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 JUNE 30, 1999

                                             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:
--------------------------------------------------------------------------------
(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 AUGUST 3, 1999 - 32,843,169 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 1.    Legal Proceedings............................................  27

Item 2.    Changes in Securities and Use of Proceeds....................  27

Item 6.    Exhibits and Reports on Form 8-K.............................  28


SIGNATURES .............................................................  29


                                       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,  1998.  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 six
months ended June 30, 1999,  will not  necessarily  be indicative of the results
for the entire fiscal year ending December 31, 1999.










                                       3

<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                    JUNE 30,      DECEMBER 31,
                                                                     1999            1998
                                                                --------------  --------------
ASSETS                                                            (UNAUDITED)

CURRENT ASSETS:
<S>                                                             <C>                <C>

  Cash and cash equivalents                                        $   2,120       $  22,953
  Accounts receivable                                                  1,144           1,625
  Inventory                                                            4,730           4,067
  Prepaid expenses and other current assets                            1,034             998
                                                                 --------------  --------------
          Total current assets                                         9,028          29,643

Property, plant and equipment, net                                    24,264          25,315
Investment in affiliate, at market                                        -            1,554
Deferred financing costs, net                                          2,033           2,505
Cash restricted for lease obligation                                   4,052           4,877
Other assets                                                             739             631
                                                                 --------------  --------------
     TOTAL ASSETS                                                  $  40,116       $  64,525
                                                                 ==============  ==============

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable                                                 $   4,103       $   3,881
  Deferred revenue                                                        62             850
  Obligation under capital leases, current portion                     1,883           1,754
  Other current liabilities                                            5,667           5,848
                                                                 --------------  --------------
         Total current liabilities                                    11,715          12,333

6.5% Convertible subordinated notes, due May 1, 2003                  75,326          83,734
4.5% Convertible secured notes, due November 13, 2003                 25,000          25,000
Obligation under capital leases, net of current portion                1,510           2,356
Deferred rent credits, net of current portion                            147              76
                                                                 --------------  --------------
     Total liabilities                                               113,698         123,499

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 (or U.S. $3.4
     million in the aggregate) in liquidation                          6,538           6,538
  Common stock, no par value; unlimited shares authorized;
     issued 32,843,169 shares at June 30, 1999 and
     32,216,096 shares at December 31, 1998                           90,387          80,824
  Additional paid-in capital                                          11,956          11,956
  Cumulative comprehensive income excluded from net loss                   -             926
  Accumulated deficit                                               (182,463)       (159,218)
                                                                 --------------  --------------
         Total shareholders' deficit                                 (73,582)        (58,974)
                                                                 --------------  --------------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                   $  40,116       $  64,525
                                                                 ==============  ==============


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

</TABLE>


                                                            4

<PAGE>

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


                                                       THREE MONTHS ENDED              SIX MONTHS ENDED
                                                            JUNE 30,                       JUNE 30,
                                                       1999         1998           1999        1998
                                                  ------------- ------------   ----------- -----------
<S>                                                <C>           <C>            <C>         <C>

 REVENUES:
      Product sales                                   $   1,257    $      81     $   2,416   $     344
      Marketing, research and development agreements        423        1,148           788       1,719
                                                   ------------- ------------   ----------- -----------
           Total revenues                                 1,680        1,229         3,204       2,063
                                                   ------------- ------------   ----------- -----------

OPERATING EXPENSES:
     Production                                           5,582        4,185        10,372       9,166
     Research and development                             3,857        4,490         7,625       8,533
     Selling, general and administrative                  2,571        2,308         5,120       4,815
                                                   ------------- ------------   ----------- -----------
           Total operating expenses                      12,010       10,983        23,117      22,514
                                                   ------------- ------------   ----------- -----------

OPERATING LOSS                                         (10,330)      (9,754)      (19,913)    (20,451)

OTHER INCOME (EXPENSE):
     Gain on sale of investment in affiliate                  -            -           952           -
     Interest and dividend income                           126          402           380         956
     Interest expense                                    (2,786)      (1,605)       (4,664)     (3,222)
                                                   ------------- ------------   ----------- -----------

NET LOSS                                              $ (12,990)   $ (10,957)    $ (23,245)  $ (22,717)
                                                   ============= ============   =========== ===========

BASIC AND DILUTED NET LOSS PER SHARE                  $  (0.40)    $   (0.34)    $   (0.72)  $   (0.71)

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING                                         32,376       32,154        32,324      32,094


