was
incorporated on November 27, 1995 and since that date its principal activities
have included defining and conducting research programs, conducting animal and
human clinical trials, raising capital and recruiting scientific and management
personnel.
 
     The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel and determination of
patentability of the Company's products and processes. In addition, the Company
has only one product candidate which has not yet obtained Food and Drug
Administration approval. Successful future operations depend upon the Company's
ability to obtain approval for and commercialize AIDSVAX.
 
  (B) INTERIM FINANCIAL STATEMENTS
 
     The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and in the opinion of management, contain all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
 
  (C) CASH EQUIVALENTS
 
     All short-term investments with an original maturity at date of purchase of
three months or less are considered to be cash equivalents. Cash equivalents
consisting of commercial paper amounted to $572,000 and $6,490,000 at December
31, 1997 and 1998, respectively.
 
  (D) INVESTMENT SECURITIES
 
     Investment securities are classified as available-for-sale and carried at
market value with unrealized gains and losses excluded from the statement of
operations and reported as other comprehensive income. Realized gains and losses
on sales of investment securities are determined on the specific identification
method and are included in investment income, net.
 
  (E) PROPERTY AND EQUIPMENT
 
     Equipment, consisting of computers and other office equipment, is
depreciated using the straight-line method over the assets' estimated useful
lives of three to ten years. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets' estimated useful lives or
the remaining term of the lease.
 
  (F) RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs are charged to expense as incurred.
 
  (G) INCOME TAXES
 
     Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
 
                                       F-7
<PAGE>   63
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is established to reduce deferred tax assets to the
amount expected to be realized.
 
  (H) FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company has financial instruments other than cash and investment
securities, consisting of interest receivable, accounts payable, and a payable
to Genentech. The fair value of these financial instruments approximates their
carrying amount due to their short-term nature.
 
  (I) STOCK-BASED COMPENSATION
 
     The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense related to employee stock options is recorded
if, on the date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company applies the disclosure only requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB 25 for transactions with employees, and to provide pro forma
results of operations disclosures for employee stock option grants as if the
fair-value-based method of accounting in SFAS 123 had been applied to these
transactions.
 
  (J) COMPREHENSIVE LOSS
 
     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (Statement 130),
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires companies to report, in
addition to net income or loss, other components of comprehensive income or
loss. Unrealized gain on securities included in comprehensive loss for 1998 is
net of the reclassification adjustment for realized losses included in net loss
of $6,000. Adoption of Statement 130 had no effect on the Company's results of
operations or financial position as reported in the financial statements.
 
  (K) LOSS PER SHARE
 
     Basic loss per share is computed on the basis of the weighted average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted average number of common shares plus
dilutive potential common shares outstanding using the treasury stock method.
Potential dilutive common shares consist of shares issuable to holders of
unexercised employee stock options and warrants outstanding. Options and
warrants to purchase, in the aggregate, approximately 419,000, 751,000, 419,000
and 751,000 shares of common stock outstanding at December 31, 1997 and 1998 and
March 31, 1998 and 1999 (unaudited), respectively, were not included in the
calculation of diluted loss per share because the representative share
increments would be antidilutive. No options or warrants were outstanding at
December 31, 1996.
 
  (L) USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
 
                                       F-8
<PAGE>   64
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
  (M) IMPAIRMENT OF LONG-LIVED ASSETS
 
     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less costs
to sell.
 
  (N) RECLASSIFICATIONS
 
     Certain prior year amounts have been reclassified to conform with the 1998
presentation.
 
  (O) BUSINESS SEGMENTS
 
     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 requires an enterprise to report segment information based
on how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to one business segment,
the discovery and development of vaccines that immunize against certain
infectious diseases.
 
