UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(MARK ONE)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                       OR

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

           For the transition period from ____________ to ____________

                         COMMISSION FILE NUMBER 1-10451

                          NORTH AMERICAN VACCINE, INC.
                          ----------------------------
             (Exact name of registrant as specified in its charter)

           CANADA                                              98-0121241
           ------                                              ----------
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                             Identification No.)

10150 OLD COLUMBIA ROAD, COLUMBIA, MARYLAND                             21046
-------------------------------------------                             -----
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:  (410) 309-7100

Former Address:  12103 Indian Creek Court, Beltsville, Maryland 20705  
---------------------------------------------------------------------  
(Former  name,  former  address and former  fiscal year,  if changed  since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF NOVEMBER 4, 1998 -- 32,208,351
SHARES


<PAGE>



                                TABLE OF CONTENTS



                                                                   PAGE NUMBER
                                                                   -----------
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements............................................  3

         Consolidated Balance Sheets.....................................  4

         Consolidated Statements of Operations...........................  5

         Consolidated Statements of Shareholders' Deficit................  6

         Consolidated Statements of Cash Flows...........................  7

         Notes to Condensed Consolidated Financial Statements............  9

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations................... 14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...... 25


PART II. OTHER INFORMATION

Item 5.  Other Information............................................... 25

Item 6.  Exhibits and Reports on Form 8-K................................ 27


SIGNATURES .............................................................. 28


                                        2

<PAGE>



                          PART I. FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

The following unaudited,  condensed  consolidated  financial statements of North
American  Vaccine,  Inc. and Subsidiaries  (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and,  therefore,  omit or condense
certain  footnotes  and  other   information   normally  included  in  financial
statements prepared in accordance with generally accepted accounting principles.
This report should be read in  conjunction  with the Company's  Annual Report on
Form 10-K  filed  for the year  ended  December  31,  1997.  In the  opinion  of
management,  all adjustments  (consisting only of normal recurring  adjustments)
necessary for a fair  presentation of the financial  information for the interim
periods  reported have been made.  Results of operations  for the three and nine
months ended  September  30, 1998,  will not  necessarily  be  indicative of the
results for the entire fiscal year ending December 31, 1998.














                                        3

<PAGE>



<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                              September 30,     December 31,
                                                                                1998              1997
                                                                             -------------     ------------
ASSETS                                                                       (Unaudited)
<S>                                                                           <C>              <C>      
CURRENT ASSETS:
  Cash and cash equivalents                                                   $   9,410        $  45,502
  Accounts receivable                                                             2,505              324
  Inventory                                                                       3,120            2,730
  Prepaid expenses and other current assets                                         922              615
                                                                              ---------        ---------
          Total current assets                                                   15,957           49,171
Property, plant and equipment, net                                               26,631           31,428
Investment in affiliate, at market                                                1,093              843
Deferred financing costs, net                                                     2,237            2,603
Cash restricted for lease obligation                                              5,271               --
Other assets                                                                        646              463
                                                                              ---------        ---------
     TOTAL ASSETS                                                             $  51,835        $  84,508
                                                                              =========        =========

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                            $   3,044        $   3,343
  Deferred revenue                                                                2,717            3,999
  Obligation under capital lease, current portion                                 1,712            1,593
  Other current liabilities                                                       7,033            5,064
                                                                              ---------        ---------
         Total current liabilities                                               14,506           13,999

6.50% Convertible subordinated notes, due May 1, 2003                            83,734           83,734
Obligation under capital lease, net of current portion                            2,811            4,110
Deferred rent credit, net of current portion                                         46               12
                                                                              ---------        ---------
     TOTAL LIABILITIES                                                          101,097          101,855

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:
  Preferred stock, no par value; unlimited shares authorized- Series A,
     convertible; issued and outstanding 2,000,000 shares;
     entitled to Can $2.50 per share in liquidation                               6,538            6,538
  Common stock, no par value; unlimited shares authorized; issued
    32,208,351 shares at September 30, 1998 and 31,936,539 shares at
    December 31, 1997                                                            80,742           78,509
  Cumulative comprehensive income excluded from net loss                            465              215
  Accumulated deficit                                                          (135,779)        (102,609)
  Loan receivable from former officer                                            (1,228)              --
                                                                              ---------        ---------
         Total shareholders' deficit                                            (49,262)         (17,347)
                                                                              ---------        ---------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                              $  51,835        $  84,508
                                                                              =========        =========
</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                       4
<PAGE>



<TABLE>
<CAPTION>
 NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE DATA)
 (UNAUDITED)

                                                                THREE MONTHS                     NINE MONTHS
                                                                   ENDED                            ENDED
                                                                SEPTEMBER 30,                    SEPTEMBER 30,
                                                            1998            1997            1998            1997
                                                          ---------       ---------       ---------       ---------

<S>                                                       <C>             <C>             <C>             <C>     
REVENUES:
     Marketing, research and development agreements       $  2,563        $  6,485        $  4,282        $  7,710
     Product sales                                             501             465             845           1,378
                                                          --------        --------        --------        --------
          Total revenues                                     3,064           6,950           5,127           9,088
                                                          --------        --------        --------        --------

OPERATING EXPENSES:
    Production                                               5,108           5,234          14,274          13,868
    Research and development                                 4,731           4,931          13,264          14,446
    General and administrative                               2,383           3,239           7,198           8,941
                                                          --------        --------        --------        --------
          Total  operating expenses                         12,222          13,404          34,736          37,255
                                                          --------        --------        --------        --------

OPERATING LOSS                                              (9,158)         (6,454)        (29,609)        (28,167)

OTHER INCOME (EXPENSES):
    Interest and dividend income                               276             739           1,232           2,489
    Interest expense                                        (1,571)         (1,685)         (4,793)         (5,077)
                                                          --------        --------        --------        --------

NET LOSS                                                  $(10,453)       $ (7,400)       $(33,170)       $(30,755)
                                                          ========        ========        ========        ========

BASIC AND DILUTED NET LOSS PER SHARE                      $  (0.32)       $  (0.23)       $  (1.03)       $  (0.97)

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING                                            32,206          31,627          32,132          31,604

</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                       5

<PAGE>



<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)



                               SERIES A                                     CUMULATIVE                                   TOTAL
                              CONVERTIBLE                                  COMPREHENSIVE                                 SHARE-
                            PREFERRED STOCK             COMMON STOCK          INCOME          ACCUM-         LOAN        HOLDERS'
                        ------------------------ ----------------------    EXCLUDED FROM      ULATED          TO         EQUITY
                          SHARES       AMOUNT       SHARES       AMOUNT      NET LOSS        DEFICIT        OFFICER     (DEFICIT)
                        ---------- ------------- ------------- --------    --------------   ----------   -----------  --------------
<S>                         <C>      <C>            <C>      <C>              <C>           <C>          <C>          <C>       
Balance,
  December 31, 1997         2,000    $   6,538      31,937   $  78,509        $     215     $(102,609)   $      --    $ (17,347)
Net loss                       --           --          --          --               --       (33,170)          --      (33,170)
Increase in market
  value of investment          --           --          --          --              250            --           --          250
                                                                                                                      ---------
Comprehensive income                                                                                                    (32,920)
Exercises of stock
  options                      --           --         260       2,017               --            --           --        2,017
Loan receivable from
  former officer               --           --          --          --               --            --       (1,228)      (1,228)
Shares issued under
  401(k) plan                  --           --          11         216               --            --           --          216