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

</TABLE>


                                       5

<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>


                         SERIES A                                           CUMULATIVE
                        CONVERTIBLE                                        COMPREHENSIVE                 TOTAL
                      PREFERRED STOCK        COMMON STOCK       ADDITIONAL     INCOME       ACCUM-       SHARE-
                    -------------------- ----------------------  PAID-IN    EXCLUDED FROM   ULATED       HOLDERS'
                    SHARES     AMOUNT     SHARES      AMOUNT     CAPITAL      NET LOSS      DEFICIT      DEFICIT
                    -------- ----------- ---------- ----------- ----------- ------------- ------------ ------------
<S>                   <C>       <C>         <C>        <C>        <C>        <C>           <C>          <C>

Balance,
  December 31, 1998   2,000     $ 6,538     32,216     $80,824    $ 11,956    $    926     $ (159,218)   $ (58,974)

Net loss                  -           -          -           -           -           -        (23,245)     (23,245)
Increase in market
  value of investment     -           -          -           -           -          26              -           26
Realized investment
  holding gain            -           -          -           -           -        (952)             -         (952)
                                                                                                         ----------
Comprehensive loss                                                                                         (24,171)

Exercises of stock
  options                 -           -         58         169           -           -              -          169
Shares issued under
  401(k) plan             -           -         19         166           -           -              -          166
Conversion of 6.5%
  subordinated
  convertible notes
  into common stock       -           -        550       9,228           -           -              -        9,228
                    -------- ----------- ---------- ----------- ----------- ------------- ------------ ------------
Balance,
  June 30, 1999       2,000     $ 6,538     32,843     $90,387    $ 11,956    $      -    $  (182,463)   $ (73,582)
                    ======== =========== ========== =========== =========== ============= ============ ============
</TABLE>

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


                                                          6
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                             JUNE 30,
                                                                      1999            1998
                                                                  -------------  ----------------
<S>                                                                  <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                         $ (23,245)        $ (22,717)
    Adjustments to reconcile net loss to net cash used in operating
    activities:
        Gain on sale of investment in affiliate                           (952)                -
        Depreciation and amortization                                    3,125             4,083
        Amortization and reduction of deferred financing costs             282               244
        Contribution of common stock to 401(k) plan                        166               139
        Debt conversion expense                                            940                 -
        Increase in other assets                                          (108)             (116)
        Increase (decrease) in deferred rent                                53               (32)
        Cash flows used in other working capital items                    (878)           (2,006)
                                                                  -------------  ----------------
         Net cash used in operating activities                         (20,617)          (20,405)
                                                                  -------------  ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                (1,814)           (1,095)
    Proceeds from sale of investment in affiliate                        1,581                 -
                                                                  -------------  ----------------
         Net cash used in investing activities                            (233)           (1,095)
                                                                  -------------  ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercises of stock options, net                          169             1,992
    Loan to a former officer related to the purchase of common stock         -            (1,228)
    Principal payments on capital lease obligations                       (977)             (777)
    Cash restricted for capital lease obligation                           825            (5,654)
                                                                  -------------  ----------------
         Net cash provided by (used in) financing activities                17            (5,667)
                                                                  -------------  ----------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                              (20,833)          (27,167)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          22,953            45,502
                                                                  -------------  ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                             $   2,120         $  18,335
                                                                  =============  ================

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

</TABLE>


                                       7
<PAGE>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                             JUNE 30,
                                                                     1999               1998
                                                                ----------------   ----------------

<S>                                                             <C>                <C>

CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

    (Increase) decrease in :
          Accounts receivable                                        $      481        $      (854)
          Inventory                                                        (663)              (188)
          Prepaid expenses and other current assets                         (36)              (225)

    Increase (decrease) in :
          Accounts payable                                                  222               (295)
          Deferred revenue and other current liabilities                   (882)              (444)
                                                                ----------------   -----------------
    Net cash used in other working capital items                     $     (878)       $    (2,006)
                                                                ================   =================



 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash paid for interest                                              $    3,476        $     2,984
                                                                ================   ================

  Equipment acquired through capital lease                           $      260        $         -
                                                                ================   ================

  Conversion of subordinated notes to common stock                   $    8,408        $         -
                                                                ================   ================

  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 markets  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 markets Certiva(TM)
in the U.S.  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.  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.  In the first half of 1999,  both
Germany and Austria  issued  their  national  marketing  authorizations  for the
Company's  DTaP-IPV vaccine pending the completion of labeling issues related to
distribution of the product.