(2) INVESTMENT SECURITIES
 
     The following summarizes the Company's investment securities at December
31:
 
<TABLE>
<CAPTION>
                                                               GROSS         GROSS
                                               AMORTIZED     UNREALIZED    UNREALIZED      MARKET
                                                 COST          GAINS         LOSSES         VALUE
                                              -----------    ----------    ----------    -----------
<S>                                           <C>            <C>           <C>           <C>
1997:
Commercial paper............................  $17,733,000     $ 4,000         $--        $17,737,000
Government obligations......................    5,498,000       4,000          --          5,502,000
                                              -----------     -------         ---        -----------
                                              $23,231,000     $ 8,000         $--        $23,239,000
                                              ===========     =======         ===        ===========
1998:
Commercial paper............................  $ 3,962,000     $ 4,000         $--        $ 3,966,000
Government obligations......................    8,645,000      39,000          --          8,684,000
                                              -----------     -------         ---        -----------
                                              $12,607,000     $43,000         $--        $12,650,000
                                              ===========     =======         ===        ===========
</TABLE>
 
     Amortized cost and market value of investment securities at December 31,
1998 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepare
obligations with or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                                             AMORTIZED       MARKET
                        MATURITIES                             COST           VALUE
                        ----------                          -----------    -----------
<S>                                                         <C>            <C>
Due in 1 year or less.....................................  $10,613,000    $10,637,000
Due between 1 year to 5 years.............................    1,994,000      2,013,000
                                                            -----------    -----------
                                                            $12,607,000    $12,650,000
                                                            ===========    ===========
</TABLE>
 
                                       F-9
<PAGE>   65
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Investment income, net, includes interest of $0, $905,000 and $1,005,000
earned on investments and gains of $0, $0 and $8,000 realized upon the sale of
investments for 1996, 1997 and 1998, respectively.
 
(3) PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following at December 31:
 
<TABLE>
<CAPTION>
                                                               1997         1998
                                                              -------    ----------
<S>                                                           <C>        <C>
Furniture and equipment.....................................  $34,000    $1,057,000
Leasehold improvements......................................       --       292,000
                                                              -------    ----------
                                                               34,000     1,349,000
Less accumulated depreciation and amortization..............    1,000        91,000
                                                              -------    ----------
                                                              $33,000    $1,258,000
                                                              =======    ==========
</TABLE>
 
(4) RELATIONSHIP WITH GENENTECH
 
     The Company was founded in 1995 to develop and commercialize an HIV vaccine
in partnership with Genentech. In 1996, in return for an equity interest
(1,150,000 shares or 54% of the then outstanding and subscribed shares) in the
Company, rights to maintain 25% ownership of the Company's common stock (through
common stock warrants), a seat on the Board of Directors and certain
manufacturing and marketing rights to the vaccine, Genentech granted the Company
an exclusive license to certain technology.
 
     Genentech financed the formation of the Company by means of a $1,000,000
line of credit. Additionally, Genentech and the Company entered into an
agreement whereby Genentech could convert the line of credit plus additional
capital totaling $2,000,000 into shares of the Company's common stock concurrent
with an initial private placement in March 1997. The conversion resulted in the
issuance of 285,714 shares of common stock. Upon the final closing of the
private placement, Genentech exercised its option to retain a 25% common stock
ownership interest and thereby acquired an additional 86,640 shares of common
stock for cash. At December 31, 1998, Genentech retained warrants for the
exercise of additional common stock in the event of a second private placement
in excess of $10 million or an Initial Public Offering (IPO). Such warrants were
exercisable at the issue price per share of the additional capital raised and
would allow Genentech to maintain its 25% ownership interest. The warrants
expired unexercised at the completion of the Company's 1998 private placement in
January 1999. Genentech has no rights beyond the second financing (whether by
private placement or IPO) to maintain its 25% ownership position.
 
     The license agreement between the Company and Genentech, in part, defines
the working relationship between the companies. Genentech has granted the
Company an exclusive license to all patents and proprietary know-how that
Genentech is free to license or sublicense related to the development of a
vaccine to prevent HIV infection. Certain of the licensed technology is
sublicensed or assigned to the Company under licenses from third parties to
Genentech. The Company, as the exclusive licensee of Genentech, has assumed all
of Genentech's obligations under these third-party license agreements. The
initial term of the license agreement is 15 years from the commercial
introduction date of a licensed product and will be determined on a
country-by-country, product-by-product basis. In addition, upon entering the
agreement, Genentech transferred to the Company 300,000 doses of the vaccine.
Under the license agreement, the Company is required to use due diligence (as
defined in the agreement) in developing, seeking regulatory approval for, and
marketing and commercializing the vaccine.
 