Balance,
                        ---------    ---------   ---------   ---------        ---------     ---------    ---------    ---------
  September 30, 1998        2,000    $   6,538      32,208   $  80,742        $     465     $(135,779)   $  (1,228)   $ (49,262)
                        =========    =========   =========   =========        =========     =========    =========    =========
</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                       6


<PAGE>



<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
                                                                                     NINE MONTHS
                                                                                        ENDED
                                                                                     SEPTEMBER 30,
                                                                                1998            1997
                                                                             ---------       ---------

<S>                                                                          <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                 $(33,170)       $(30,755)
    Adjustments to reconcile net loss to net cash used in operating
    activities:
          Depreciation and amortization                                         6,117           8,211
          Amortization and reduction of deferred financing costs                  366             377
          Contribution of common stock to 401(k) plan                             216             173
          Stock option compensation                                                --           1,313
          Increase in other assets                                               (183)            (10)
          Decrease in deferred rent                                               (29)            (67)
          Cash flows (used in) provided by other working capital items         (2,427)          6,317
                                                                             --------        --------
              Net cash  used in operating activities                          (29,110)        (14,441)
                                                                             --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                       (1,320)         (1,836)
                                                                             --------        --------
               Net cash used in investing activities                           (1,320)         (1,836)
                                                                             --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercises of stock options, net                               2,017           2,421
    Loan to a former officer related to the purchase of common stock           (1,228)             --
    Principal payments on capital lease obligation                             (1,180)         (1,108)
    Cash restricted for capital lease obligation                               (5,271)             --
                                                                             --------        --------
               Net cash (used in) provided by financing activities             (5,662)          1,313
                                                                             --------        --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                     (36,092)        (14,964)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 45,502          70,881
                                                                             --------        --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                     $  9,410        $ 55,917
                                                                             ========        ========
</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                       7


<PAGE>



<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(IN THOUSANDS)
(UNAUDITED)
                                                                            NINE MONTHS
                                                                               ENDED
                                                                            SEPTEMBER 30,
                                                                       1998           1997
                                                                     --------       --------

<S>                                                                  <C>            <C>    
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

    (Increase) decrease in :
          Accounts receivable                                        $(2,181)       $ 3,698
          Inventory                                                     (390)          (641)
          Prepaid expenses and other current assets                     (307)          (273)

    Increase (decrease) in :
          Accounts payable                                              (299)            78
          Other current liabilities                                      750          3,455
                                                                     -------        -------
    Net cash (used in) provided by other working capital items       $(2,427)       $ 6,317
                                                                     =======        =======



 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash paid for interest                                              $ 3,105        $ 3,308
                                                                     =======        =======

  Use of stock to exercise stock options                             $ 3,429        $    --
                                                                     =======        =======
</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

                                       8


<PAGE>




                  NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1. BUSINESS

The Company is engaged in the  research,  development,  production,  and sale of
vaccines for the  prevention of infectious  diseases in children and adults.  In
July 1998, the Company received  marketing  authorization from the U.S. Food and
Drug  Administration  ("FDA") to market its DTaP  vaccine  (Certiva(TM))  in the
United States for the prevention of diphtheria, tetanus, and pertussis (whooping
cough).  Under a marketing agreement between the Company and Abbott Laboratories
("Abbott"),  Abbott will market  Certiva(TM)  to private  physicians and managed
care  markets in the United  States for  immunization  of infants and  children.
Abbott began the launch of  Certiva(TM) in October 1998. The Company will market
Certiva(TM) and the  combination  vaccines to government  purchasers,  including
state  governments and the Centers for Disease  Control and Prevention  ("CDC").
Previously,   in  1996,  regulatory  approval  for  a  European  formulation  of
Certiva(TM)  was  granted  in  Sweden,  and  regulatory  approval  of a combined
DTaP-IPV  (polio)  vaccine  was granted in  Denmark.  In April 1997,  regulatory
approval  for the  Company's  monovalent  acellular  pertussis  (aP)  vaccine to
vaccinate children was also granted in Sweden,  thereby expanding the market for
the Company's aP vaccine.  In June 1998, the Company was advised that, under the
European mutual recognition  procedure,  the regulatory  authorities in Germany,
Austria,  Sweden and Finland  agreed to recognize  the  marketing  authorization
granted by Denmark for the DTaP-IPV vaccine.  The mutual  recognition  procedure
now requires that each of these regulatory authorities,  upon receipt of certain
prescribed  information,  issue the  national  marketing  authorization  for the
product.  The Company has  appointed  Chiron  Behring GmbH & Co.  ("Chiron")  to
market and distribute the DTaP-IPV product in Germany and Austria. Statens Serum
Institut,  Copenhagen,  Denmark, holds the product registrations and will market
and  distribute  the  product in the  Scandinavian,  Baltic and other  countries
comprising its territory.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF  ACCOUNTING  AND  CURRENCY.  The Company is a Canadian  corporation
incorporated under the Canadian Business Corporations Act ("CBCA") on August 31,
1989. The accompanying  consolidated  financial statements have been prepared in
accordance with generally accepted accounting  principles ("GAAP") in the United
States and are  denominated in U.S.  dollars,  because the Company  conducts the
majority of its transactions in this currency.  The application of Canadian GAAP
would  not  result  in  material  adjustments  to  the  accompanying   financial
statements  except for the impact of the  adoption  of  Statement  of  Financial
Accounting   Standards   ("SFAS")  No.  115.  The  effect  of  foreign  currency
translation has been immaterial.

(b)  PERVASIVENESS  OF ESTIMATES.  The  preparation  of financial  statements in
conformity with GAAP requires  management to make estimates and assumptions that

                                        9

<PAGE>



affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from estimates.

(c) REVENUE RECOGNITION.  Nonrefundable fees or milestone payments in connection
with research and  development or  collaborative  agreements are recognized when
they are earned in accordance with the applicable  performance  requirements and
contract  terms.  Revenue from product sales is recognized  when all significant
risks of ownership  have been  transferred,  the amount of the selling  price is
fixed and  determinable,  all significant  related acts of performance have been
completed,  and no other significant  uncertainties  exist. In most cases, these
criteria are met when the goods are shipped.

(d)  DEPRECIATION  AND  AMORTIZATION.  Prior to 1998,  depreciation of property,
plant and equipment,  with the exception of leasehold  improvements and an owned
facility,  was provided  using an accelerated  method over the estimated  useful
lives of the assets.  For property,  plant and equipment  purchased  after 1997,
depreciation will be provided using the straight-line  method over the estimated
useful lives.

(e) NET LOSS PER  SHARE.  Net loss per  share is  computed  in  accordance  with
Financial Accounting Standards Board release SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires dual  presentation of basic and diluted earnings per share
on the face of the income  statement for all periods  presented.  Basic earnings
per share  excludes  dilution  and is computed by dividing  income  available to
common stockholders by the weighted-average  number of common shares outstanding
for the period.  Diluted earnings per share reflects the potential dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock  that  then  shared  in the  earnings  of the  entity.  SFAS  No.  128 was
implemented  for the year  ended  December  31,  1997.  Options,  warrants,  and
convertible securities that were outstanding at the end of all periods presented
were not included in the  computation  of diluted loss per share as their effect
would have been anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical for all periods presented.

Since the effect of outstanding options,  convertible notes, and preferred stock
is antidilutive,  they have been excluded from the Company's  computation of net
loss per share for both 1998 and 1997. Accordingly, SFAS No. 128 did not have an
impact upon historical net loss per share as reported.

(f) In 1997,  the  Financial  Accounting  Standards  Board  issued SFAS No. 130,
"Reporting  Comprehensive Income." The Company presents its comprehensive income
in the statement of shareholders' equity.

(g) In 1997,  the  Financial  Accounting  Standards  Board  issued SFAS No. 131,
"Disclosures  About  Segments of an  Enterprise  and Related  Information."  The
Company is evaluating the impact of SFAS 131, which is required for its year end
1998 reporting.



                                       10

<PAGE>



2. PROPERTY, PLANT AND EQUIPMENT

In March 1998, the Company leased an  approximately  75,500 square foot facility
to be used for research,  development,  general and administrative functions and
for future  expansion of the Company's  operations.  The lease is for an initial
term of ten years, with two five-year  renewal options.  The initial base annual
rent under the lease is approximately  $981,000 with minimum annual escalations.
At the end of the fifth year of the initial  term,  the Company has the right to
terminate the lease for a specified fee. In addition,  the Company has an option
to  purchase  the  facility  during  specified  periods of the lease  term.  The
landlord   has  provided   the  Company  a  tenant   improvement   allowance  of
approximately  $1.4 million,  and will provide an additional $1.8 million to the
Company,  if needed,  under a line of credit to fund improvement costs in excess
of the tenant improvement allowance.  Monthly payments under this line of credit
would consist of interest only accruing at the simple annual rate of 12.75%, and
the entire  unpaid  principal  balance  would mature in September  2000,  unless
extended  by the  Company  up to March  2002.  The line of credit  also would be
secured  by  all  leasehold   improvements  and  related  facility  enhancements
purchased  with funds  provided by the  landlord.  No funds have been drawn down
under this line of credit.

3. INVENTORIES

Inventories  are stated at the lower of cost  (first-in,  first-out)  or market.
Components  of  inventory  cost  include  materials,  labor,  and  manufacturing
overhead.  Production  costs  attributable  to  a  product  are  expensed  until
regulatory approval is obtained for such product. Beginning in the third quarter
of 1998,  costs  to  produce  Certiva(TM)  for sale in the  United  States  were
capitalized. Any production costs incurred in excess of net realizable value are
expensed in the quarter in which they are incurred.  Inventories  consist of the
following:

                                         September 30,     December 31,
                                             1998              1997      
                                         -------------     ------------  
                                                 (in thousands)
      Raw materials                        $  2,497           $ 2,584
      Work in process                           464                 -
      Finished goods                            159               146
                                           --------           -------
           Total                           $  3,120           $ 2,730
                                           ========           =======




                                       11

<PAGE>




4. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following components:

                                              September 30,       December 31,
                                                   1998               1997      
                                              -------------       ------------  
                                                         (in thousands)
Payroll and fringe benefits                   $  2,153              $ 1,488
Accrued interest                                 2,309                  959
Reserve for contract loss                          720                  720
Accrued taxes                                      806                  642
Accrued costs of clinical trials                   329                  269
Accrued consulting and professional fees           358                  381
Other accrued liabilities                          358                  605
                                              --------              -------
           Total other current liabilities    $  7,033              $ 5,064
                                              ========              =======



5.  RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE

In connection with an operating  lease for a 35,000 square foot  development and
production  facility,  the Company  entered into an agreement  that included the
purchase  and lease of  equipment  and  leasehold  improvements.  As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February  2001, but may be extended  through 2011.  Under
the terms of the equipment  lease,  there are certain  financial  covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes),  and certain other financial  ratios.  The equipment lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application of all financial covenants.  The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted  cash is $5.3 million at September 30,
1998. The letter of credit will expire by its terms on November 1, 2000.

6.  STOCK OPTION COMPENSATION

In March  1997,  the  Company  extended  the  expiration  date for an  option to
purchase  150,000  shares of common  stock at an exercise  price of $11.13.  The
Company  recognized  as  compensation  expense $1.3 million in the quarter ended
March 31, 1997,  which was the excess of the fair market value of the  Company's
common stock as of the date of the option  extension  over the exercise price of
$11.13 per share.

                                       12

<PAGE>



7.  RELATED PARTY TRANSACTION

In April 1998, the Company extended a loan to its then president, related to the
exercise of expiring stock options. The loan was comprised of approximately $1.0
million for the exercise of the options and $217,000 for payment of  withholding
taxes.  The loan was made on a full recourse basis,  was for a six month period,
was  collateralized  by  approximately  94,000  shares  of  common  stock of the
Company,  which at the time of the loan had a fair  market  value of 125% of the
principal  amount of the loan. The loan accrued  interest at a fair market rate.
The loan was repaid in full at maturity during October, 1998, and the collateral
has been released.

8.  SUBSEQUENT EVENT

In September 1998, the Company reached an  agreement-in-principle  to complete a
$25 million financing through the private placement of 4.5% Convertible  Secured
Notes ("4.5% Notes"). When issued, the 4.5% Notes are convertible into shares of
the  Company's  Common Stock at a conversion  price of  approximately  $8.54 per
share.  The conversion  price was set based on the average  closing price of the
Company's  Common Stock for the twenty (20) trading days  preceding  the date of
the  announcement  of the  agreement-in-principle.  The  measurement  period for
determining  the  conversion  price began on August 26, 1998 and  terminated  on
September 23, 1998. The closing prices of the Company's Common Stock during that
period ranged from a low of $6.875 to a high of $11.25. The 4.5% Notes are to be
secured by certain  assets of the Company,  will  otherwise be  subordinated  in
right of payment to all existing and future senior  indebtedness of the Company,
will not restrict the incurrence of future senior or other  indebtedness  of the
Company  and will be  redeemable,  in whole or in  part,  at the  option  of the
Company  on or after one year from the date of  issuance  at par,  plus  accrued
interest to the redemption  date. Upon a change in control,  the Company will be
required  to offer to  purchase  all of the 4.5%  Notes  then  outstanding  at a
purchase price equal to 100% of the principal amount thereof, plus interest. The
repurchase  price will be payable in cash or, at the option of the  Company,  in
shares of the Company's  Common Stock.  The purchasers of the notes will include
the principal  shareholders of the Company,  BioChem Pharma Inc. ("BioChem") and
Dr.  Phillip  Frost,   which  have  agreed  to  purchase  up  to  36%  and  17%,
respectively, of the aggregate principal amount of the 4.5% Notes.