                                      F-10
<PAGE>   66
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     In connection with reaching this goal, the Company is required to achieve
the filing of the first market approval for a product with the FDA not later
than the fifth anniversary of the closing of the 1997 private placement, which
occurred in March 1997. The Company and Genentech can agree to extend this
requirement, subject to a two-year limit. If the Company fails to exercise due
diligence, Genentech has the right to convert the exclusive license to a
non-exclusive license, and may be entitled to terminate the license. Genentech
may terminate the license agreement if the Company fails to: (1) maintain a
tangible net worth of at least $1,000,000; or (2) meet certain due diligence
milestones within two years of the date originally set for such milestones.
 
     As part of the license agreement, Genentech has an option to manufacture
the vaccine and a one-time option to be responsible for marketing the vaccine
worldwide. Should Genentech exercise its marketing option, Genentech will pay a
license fee to the Company equal to 33% of the Company's developmental costs of
the initial AIDSVAX product (including the Phase III clinical trials and
regulatory submissions), as well as a percentage of ongoing profits on the sales
of the vaccine. If Genentech does not elect its marketing option, it will
receive a royalty on product sales; the royalty rate depends on whether
Genentech elects to manufacture the vaccine being sold commercially.
 
     The Company has a service contract with Genentech originally expiring
December 31, 1998, whereby Genentech supplies research, vaccine production, and
administrative and regulatory support to the Company. Expenses incurred by
VaxGen for 1996, 1997 and 1998 were $1,442,000, $2,352,000 and 690,000,
respectively, under the contract. In excess of 95% of costs represent research
and development expenses in each period and the remainder are general and
administrative expenses. The contract has been extended under similar terms
through December 31, 2000.
 
     Prior to September 1998, the Company leased office space from Genentech.
Rent expense under this lease was $0, $18,000, and $80,000 in 1996, 1997, and
1998, respectively.
 
(5) STOCK OPTIONS AND WARRANTS
 
  (A) STOCK OPTION PLANS
 
     1996 Stock Option Plan
 
     The Company's 1996 Stock Option Plan (the Plan) has 500,000 shares of
common stock reserved for grant. Options granted under the Plan may be
designated as qualified or nonqualified at the discretion of the compensation
committee of the Board of Directors. At December 31, 1998, 61,750 shares were
available for grant under the Plan.
 
     Generally, options granted under the Plan vest and may be exercised over a
four-year period in increments of 25% each year beginning one year from the date
of grant; however, options can vest upon grant. All options expire no later than
ten years from the date of grant. Qualified stock options are exercisable at not
less than the fair market value of the stock at the date of grant and
nonqualified stock options are exercisable at prices determined at the
discretion of the Board of Directors, but not less that 85% of the fair market
value of the stock at the date of grant. All Board approved options have been
granted at an exercise price of $7.00 per share.
 
     1998 Director Stock Option Plan
 
     In 1998, the Board of Directors approved the 1998 Director Stock Option
Plan (the Director Plan) for nonemployee directors. Under the Director Plan,
37,500 shares of common stock are reserved for grant. On May 6, 1998,
nonemployee directors were granted options to purchase 8,571 shares of the
Company's
 
                                      F-11
<PAGE>   67
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
common stock at an exercise price of $7.00 per share. Such options vested
immediately. Under the Director Plan, options will automatically be granted to
nonemployee directors on the date of the annual shareholders' meeting. The
exercise price of each annual option grant is to be the fair market value of the
Company's common stock on the grant date. Each annual option grant fully vests
on the first anniversary of its grant date, subject to certain meeting
attendance requirements. At December 31, 1998, 28,929 shares were available for
grant under the Director Plan.
 
     A summary of stock option plans follows:
 
<TABLE>
<CAPTION>
                                                                    STOCK OPTIONS
                                                              -------------------------
                                                                            WEIGHTED
                                                                            AVERAGE
                                                                         EXERCISE PRICE
                                                              SHARES       PER SHARE
                                                              -------    --------------
<S>                                                           <C>        <C>
Outstanding at
  December 31, 1996.........................................       --        $  --
  Granted...................................................  200,000         7.00
  Exercised.................................................       --           --
  Canceled..................................................       --           --
                                                              -------        -----
Outstanding at
  December 31, 1997.........................................  200,000         7.00
  Granted...................................................  271,071         7.00
  Exercised.................................................   (5,750)        7.00
  Canceled..................................................  (24,250)        7.00
                                                              -------        -----
Outstanding at
  December 31, 1998.........................................  441,071        $7.00
                                                              =======        =====
</TABLE>
 
     At December 31, 1998, options to purchase 116,696 shares were vested and
exercisable under stock option plans. The weighted average remaining contractual
life of stock options outstanding at December 31, 1998 is 9.0 years.
 