                                       13

<PAGE>




ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
           CONDITION AND RESULTS OF OPERATIONS
           -------------------------------------------------

           THE FOLLOWING  PARAGRAPHS IN THIS FORM 10-Q CONTAIN  CERTAIN  FORWARD
LOOKING  STATEMENTS,  WHICH ARE WITHIN THE  MEANING OF AND MADE  PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES  LITIGATION REFORM ACT OF 1995.
THESE FORWARD LOOKING STATEMENTS INCLUDE,  WITHOUT  LIMITATION,  THOSE REGARDING
THE  PROSPECTS  FOR  REGULATORY  APPROVAL,   THE  PROSPECTS  FOR  MARKETING  AND
DISTRIBUTION  OF VACCINE  PRODUCTS,  THE  PROSPECTS  FOR  INCREASING  PRODUCTION
CAPACITY AND EFFICIENCY, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE REVENUES
AND PROFITABILITY,  LIKELIHOOD OF ADDITIONAL  FUNDING UNDER LICENSE,  MARKETING,
DISTRIBUTION  AND/OR  DEVELOPMENT  AGREEMENTS OR FROM FURTHER  FINANCINGS,  CASH
REQUIREMENTS FOR FUTURE OPERATIONS, AND PROJECTED CAPITAL EXPENDITURES.  READERS
ARE CAUTIONED THAT FORWARD LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES,  AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS,  INCLUDING WITHOUT
LIMITATION THOSE DESCRIBED BELOW AS WELL AS THE RISKS ASSOCIATED WITH: OBTAINING
REGULATORY  APPROVAL OF PRODUCTS BY REGULATORY  AGENCIES INCLUDING THE U.S. FOOD
AND DRUG  ADMINISTRATION  ("FDA");  THE  PRODUCTION  OF VACCINES;  THE NATURE OF
COMPETITION;  NEED FOR EFFECTIVE MARKETING;  DEPENDENCE ON SUPPLIERS,  INCLUDING
STATENS SERUM INSTITUT ("SSI");  AND UNCERTAINTIES  RELATING TO CLINICAL TRIALS,
ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S.  SECURITIES AND EXCHANGE
COMMISSION ("SEC"),  INCLUDING THE 1997 ANNUAL REPORT ON FORM 10-K, TO WHICH THE
READER'S ATTENTION IS DIRECTED.

Background
----------

           The Company is engaged in the research, development,  production, and
sale of vaccines  for the  prevention  of  infectious  diseases in children  and
adults.

           In July 1998, the Company  received FDA approval to  manufacture  and
market  its DTaP  vaccine  (Certiva(TM))  in the  United  States.  Under the FDA
approval,  Certiva(TM) is indicated for active immunization  against diphtheria,
tetanus and  pertussis  (whooping  cough) in infants and  children  six weeks to
seven years of age. The Company produces the monocomponent  acellular  pertussis
toxoid and  formulates  the final product with  diphtheria  and tetanus  toxoids
manufactured and supplied by SSI.

           Under  a   marketing   agreement   between  the  Company  and  Abbott
Laboratories  ("Abbott"),  Abbott will market  Certiva(TM) to private physicians
and managed care markets in the United  States for  immunization  of infants and
children.  Abbott began the launch of  Certiva(TM)  in October 1998. The Company
will market Certiva(TM) and the combination  vaccines to government  purchasers,
including  state  governments and the Centers for Disease Control and Prevention
("CDC").  The marketing agreement also will allow Abbott to market the Company's
DTaP-HIB,  DTaP-IPV  and  DTaP-IPV-HIB  combination  vaccines,  which  are under
development.

           The Company and Abbott are collaborating in the clinical  development
of the  combination  vaccines,  and  the  Company  will  receive  payments  upon


                                       14

<PAGE>



achievement of prescribed clinical development  milestones.  Under the agreement
with  Abbott,  the Company  will  receive  revenues  from Abbott as it purchases
Certiva(TM)  and the  combination  vaccine  products  for resale to the  private
pediatric  market in the United States.  See  "Liquidity and Capital  Resources;
Outlook," below.

           FDA approval of Certiva(TM)  followed  regulatory approval in various
European countries of vaccines using the Company's  acellular pertussis vaccine.
The Swedish Ministry of Health granted  regulatory  approval in February 1996 to
market a European formulation of Certiva(TM).  This marketing  authorization was
the first regulatory  approval for any of the Company's  products.  In addition,
the Danish  National  Board of Health granted  regulatory  approval in September
1996 of the DTaP vaccine  combined  with an enhanced  inactivated  polio vaccine
("DTaP-IPV")  for all  primary and  booster  doses for  infants and  children in
Denmark.  In June 1998,  the Company was advised that under the European  mutual
recognition procedure,  the regulatory authorities in Germany,  Austria,  Sweden
and Finland  agreed to recognize the marketing  authorization  granted to SSI by
Denmark for the DTaP-IPV vaccine. The mutual recognition  procedure now requires
that these regulatory  authorities issue national marketing  authorizations upon
receipt  of  certain   information,   which  is  presently  being  prepared  for
submission.  The Company has appointed  Chiron Behring GmbH & Co.  ("Chiron") to
market and distribute the DTaP-IPV product in Germany and Austria. SSI holds the
European product registrations and will market and distribute the product in the
Scandinavian,  Baltic  and other  countries  comprising  its  territory  ("SSI's
Territory").

           Under  supply  agreements,  the Company  manufactures  the  acellular
pertussis   component,   and  SSI  manufactures  the  diphtheria,   tetanus  and
inactivated polio vaccine ("IPV") components for the DTaP and DTaP-IPV vaccines.
SSI is responsible  for the marketing and  distribution of the DTaP and DTaP-IPV
products in SSI's  Territory.  Accordingly,  the  Company  has been  selling its
acellular  pertussis  toxoid to SSI for  formulation  into DTaP and DTaP-IPV for
sale in its territory.

           In 1995, 1996 and 1997, the Company recognized  development  revenues
pursuant to agreements  with Pasteur  Merieux Serums et Vaccins,  a wholly-owned
subsidiary  of  Rhone-Poulenc,  which  operates  in North  America  through  its
subsidiary Connaught Laboratories ("Pasteur Merieux-Connaught"), under which the
Company  and  Pasteur  Merieux-Connaught  will  jointly  develop  the  Company's
meningococcus  B vaccine.  Additional  funding may be provided to the Company by
Pasteur   Merieux-Connaught   under  the  terms  of  the  license  and  clinical
development agreements. See "Liquidity and Capital Resources; Outlook," below.

            In May 1996, the Company  completed an offering of 6.50% convertible
subordinated  notes in the principal amount of $86.25 million due in full on May
1, 2003 ("6.5% Notes").  The net proceeds from this offering were  approximately
$82.7  million.  Interest  on the  notes is  payable  semiannually  on May 1 and
November  1 each  year.  The 6.5%  Notes  are  convertible  into  shares  of the
Company's Common Stock, at an initial  conversion price of approximately  $24.86
per share,  are  subordinated  to present and future senior  indebtedness of the


                                       15

<PAGE>



Company, will not restrict the incurrence of future senior or other indebtedness
by the Company,  and are  redeemable,  in whole or in part, at the option of the
Company on or after May 1, 1999 at certain  pre-established  redemption  prices,
plus  accrued  interest.  Upon a change in  control,  the Company is required to
offer to purchase all or part of the 6.5% Notes then  outstanding  at a purchase
price  equal  to  100% of the  principal  amount  thereof,  plus  interest.  The
repurchase price is payable in cash or, at the option of the Company,  in shares
of the Company's Common Stock. In December of 1997,  approximately  $2.5 million
of the principal  amount of the 6.5% Notes were converted into 101,207 shares of
the Company's  common stock.  As of September 30, 1998, the principal  amount of
the outstanding notes was $83.7 million.

           In September 1998, the Company reached an  agreement-in-principle  to
complete  a  $25  million  financing  through  the  private  placement  of  4.5%
Convertible  Secured Notes ("4.5%  Notes") with net proceeds  estimated at $24.6
million.  When  issued,  the 4.5%  Notes  are  convertible  into  shares  of the
Company's Common Stock at a conversion  price of approximately  $8.54 per share.
The conversion price was set based on the average closing price of the Company's
Common  Stock  for the  twenty  (20)  trading  days  preceding  the  date of the
announcement  of  the   agreement-in-principle.   The  measurement   period  for
determining  the  conversion  price began on August 26, 1998 and  terminated  on
September 23, 1998. The closing prices of the Company's Common Stock during that
period ranged from a low of $6.875 to a high of $11.25. The 4.5% Notes are to be
secured by certain  assets of the Company,  will  otherwise be  subordinated  in
right of payment to all existing and future senior  indebtedness of the Company,
will not restrict the incurrence of future senior or other  indebtedness  of the
Company  and will be  redeemable,  in whole or in  part,  at the  option  of the
Company  on or after one year from the date of  issuance  at par,  plus  accrued
interest to the redemption  date. Upon a change in control,  the Company will be
required  to offer to  purchase  all of the 4.5%  Notes  then  outstanding  at a
purchase price equal to 100% of the principal amount thereof, plus interest. The
repurchase  price will be payable in cash or, at the option of the  Company,  in
shares of the Company's  Common Stock.  The purchasers of the notes will include
the principal  shareholders of the Company,  BioChem Pharma Inc. ("BioChem") and
Dr.  Phillip  Frost,   which  have  agreed  to  purchase  up  to  36%  and  17%,
respectively,  of the  aggregate  principal  amount of the  Notes.  The  Company
anticipates  that the private  placement  of the 4.5% Notes will be  consummated
during the fourth quarter of 1998. This is a forward looking statement and there
are no  assurances  that this  offering  will be completed  in a timely  manner.
Failure to timely complete the offering would have a material  adverse effect on
the Company. See Item 5 -- "Other Information."

           In  November  1996,  the  Company   acquired  a  35,000  square  foot
manufacturing  facility in Beltsville,  Maryland.  That acquisition included the
purchase and lease of equipment and leasehold improvements and the assumption of
real estate leases.  The total  acquisition cost for the equipment and leasehold
improvements was approximately  $24.9 million,  which included a cash payment of
$17.2 million.  The balance of $7.7 million is represented by an equipment lease
obligation  accounted for as a capital lease,  which expires in 2000.  Under the
equipment  lease  agreement,  there are  financial  covenants  that obligate the
Company to maintain  certain  minimum cash and  investment  balances,  a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes) and certain other  financial  ratios.  The equipment  lease
agreement  permits the Company,  at its option,  to suspend the  application  of


                                       16

<PAGE>



financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application of all financial covenants.  The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted  cash is $5.3 million at September 30,
1998.  The letter of credit will  expire by its terms on  November  1, 2000.  In
addition,  the  Company  has  assumed  the real  estate  leases  underlying  the
facility,  which are scheduled to expire in February  2001,  but may be extended
through 2011.

           The Company had 290 and 261  employees as of  September  30, 1998 and
1997, respectively.

Results of Operations 
--------------------- 

THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

           In 1998,  the Company  recognized  $501,000 in revenue  from  product
sales to SSI and $2.6  million  under  collaborative  agreements.  Revenue  from
collaboration agreements consists of milestone and development funding under the
Company's  agreement with Abbott.  Revenue in 1997 totaled $7.0 million of which
$6.0 million was from a collaborative agreement with Pasteur Merieux-Connaught.

           Production  expenses  were  $5.1  million  in 1998  compared  to $5.2
million  in  1997.   The  decrease  in  these  expenses  in  1998  is  primarily
attributable to the capitalization of costs to produce Certiva(TM) inventory for
sale in the United States, and lower depreciation  expense related to the use of
an accelerated  depreciation  method in prior years. These decreases were offset
by higher labor expenses, attributable primarily to an increase in the number of
employees and to payments made under a licensing  agreement.  Costs attributable
to Certiva(TM)  production were expensed until regulatory  approval was obtained
in the third quarter of 1998.

           Research and development  expenses were $4.7 million in 1998 compared
to $4.9  million  in 1997.  The  decrease  is  attributable  primarily  to lower
depreciation expense related to the use of an accelerated depreciation method in
prior  years.  This  decrease  was  offset  in part  by  higher  building  costs
associated  with the new 75,500  square foot leased  facility  and to  increased
expenses for patent  filings.  See "Liquidity and Capital  Resources;  Outlook,"
below.

           General  and  administrative  expenses  were  $2.4  million  in  1998
compared  to $3.3  million in 1997.  The  decrease  is  primarily  due to a non-
recurring royalty payment made in 1997.

           Interest  and  dividend  income  decreased  to  $276,000 in 1998 from
$739,000  in 1997.  This  reduction  is due to a decrease  in the  average  cash
balance.


                                       17

<PAGE>



           Interest expense  decreased to $1.6 million in 1998 from $1.7 million
in 1997. The decrease is due to principal  payments made on the equipment lease,
as well as to the  conversion of $2.5 million  principal  amount of  convertible
notes into common stock of the Company in December 1997.

           The factors  cited above  resulted in a net loss of $10.5  million or
$0.32 per share in 1998 as compared  to a net loss of $7.4  million or $0.23 per
share in 1997. The weighted-average number of common shares outstanding was 32.2
million for 1998  compared to 31.6 million for 1997.  The increase in the number
of  weighted-average  shares  outstanding  for  1998  as  compared  to  1997  is
attributable  primarily to the exercise of stock  options and the  conversion of
$2.5 million principal amount of convertible notes into 101,207 shares of common
stock in December 1997.

NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

           In 1998,  the Company  recognized  $845,000 in revenue  from  product
sales to SSI and $4.3  million  under  collaborative  agreements.  Revenue  from
collaboration   agreements   consists   primarily  of  milestone   payments  and
development  funding under the Company's  agreement  with Abbott and to a lesser
extent milestone payments under a supply and distribution agreement with Chiron.
Revenue in 1997  consisted of $1.4  million  from product  sales to SSI and $7.7
million of revenue from collaborative  agreements of which $6.0 million was from
an agreement with Pasteur Merieux-Connaught.

           Production  expenses  were $14.3  million in 1998  compared  to $13.9
million  in  1997.   The  increase  in  these  expenses  in  1998  is  primarily
attributable  to an increase  in the number of  production  and  service-related
employees as the Company  prepared for regulatory  approval of Certiva(TM).  The
increase was offset in part by lower depreciation  expense related to the use of
an accelerated  depreciation  method in prior years and to the capitalization of
Certiva(TM)  inventory  for sale in the United  States  following  FDA approval.
Costs  attributable  to Certiva(TM)  production  were expensed until  regulatory
approval was obtained.

           Research and development expenses were $13.3 million in 1998 compared
to $14.5  million in 1997.  The  decrease  is  attributable  primarily  to lower
depreciation expense related to the use of an accelerated depreciation method in
prior years,  reduced  expenses  for clinical  trials,  and  reimbursements  for
expenses under a collaborative agreement. These decreases were offset in part by
higher labor  expenses as a result of an increase in the number of employees and
higher building costs.

           General  and  administrative  expenses  were $7.2  million in 1998 as
compared  to  $8.9  million  in  1997.  The  decrease  is  primarily  due to the
recognition of a non-cash compensation expense of approximately $1.3 million and
a non-recurring  royalty payment both incurred in 1997, offset in part by higher
labor expenses as a result of an increase in the number of employees.


                                       18

<PAGE>



           Interest and dividend  income  decreased to $1.2 million in 1998 from
$2.5  million in 1997.  This  reduction  is due  primarily  to a decrease in the
average cash balance.

           Interest expense  decreased to $4.8 million in 1998 from $5.1 million
in 1997. The decrease is due to principal  payments made on the equipment lease,
as well as to the  conversion of $2.5 million  principal  amount of  convertible
notes into common stock of the Company in December 1997.