     Had compensation cost for the plan been determined consistent with SFAS
123, the Company's net loss and loss per share would have been adjusted to the
pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31
                                                            --------------------------
                                                               1997           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Net loss -- as reported...................................  $(3,060,000)   $(9,163,000)
Net loss -- pro forma.....................................  $(3,005,000)   $(9,333,000)
Loss per share -- basic and diluted, as reported..........       $(0.60)        $(1.48)
Loss per share -- basic and diluted, pro forma............       $(0.60)        $(1.51)
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants in 1997
and 1998: expected dividend yield of 0%; expected volatility of 0%; risk-free
interest rate of 6.0%; and expected lives of four years. Using these
assumptions, the fair value of options granted in 1997 and 1998 was estimated as
$0.74 per share.
 
     During 1998, the Board of Directors approved for grant options to purchase
174,925 shares of the Company's common stock at an exercise price of $7.00 per
share and 302,900 shares at an exercise price of $9.50 per share. However, since
the grant of such options would cause the number of shares outstanding to exceed
the number of shares reserved for grant under the Plan, the Company's
shareholders must approve an increase in the number of shares reserved for grant
under the Plan. Because the shareholders
 
                                      F-12
<PAGE>   68
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
must first approve an increase in the number of shares reserved for grant, the
financial effect of the grants, if any, has not been reported in these financial
statements (note 8b).
 
  (B) COMMON STOCK WARRANTS
 
     In connection with the Company's 1997 private placement, certain
consultants were issued warrants to purchase approximately 219,000 shares of the
Company's common stock exercisable at $7.00 per share through June 2007. No
warrants have been exercised to date.
 
     The Company similarly agreed to issue warrants to purchase approximately
91,000 shares of the Company's common stock exercisable at $9.50 per share to
certain consultants in connection with the Company's 1998 private placement.
Such warrants were earned in December 1998 and January 1999. The warrants are to
be exercisable through 2009. No warrants have been exercised to date.
 
     Additionally, in connection with the 1997 private placement, the Company
granted an unrelated party a first option to maintain its approximately 4.8%
interest in the Company. Such right allows the party, at any subsequent private
placement or IPO through March 31, 2002, the option to acquire a proportionate
number of shares at an equivalent price to maintain its ownership percentage.
The party exercised its option in connection with the 1998 private placement.
 
(6) INCOME TAXES
 
     The Company has reported no income tax benefits due to limitations on the
recognition of deferred tax assets for financial reporting purposes.
 
     The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                              ------------------------
                                                                 1997          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Deferred tax assets:
  Research and experimentation credit carryforwards.........  $  195,000    $  440,000
  Net operating loss carryforwards..........................   1,705,000     4,758,000
  Other.....................................................      49,000        50,000
                                                              ----------    ----------
          Total gross deferred tax assets...................   1,949,000     5,248,000
  Less valuation allowance..................................   1,949,000     5,248,000
                                                              ----------    ----------
          Net deferred tax assets...........................  $       --    $       --
                                                              ==========    ==========
</TABLE>
 
     The increases in the valuation allowance for deferred tax assets of
$1,203,000 in 1997 and $3,299,000 in 1998 are primarily attributable to
increases in net operating loss and tax credit carryforwards whose utilization
cannot reasonably be assured.
 
     At December 31, 1998 the Company had net operating loss carryforwards of
approximately $13,995,000 and research and experimentation credit carryforwards
of approximately $440,000 which are available to offset future Federal taxable
income and income taxes, respectively, if any, and expire beginning in 2010.
 
(7) COMMITMENTS
 
  (A) LEASES
 
     The Company leases office facilities under cancelable operating leases,
which expire from 1999 to 2005. Until September 1998, the Company also leased
office space from Genentech.
 
                                      F-13
<PAGE>   69
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     In August 1998, the Company commenced a lease for office space at Mahidol
University in Bangkok, Thailand, ending at the conclusion of Phase III clinical
trials in Thailand. The lease requires monthly payments of $2,000. Additionally,
the Company began renovation of project office space at Taksin Hospital, also in
Bangkok. The Company is required to pay up to $100,000 for renovations, for
which the Company will receive use of the facility for a five-year term at no
additional cost.
 