           The factors  cited above  resulted in a net loss of $33.2  million or
$1.03 per share in 1998 as compared to a net loss of $30.8  million or $0.97 per
share in 1997.  Without  the effect of the $1.3  million  non-cash  compensation
expense,  the loss in 1997 would have been $29.4 million or $.93 per share.  The
weighted-average  number of common shares  outstanding was 32.1 million for 1998
compared   to  31.6   million   for  1997.   The   increase  in  the  number  of
weighted-average shares outstanding for 1998 as compared to 1997 is attributable
primarily to the exercise of stock  options and the  conversion  of $2.5 million
principal  amount of  convertible  notes into 101,207  shares of common stock in
December 1997.

Liquidity and Capital Resources; Outlook
----------------------------------------

           The  Company  recognized  a net loss of $10.5  million  in the  third
quarter of 1998 as  compared to a net loss of $11.0 in the second  quarter.  The
Company's cash  requirement for operations was $9.7 million in the third quarter
of 1998 as  compared  to $11.8  million  in the  second  quarter  of  1998.  The
Company's  cash  requirement  for  operations  is the net cash used in operating
activities  for the period being  reported less amounts  received under license,
marketing,  distribution  and/or development  agreements and further adjusted by
the timing of proceeds from the sale of an investment in an affiliate.

           The  decrease  in  cash  requirements  from  the  second  quarter  is
attributable  primarily to a semi-annual interest payment of $2.7 million on the
6.5% Notes made in May 1998.  At September  30,  1998,  the Company had cash and
cash  equivalents  of  approximately  $14.7  million,  of which $5.3  million is
pledged as collateral under the letter of credit agreement  described above, and
investment  securities in an affiliate with a market value of $1.1 million.  The
investment  consisted  of 125,000  shares of IVAX  Corporation  ("IVAX")  common
stock.  The  fair  market  value  of such  stock  as of  November  4,  1998  was
approximately $1.2 million. This investment is volatile and therefore subject to
significant fluctuations in value.

           The  Company  expects  to  incur a net  loss of  between  $11 and $12
million in the fourth quarter of 1998 and that cash  requirements for operations
in that  period  are  projected  to be  between  approximately  $11.5  and $12.5
million.   The  quarterly  operating  results  and  the  cash  requirements  for
operations  projected  for the fourth  quarter are not expected to be materially
different  from those  incurred in prior  periods  and will likely be  primarily
attributable  to  production  costs for  Certiva(TM);  production  costs for the
Company's  acellular  pertussis  vaccine  for  sale  in  Europe;  production  of


                                       19

<PAGE>



investigational   combination  vaccines  and  conjugate  vaccines  for  clinical
investigations;  costs incurred in preparing for and conducting clinical trials;
and the semi-annual  interest  payment of $2.7 million on the 6.5% Notes paid on
November 1, 1998.  Costs incurred to produce  Certiva(TM) for sale in the United
States  were  expensed  as  incurred  prior to FDA  approval.  Initial  sales of
Certiva(TM) made during the fourth quarter and into 1999 are expected to be made
from existing  inventory  produced  prior to regulatory  approval.  Accordingly,
until such  inventory  is sold,  the cost of goods to be reported by the Company
will be lower  than in  subsequent  periods.  Beginning  in the  third  quarter,
production expenses for Certiva(TM) are capitalized in accordance with generally
accepted  accounting  principles and recognized as expense when product is sold.
Any production costs incurred in excess of net realizable value will be expensed
in the  quarter in which they are  incurred.  This  paragraph  contains  forward
looking  statements  and the factors  which affect the actual cash  required for
operations will include: the production levels of vaccine product for commercial
sale and clinical investigations;  marketing costs associated with the launch of
Certiva(TM) in the United States; timing of regulatory authorization to commence
clinical investigations; timing for the commencement of planned clinical trials;
and the level of expenditures for the Company's ongoing research and development
program.

           The Company  anticipates  that it will incur  quarterly net operating
losses in 1999 based upon  several  factors.  As  described  above,  Abbott will
market  Certiva(TM) to private physicians and managed care markets in the United
States for  immunization of infants and children and the Company will market the
product to  government  purchasers,  including  state  governments  and the CDC.
Certiva(TM)  has been launched by Abbott  during the fourth  quarter of 1998 and
the  Company  initially  anticipates  limited  revenues  as the product is first
introduced to U.S. pediatricians and other vaccine purchasers. This is a forward
looking  statement  and the factors  that  affect the success of the  commercial
launch of Certiva(TM) include, among other things, the ability of Abbott and the
Company's internal marketing  organization to effectively  position  Certiva(TM)
against  competitive  products  and the  Company's  ability to  manufacture  and
deliver  products in  accordance  with  customer  orders.  In this  regard,  the
Company's  manufacturing  facility has limited production  capacity based on the
present  size,  configuration,  equipment,  processes  and  methods  utilized to
produce  Certiva(TM).  During the first  three  quarters  of 1999,  the  Company
expects that costs to produce  Certiva(TM)  and its acellular  pertussis  toxoid
will exceed their respective net selling  prices. The Company believes that unit
production  costs will be reduced  significantly  in late 1999,  as the  Company
substantially  increases  production  capacity  and  output  from  its  existing
facility.  The Company has completed  engineering  designs,  and is preparing to
begin  modifying its existing  facilities and operations in a manner intended to
enhance production capabilities and significantly expand production capacity and
efficiency.  These  enhancements are presently  scheduled to be completed in the
latter half of 1999.  Following  completion of these  enhancements,  the Company
believes it will produce  Certiva(TM)  in  quantities  sufficient  to generate a
gross margin based on current  known  pricing  arrangements.  The  foregoing are
forward looking  statements and the factors affecting the ability of the Company
to timely and efficiently expand its production capacity include,  among others,
the adequacy of engineering designs,  the availability of needed equipment,  the
manufacturing  experience with these enhancements,  the timeliness of regulatory
review of modifications, and the acceptability of such modifications to the


                                       20

<PAGE>



applicable regulatory authorities. There can be no assurances that the Company's
plans to increase  production capacity and output will be effective or result in
anticipated  production  efficiencies.  Finally,  the Company is continuing  its
development  efforts for several  products,  including those covered by existing
marketing,  license and research  agreements.  Although the Company is entitled,
under those  agreements,  to milestone  payments upon  achievement of prescribed
events,  there are no assurances  that such  milestone  events will occur during
1999,  or at all,  or that any  such  payments  will  contribute  materially  to
quarterly net operating results.

           Total  capital  expenditures  for the first nine  months of 1998 were
$1.3 million.  In March 1998, the Company leased an approximately  75,500 square
foot facility to be used for research,  development,  general and administrative
functions  and for future  expansion of the  Company's  operations.  The Company
received from the landlord a tenant  improvement  allowance of $1.4 million.  In
addition,  the landlord committed an additional $1.8 million, if needed, under a
line of credit to fund excess  improvement costs. The Company has not drawn down
under the line of credit and has not advised the landlord of any intention to do
so. The Company currently  anticipates that total capital expenditures to modify
the facility  would not exceed the $1.4  million  tenant  improvement  allowance
described above. In addition,  as noted above, the Company has completed designs
to expand  manufacturing  capacity and  efficiency  for its acellular  pertussis
toxoid  and  Certiva(TM).  Total  projected  capital  expenditures  for 1998 for
facilities' modifications,  equipment, systems and other capital additions could
range between $2 million to $4 million.  The foregoing  include  forward looking
statements.  The amount of and timing for capital  expenditures  could fluctuate
based upon a number of  factors  including,  without  limitation:  the  ultimate
configuration of the proposed facility modifications and leasehold improvements,
the equipment  purchases  required in order to expand the  Company's  production
capacity,  and the amount and timing of unanticipated costs to replace or repair
existing  equipment and systems in order to keep  facilities  operational and in
compliance with regulatory requirements.