     The Company entered into a 62-month laboratory lease commencing January 1,
1999 which requires the Company to expend a minimum of $500,000 in leasehold
improvements, in addition to its scheduled lease payments.
 
     Minimum annual payments, excluding required leasehold improvements and
renovations, under the foregoing leases, are as follows:
 
<TABLE>
<S>                                                         <C>
1999......................................................  $571,000
2000......................................................   625,000
2001......................................................   650,000
2002......................................................   652,000
2003......................................................   677,000
Thereafter................................................   877,000
</TABLE>
 
     Rent expense for 1996, 1997 and 1998 was $12,000, $66,000 and $353,000,
respectively.
 
  (B) EMPLOYMENT AGREEMENTS
 
     The Company has employment contracts with its Chairman and President ending
in 2002. Such agreements provide for discretionary bonuses and annual increases
in compensation as determined by the Board of Directors. Minimum compensation
under these two contracts aggregates $500,000 annually. Such contracts also
provide for the issuance of 125,000 shares of the Company's common stock to both
the Chairman and President of the Company once the per share value of the
Company's common stock has reached $28.00 over a 30 day period. This represents
four times the per share value of the Company's common stock based on the 1997
private placement, or upon a change in control. If the shares are issued as a
result of the common stock reaching an average value of $28 per share, the
Company will record an immediate non-cash charge of $7,000,000 to expense.
 
  (C) CLINICAL TRIALS
 
     In connection with Phase III clinical trials, the Company has contracted
with or will contract for the services of 50 to 60 medical clinics. The clinics
will provide the location, clinicians, oversight, and volunteers for the three
year testing of the Company's vaccine. Payment will be made over the period
based on the number of volunteers vaccinated, the number of return visits and
the subsequent testing and follow-up of these volunteers. Total commitments will
aggregate approximately $25,000,000, of which the Company had paid approximately
$2,400,000 as of December 31, 1998.
 
(8) SUBSEQUENT EVENTS
 
     (A) In connection with the Company's 1998 private placement, the final
closing and issuance of 583,913 shares of common stock for proceeds of
$5,273,000, net of issue costs of $264,000, occurred on January 11, 1999.
 
     (B) On April 1, 1999, the shareholders concurrently approved a one-for-two
reverse split of the number of shares of issued and outstanding common stock of
the Company effective April 9, 1999 and a
 
                                      F-14
<PAGE>   70
                                  VAXGEN, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
reduction in the number of common shares authorized from 30,000,000 to
20,000,000. These financial statements and the notes thereto reflect these
changes for all periods presented.
 
     Additionally, on April 1, 1999, the shareholders of the Company approved an
increase in the number of shares reserved for grant under the 1996 stock option
plan to 1,750,000 shares. This represents the measurement date for previously
granted but unapproved options (note 5a). As a result, the Company recorded
deferred compensation in the amount of $437,000 representing the excess of the
fair market value of the common shares on April 1, 1999 ($9.50 per share) over
the exercise price of the options. Additionally, the Company recorded an
immediate charge to expense of $100,000 for the portion of the vesting period
elapsed at April 1. The deferred compensation will be amortized to expense over
the remaining vesting period.
 
                                      F-15
<PAGE>   71
 
--------------------------------------------------------------------------------
 
Until  ___ , all dealer effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------------------------------------------------------------
 
                                 [VAXGEN LOGO]
 
                             PRUDENTIAL SECURITIES
                             PUNK, ZIEGEL & COMPANY
 
--------------------------------------------------------------------------------
<PAGE>   72
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
<TABLE>
<S>                                                           <C>
Securities and Exchange Commission registration fee*........  $   14,866
NASD filing fee.............................................       5,848
Nasdaq listing fee..........................................      78,875
Legal fees and expenses.....................................     300,000
Accountants' fees and expenses..............................     100,000
Printing and engraving expenses.............................     150,000
Transfer agent and registrar fees...........................      10,000
Directors' and officers' insurance expenses.................     350,000
Miscellaneous expenses......................................     290,411
                                                              ----------
          Total.............................................  $1,300,000
                                                              ==========
</TABLE>
 
---------------
* All expenses other than the SEC registration fee, the NASD filing fee and the
  Nasdaq listing fee are estimates.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Our amended and restated
certificate of incorporation and amended and restated bylaws provide for
indemnification of directors, officers, employees and other agents to the
maximum extent permitted by Delaware General Corporation Law. The underwriting
agreement also provides for cross-indemnification among VaxGen and the
underwriters with respect to certain matters, including matters arising under
the federal securities laws. We have entered into an indemnification agreement
with Ms. Katz, a director nominee, under which we have agreed to indemnify Ms.
Katz with respect to any liability in connection with this offering.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Since November 27, 1995, we have issued and sold the following unregistered
securities (adjusted to reflect the one-for-two reverse split):
 
          (1) On April 10, 1996, we issued 1,150,000 shares of common stock to
     Genentech, 500,000 shares of common stock to Donald P. Francis, and 250,000
     shares of common stock to Robert C. Nowinski, at a purchase price of $0.02
     per share for an aggregate purchase price of $38,000. Each of these
     purchases are insiders of VaxGen. We relied on Section 4(2) and Rule 701
     for exemption.
 
          (2) On October 29, 1996, we issued an aggregate of 230,000 shares of
     common stock to certain accredited investors at a purchase price of $0.02
     per share for an aggregate purchase price of $4,600; including 133,333
     shares to Donald P. Francis, 66,666 shares to Robert C. Nowinski, and
     20,000 shares to Stephen C. Francis. We relied on Section 4(2) and Rule 506
     for exemption.
 
          (3) From March 12, 1997 through December 31, 1997, we issued an
     aggregate of 3,607,047 shares of common stock to certain accredited
     investors at a price of $7.00 per share for an aggregate amount of
     $25,249,329; including 6,414 shares to Robert C. Nowinski. We also issued
     an aggregate of 372,354 shares of common stock to Genentech at an average
     price of $5.38 per share for an aggregate amount of $2,002,000. We relied
     on Section 4(2) and Rule 506 for exemption.
                                      II-1
<PAGE>   73
 
          (4) From December 4, 1998 through January 11, 1999, we issued an
     aggregate of 1,570,010 shares of common stock to certain accredited
     investors at a price of $9.50 per share for an aggregate amount of
     $14,915,095; including 20,000 shares to Stephen C. Francis. We relied on
     Section 4(2) and Rule 506 for exemption.
 
          (5) From November 17, 1997 through April 30, 1998, we granted options
     to employees under the 1996 stock option plan to purchase an aggregate of
     637,425 shares of common stock at an exercise price of $7.00 per share. We
     relied on Rule 701 for exemption.
 
          (6) From January 1, 1999 through April 15, 1999, we granted options to
     employees and consultants under the 1996 stock option plan to purchase an
     aggregate of 452,875 shares of common stock at an exercise price of $9.50
     per share. We relied on Rule 701 for exemption.
 
          (7) On April 1, 1999 we granted options to employees under the 1996
     stock option plan to purchase an aggregate of 8,000 shares of common stock
     at an exercise price of $13.40 per share. We relied on Rule 701 for
     exemption.
 
          (8) On May 6, 1998 we granted options to three directors under the
     1998 director stock option plan to purchase an aggregate of 8,571 shares of
     common stock at an exercise price of $7.00 per share. We relied on Rule 701
     for exemption.
 
          (9) On July 25, 1997 we issued aggregate warrants to purchase up to
     218,947 shares of common stock in connection with our 1997 private
     placement. We relied on Section 4(2) and Rule 506 for exemption.
 
          (10) We issued aggregate warrants to purchase up to 90,878 shares of
     common stock in connection with our 1998 private placement to consultants.
     We relied on Section 4(2) and Rule 506 for exemption.
 
          (11) As of April 15, 1999 we have issued an aggregate of 5,750 shares
     of common stock to employees on exercise of options. We received an
     consideration of $40,250 for such shares. We relied on Rule 701 for
     exemption.
 
     No underwriters were engaged in connection with these issuances and sales.
 