           Cash  requirements  for operations and capital  expenditures  for the
remainder  of  1998  and  into  1999  are  expected  to be  financed  through  a
combination of: cash and cash equivalents (including the proceeds to be received
by the Company upon  completion of the sale of the 4.5% Notes);  product  sales;
fees and payments  from  existing  and/or new license,  marketing,  distribution
and/or  development  agreements;   the  exercise  of  stock  options;   mortgage
financing;  lines of credit;  and  equipment  leases.  In order to maintain  the
Company's production,  research,  development and growth at present or increased
levels, the Company anticipates that it will secure additional financing through
the sale of debt and/or  equity  securities  during the latter half of 1999.  If
such  financing is not  available to the Company,  then the Company would reduce
its cash requirements  through significant  reductions in operating levels. This
paragraph  contains forward looking  statements,  and there can be no assurances
that the Company  will be able to place debt or equity  securities  on favorable
terms or in an amount required to meet its future cash requirements, or that the
Company would be successful in reducing operating levels, or if operating levels
are reduced,  it would be able to maintain operations for any extended period of
time.


                                       21

<PAGE>



           The Company is considering executing further distribution  agreements
for  certain  markets   throughout  the  world.  The  Company  also  intends  to
collaborate in the development of selected  vaccine  products and may enter into
additional collaborative  development agreements. In addition, the Company is in
various  stages of discussions  with third parties  regarding  various  business
arrangements including licensing, joint venture, acquisition, and other business
agreements,  some of which possibly may be concluded in the near term. There are
no  assurances  that the Company will  successfully  negotiate and sign any such
agreements or that, if executed, the financial terms for any such agreement will
be significant.

           The foregoing  paragraphs  contain only a partial  description of the
factors  affecting the Company's  business  prospects and risk factors affecting
future  operations.  Reference is made to the risk factors and other information
contained in this report,  as well as the Company's  other filings with the SEC,
for a more complete  description  of the risks and  uncertainties  affecting the
Company and its business.

Tax and Other Matters
---------------------

           ACCOUNTING  AND TAX  IMPACT  OF  CONSUMMATION  OF  SALE OF 4.5%  NOTE
("OFFERING").  Under generally accepted accounting principles if the fair market
value of the Company's  Common Stock is greater than the conversion price of the
4.5% Notes on the date of issue,  then the Company must recognize for accounting
purposes  a  beneficial  conversion  feature  by  allocating  a  portion  of the
Offering's  proceeds  to  paid-in  capital.   The  discount  represented  by  an
allocation to paid-in capital would be calculated as the difference  between the
fair market value per share of the Common  Shares on the date the 4.5% Notes are
issued and the conversion price for the 4.5% Notes,  multiplied by the aggregate
number of shares  into  which the 4.5%  Notes  would  then be  convertible.  The
discount also would be deemed an increase in the effective  interest rate of the
4.5% Notes and would be reflected as a charge to interest expense.  The discount
would be amortized as interest expense over the period from the date of issuance
of the 4.5% Notes to the date the 4.5% Notes first become  convertible.  Because
the 4.5% Notes are  immediately  convertible,  this  would  result in a one-time
interest charge in the quarter in which the Offering closes.

           In addition,  with recent  amendments to the U.S. tax laws,  the 4.5%
Notes may be deemed to be disqualified debt  instruments,  such that the Company
would not be permitted to deduct the annual $1.1 million  interest  payments for
U.S.  federal  tax  purposes.  Under  the new law,  if  there  is a  substantial
certainty  that the 4.5% Notes would be  converted  as of the date of  issuance,
they would be disqualified for  deductibility  purposes.  In the near term, this
would reduce the Company's net operating  losses to be used to offset any future
operating profits, and if the Company earns any operating profits while the 4.5%
Notes are  outstanding,  the  non-deductibility  of the interest  payments would
effectively increase the Company's U.S. federal tax liability.


                                       22

<PAGE>



           OTHER  TAX  ISSUES.  At  December  31,  1997,  the  Company  and  its
subsidiaries had income tax loss carry forwards of  approximately  $22.3 million
to offset  future  Canadian  source  income and  approximately  $77.1 million to
offset future United States taxable income  subject to the  alternative  minimum
tax rules in the United States.

           If more than a certain  percentage of the Company's  assets or income
becomes  passive,  the Company  will be  classified  for U.S.  tax purposes as a
passive foreign investment company ("PFIC"),  and a U.S. taxpayer may be subject
to an additional  Federal  income tax on receiving  certain  dividends  from the
Company  or  selling  the  Company's  Common  Stock.  The  Company  has not been
classified  as a PFIC to date,  and it  intends  to, and  believes  that it can,
generate  sufficient other income to avoid being classified as a PFIC. This is a
forward looking statement and the factors affecting this classification include,
among other  things,  the timing and amount of revenue from product  sales;  the
timing and amount of license fees,  milestone  payments and development  funding
under  license,   marketing,   distribution  and  development  agreements;   the
classification of payments received by the Company as active or passive; and the
classification of the Company's assets as active or passive.

           In March 1997,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting  Standards ("SFAS") No. 128, "Earnings
Per  Share."  SFAS No. 128 is  effective  for  financial  statements  issued for
periods ending after December 15, 1997. The Company has implemented SFAS No. 128
for 1997 and 1998. SFAS No. 128 requires dual  presentation of basic and diluted
earnings per share. Basic loss per share includes no dilution and is computed by
dividing net loss  available  to common  stockholders  by the  weighted  average
number of common  shares  outstanding  for the  period.  Diluted  loss per share
includes  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted  into common stock.
Options,  warrants and convertible securities that were outstanding at September
30, 1997 and 1998,  were not  included in the  computation  of diluted  loss per
share as their effect would be anti-dilutive. As a result, the basic and diluted
loss per share amounts are identical.

           In June 1997, the FASB issued SFAS No. 130, "Reporting  Comprehensive
Income" and No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information."  The Company has  implemented  SFAS 130  beginning  with the first
quarter 1998 financial  statements.  The implementation of this standard did not
result in a material impact to the Company's financial  statements.  The Company
is  currently  evaluating  the  impact  of SFAS  131,  which is  required  to be
implemented in the Company's year end 1998 financial statements.

Impact of the Year 2000 Issue On the Company
--------------------------------------------

           The Year 2000 issue is the  result of some  computers,  software  and
other  equipment,  including  computer  code,  in which  calendar  year  data is
abbreviated to only two digits.  Management has initiated a company-wide program
to prepare  the  Company's  information  systems  for the year 2000.  Based on a


                                       23

<PAGE>



recent  internal  interim  assessment,  the Company  believes that the principal
management  information  system  software  that was  recently  purchased  and is
currently  being  implemented  is designed to be Year 2000  compliant.  However,
there can be no  assurances  in this  regard.  The  Company  intends to test the
system for Year 2000  compliance.  The Company also uses various "off the shelf"
software  applications for the storage and analysis of various types of data and
systems. Management is dependent on this software for day-to-day operations. The
Company is  currently  in the  inventory  and  assessment  phases in which it is
evaluating all such applications and systems,  as well as embedded  systems,  in
order to determine whether or not modifications or replacement will be necessary
to achieve Year 2000  qualification.  This is an ongoing process and the Company
is unable at this time to assess  the  impact,  if any,  this  assessment  might
ultimately have on the Company's  systems and operations or its future financial
position  or results of  operations.  Upon  completion  of its  assessment,  the
Company  will  commence  any required  remediation,  beginning  with its mission
critical systems.