                                      II-2
<PAGE>   74
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
     1.1* Form of Underwriting Agreement
     3.1  Amended and Restated Certificate of Incorporation
     3.2* Amended and Restated Bylaws
     4.1* Specimen stock certificate
     5.1* Opinion of Graham & James LLP/Riddell Williams P.S.
    10.1  Registration Rights Agreement between VaxGen and Genentech,
          dated as of May 5, 1997
    10.2  1996 Registration Rights Agreement between VaxGen and
          certain stockholders
    10.3  1998 Registration Rights Agreement between VaxGen and
          certain stockholders
    10.4  1996 Stock Option Plan
    10.5  1998 Director Stock Option Plan
    10.6  Form of stock option agreement
    10.7  Form of common stock warrant
    10.8  Right of First Option Agreement between VaxGen and Leon A.
          Greenblatt, dated March 14, 1997
    10.9  Amended and Restated Employment Agreement between VaxGen and
          Robert C. Nowinski, dated January 1, 1998
    10.10 Amended and Restated Employment Agreement between VaxGen and
          Donald P. Francis, dated January 1, 1998
    10.11 Employment Agreement between VaxGen and Phillip W. Berman,
          dated as of October 10, 1997
    10.12 Employment Agreement between VaxGen and John G. Curd, dated
          as of May 3, 1999
    10.13 Employment Agreement between VaxGen and Carter A. Lee, dated
          as of April 1, 1999
    10.14 License Agreement with Genentech, dated as of May 1, 1996
    10.15 Services Agreement with Genentech, dated as of January 1,
          1999
    10.16 Letter of Intent for Supply Development Agreement between
          VaxGen and Pasteur Merieux Serums et Vaccins (Pasteur
          Merieux Connaught), dated April 10, 1998
    10.16.1 Amendment to Letter of Intent for Supply Development
          Agreement between VaxGen and Pasteur Merieux Serums et
          Vaccins (Pasteur Merieux Connaught), dated May 3, 1999
    10.17 Form of trial clinic agreement
    10.18 Lease Agreement between VaxGen and Oyster Point Tech Center
          LLC, dated October 26, 1998
    10.19 Lease Agreement between VaxGen and Spieker Properties, L.P.,
          dated May 20, 1998.
    23.1  Consent of Graham & James LLP/Riddell Williams P.S.
          (included in Exhibit 5.1)
    23.2  Consent of KPMG LLP
    23.3  Consent of Roberta R. Katz
    24.1  Power of attorney (included on page II-5)
    27.1  Financial data schedule
</TABLE>
 
---------------
* To be filed by amendment.
 
(b) FINANCIAL STATEMENT SCHEDULE
 
                                      II-3
<PAGE>   75
 
ITEM 17. UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
 
     The undersigned registrant hereby undertakes:
 
          (1) That for purposes of determining any liability under the
     Securities Act of 1933, the information omitted from the form of prospectus
     filed as part of this registration statement in reliance upon Rule 430A and
     contained in a form of prospectus filed by the registrant pursuant to Rule
     424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
     part of this registration statement as of the time it was declared
     effective.
 
          (2) That for the purpose of determining any liability under the
     Securities Act of 1933, each post-effective amendment that contains a form
     of prospectus shall be deemed to be a new registration statement relating
     to the securities offered therein, and the offering of such securities at
     that time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-4
<PAGE>   76
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Seattle, Washington on May 7, 1999.
 
                                          VAXGEN, INC.
 
                                          By: /s/ Robert C. Nowinski
                                            ------------------------------------
                                              Robert C. Nowinski, Chairman of
                                              the Board and Chief Executive
                                              Officer
 
                               POWER OF ATTORNEY
 
     Each person whose signature appears below constitutes and appoints Donald
P. Francis and Robert C. Nowinski, and each of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement and a new registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the United States Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<S>                                                    <C>                                <C>
 
               /s/ Robert C. Nowinski                   Chairman of the Board and Chief   May 7, 1999
-----------------------------------------------------    Executive Officer (Principal
                 Robert C. Nowinski                           Executive Officer)
 
                /s/ Donald P. Francis                       President and Director        May 7, 1999
-----------------------------------------------------
                  Donald P. Francis
 
                  /s/ Carter A. Lee                    Senior Vice President, Finance &   May 7, 1999
-----------------------------------------------------      Administration (Principal
                    Carter A. Lee                             Financial Officer)
 
                /s/ Phillip W. Berman                  Senior Vice President, Research &  May 7, 1999
-----------------------------------------------------        Development, Director
                  Phillip W. Berman
 
               /s/ Stephen C. Francis                              Director               May 7, 1999
-----------------------------------------------------
                 Stephen C. Francis
 
                /s/ William D. Young                               Director               May 7, 1999
-----------------------------------------------------
                  William D. Young
</TABLE>
 
                                      II-5