           The  Company  has  not  communicated  with  all  of  its  significant
suppliers to determine the extent to which the Company is vulnerable to failures
by such third parties to remediate  their own Year 2000 issues.  The Company has
not been advised by its suppliers that costs to obtain Year 2000 compliance will
be passed on to the Company; however, there can be no assurances that such costs
will not be passed through to the Company  either  directly or indirectly or, if
passed  through to the Company,  the magnitude of such  charges.  The systems of
other companies on which the Company's systems rely may not be timely converted.
Accordingly,  there are no assurances that the failure by such other  companies'
systems  to achieve  Year 2000  qualification,  or  qualify in a manner  that is
compatible to Company  systems,  would not have a material adverse effect on the
Company. Upon completion of the assessment phase, the Company intends to develop
contingency plans for various possible scenarios.

           The Company has determined  that it has no exposure to  contingencies
related to the Year 2000 Issue for product it has sold. Based on the preliminary
internal  assessment,  the  Company has not  identified  any  material  costs or
expenditures  specifically  related to modifications of information  systems for
Year 2000  compatibility.  This  internal  assessment  is a continuing  process,
consequently there can be no assurances that the Company will not be required to
expend  significant  amounts on achieving Year 2000  qualification  or that such
expenditures  will not have a material  adverse  affect on future  results  from
operations or financial condition.

           The foregoing  paragraphs  contain forward looking statements and the
factors affecting the impact of Year 2000 on the Company include,  among others,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, unanticipated problems identified in the ongoing
compliance  assessment,  and  compliance of material  third party  suppliers and
vendors.


                                       24

<PAGE>




ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
           ----------------------------------------------------------

           Not applicable.


ITEM 5.    OTHER INFORMATION
           -----------------

           In September 1998, the Company reached an  agreement-in-principle  to
complete a $25  million  financing  through the  private  placement  of the 4.5%
Notes, with net proceeds estimated at $24.6 million. When issued, the 4.5% Notes
are convertible  into shares of the Company's Common Stock at a conversion price
of  approximately  $8.54 per share.  The  conversion  price was set based on the
average  closing  price of the  Company's  Common Shares for the twenty (20) day
period preceding the date of the announcement of the agreement-in-principle. The
measurement period for determining the conversion price began on August 26, 1998
and terminated on September 23, 1998. The closing prices of the Company's Common
Stock  during that period  ranged from a low of $6.875 to a high of $11.25.  The
4.5% Notes are to be secured by certain assets of the Company, will otherwise be
subordinated in right of payment to all existing and future senior  indebtedness
of the  Company,  will not  restrict the  incurrence  of future  senior or other
indebtedness of the Company and will be redeemable,  in whole or in part, at the
option of the  Company  on or after one year from the date of  issuance  at par,
plus accrued  interest to the  redemption  date.  Upon a change in control,  the
Company  will be  required  to offer to  purchase  all of the  4.5%  Notes  then
outstanding at a purchase price equal to 100% of the principal  amount  thereof,
plus interest. The repurchase price will be payable in cash or, at the option of
the Company,  in shares of the  Company's  Common Stock.  The  purchasers of the
notes will include the principal  shareholders  of the Company,  BioChem and Dr.
Phillip Frost, which have agreed to purchase up to 36% and 17%, respectively, of
the aggregate  principal amount of the 4.5% Notes. The Company  anticipates that
the private  placement of the 4.5% Notes will be  consummated  during the fourth
quarter of 1998. This is a forward looking statement and the factors that affect
the timely  completion  of the  offering  relate to the  investors'  receipt and
acceptance of the definitive documents relating to the offering, and the outcome
of the litigation  described  below.  Any failure or delay in  consummating  the
offering  as a result of the  litigation  or  otherwise  would  have a  material
adverse  effect on the Company  given the Company's  present cash  resources and
anticipated cash requirements for operations.

           On October 21, 1998, the Company  announced the appointment of Randal
D.  Chase,  Ph.D.  as the  Company's  President  and  Chief  Executive  Officer.
Previously,  Dr. Chase was the President and Chief Executive  Officer of Pasteur
Merieux-Connaught  (Canada) from January 1996. He also served as a member of the
Executive Committee for Pasteur  Merieux-Connaught  (Worldwide),  as Chairman of
Pasteur Merieux-Connaught  (Mexico) and as a member of the Board of Directors of
Rhone-Poulenc  Canada.  Prior to joining  Pasteur  Merieux-Connaught,  Dr. Chase
served  as  the   President  and  Chief   Executive   Officer  of  Quadra  Logic
Technologies.  Dr. Chase also serves on several  outside  boards,  including the
Board of New York General Hospital,  BIOtech Canada and Innovations  Foundations
at the University of Toronto.


                                       25

<PAGE>



           On November 3, 1998,  the  Company  was  advised  that Sharon  Mates,
Ph.D., a director of the Company and the Company's former  president,  initiated
litigation in United States District  Court,  District of Maryland (Civil Action
No. AW 98-3678) (the "Complaint")  against the Company, two of its directors and
BioChem.  The  claims  against  the  Company  seek  principally  the  following:
declaratory  relief against the Company  regarding the approval and consummation
of the private placement of the 4.5% Notes; injunctive relief seeking to prevent
the  Company  from  consummating  the  private  placement  of  the  4.5%  Notes;
injunctive  relief against the Company  relating to Dr. Mates' access to Company
books and record and to her continued service as a director;  declaratory relief
regarding the termination of employment and removal as president of the Company;
and claims against the Company  alleging abusive  discharge and defamation.  The
Complaint  also seeks  actual and  punitive  damages  against  the Company in an
unspecified amount. The Company intends to vigorously contest and defend against
these claims in this litigation. The Company believes that the claims against it
are without merit and that the Company has meritorious defenses available to it.
Accordingly, in the opinion of management, this lawsuit will not have an adverse
effect on the Company.  The foregoing are forward looking statements,  and there
can be no assurances that the Company will prevail in this  litigation.

           In addition,  the Complaint seeks  declaratory and injunctive  relief
against Dr. Frost and BioChem arising out of alleged violations of the reporting
requirements of Sections 13(d) and Rule 13d-1(a) of the Securities  Exchange Act
of 1934, as amended (the  "Exchange  Act"),  and  unspecified  damages from Drs.
Frost and Bellini and BioChem for tortious interference with Dr.
Mates' business relations with the Company.










                                       26

<PAGE>




                           PART II. OTHER INFORMATION



ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits
               --------

               Exhibit No.   Description
               -----------   -----------

               27            Financial Data Schedule















                                       27

<PAGE>



                                   SIGNATURES
                                   ----------


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


                            NORTH AMERICAN VACCINE, INC. 
                                   (Registrant)


                            By:    /s/ Randal D. Chase                
                                   -------------------------------------
                                   Randal D. Chase, Ph.D.
                                   President and Chief Executive Officer


                            By:    /s/ Lawrence J. Hineline          
                                   ------------------------          
                                   Lawrence J. Hineline
                                   Vice President - Finance














Date: November 6, 1998




                                       28