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, and the interest charge of $12.0 million
related to the issuance of the 4.5%  Convertible  Secured Notes due November 13,
2003 ("4.5% Notes") during the fourth quarter of 1998.  Under Canadian GAAP, the
beneficial  conversion  feature of the 4.5% Notes  would be assigned a value and
reported as additional  equity to be amortized to retained earnings ratably over
the term of the 4.5% Notes  rather than being  charged to interest in 1998.  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) SEGMENT REPORTING.  In 1997, the Financial Accounting Standards Board issued
SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information."  The Company  implemented SFAS No. 131 for the year ended December
31, 1998 and has determined that it currently does not have reportable segments.
Product sales in the United States were approximately  $796,000 and $792,000 for
the first and second quarters of 1999, respectively, and $0 for each of the same
periods  in 1998.  Product  sales to  Europe  were  approximately  $363,000  and
$465,000 for the first and second quarters of 1999,  respectively,  and $263,000
and $81,000 for the same  periods in 1998.  All  products  are  currently  being
manufactured at the Company's one production  facility in the United States. The
production  process,  and ultimately product costing,  is primarily the same for
all of the Company's  acellular  pertussis  vaccine  products sold in the United
States and Europe.  Because of this,  and the  relative  consistency  in selling
prices,  as well as the  nature  of the  distribution  methods  utilized  by the
Company,  the  Company  does not  differentiate  and manage its  business  along
geographic lines.

3. 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  provided the Company a tenant  improvement  allowance of approximately
$1.4 million.


4. 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,  except that costs  attributable  to Certiva(TM)  production  under
non-regulatory  approved  optimization  production  processes are being expensed
until  regulatory  approval is obtained for such new  processes.  Any production

                                       10

<PAGE>

costs incurred in excess of net realizable  value are expensed in the quarter in
which they are incurred.

Inventories consist of the following:

                                         June 30,     December 31,
                                           1999            1998
                                         ------------------------
                                              (in thousands)

           Raw materials                 $ 2,110        $ 2,509
           Work in process                 1,947          1,024
           Finished goods                    673            534
                                         -------        -------
                Total                    $ 4,730        $ 4,067
                                         =======        =======


5. OTHER CURRENT LIABILITIES


Other current liabilities consisted of the following components:

                                             June 30,      December 31,
                                               1999            1998
                                             ------------------------
                                                  (in thousands)

Accrued interest                           $ 1,000          $ 1,103
Payroll and fringe benefits                  1,818            1,702
Accrued taxes                                  926            1,149
Reserve for contract loss                      720              720
Accrued consulting and professional fees       343              353
Accrued costs of clinical trials               221              216
Other accrued liabilities                      639              605
                                           -------          -------
   Total other current liabilities         $ 5,667          $ 5,848
                                           =======          =======


6.  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  decreases 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


                                       11
<PAGE>

credit and the  corresponding  restricted cash is $4.1 million at June 30, 1999.
The letter of credit will expire by its terms on November 1, 2000.

7.  CONVERTIBLE DEBT

In November  1998,  the Company  completed a $25 million  financing  through the
private  placement of 4.5%  Convertible  Secured Notes ("4.5% Notes").  The 4.5%
Notes were sold at par,  mature on November  13,  2003 and provide for  interest
payable  semi-annually  on May 13 and November 13 of each year commencing on May
13, 1999. The net proceeds from this offering were approximately  $24.6 million.
The 4.5% Notes are  convertible,  in whole or in part,  by the  holder(s) at any
time prior to maturity (unless  previously  redeemed or repurchased) into shares
of the Company's Common Stock at the conversion price of approximately $8.54 per
share.  The 4.5%  Notes  are  secured  by  certain  assets of the  Company,  are
otherwise  subordinated  in right of payment to all existing  and future  senior
indebtedness of the Company;  do not restrict the incurrence of future senior or
other  indebtedness of the Company and are  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.

On November 12, 1998, the date on which the 4.5% Notes were issued,  the closing
price for the  Company's  Common Stock was $12.625,  which  exceeded the initial
conversion  price  for the  4.5%  Notes.  The  difference  between  the  initial
conversion price and the fair market value per share on the date of issue of the
4.5%  Notes,  for the  number of  equivalent  shares,  has been  recognized  and
recorded as paid in capital,  with a corresponding  charge to interest  expense,
thus  increasing the effective  interest rate of the 4.5% Notes.  Given that the
4.5% Notes are immediately  convertible,  the interest  expense of approximately
$12.0  million  was  recognized   immediately  and  was  included  in  the  1998
Consolidated Statements of Operations.

In June 1999,  the Company  retired  $8.4 million  principal  amount of the 6.5%
convertible  subordinated notes ("6.5% Notes") in exchange for 550,000 shares of
Common  Stock.  As a result of the  transaction,  the Company has  recognized  a
one-time non-cash debt conversion  expense of approximately  $940,000,  which is
included in interest expense. The principal balance of the outstanding notes was
$75.3 million at June 30, 1999.

8.    LINE OF CREDIT

In July 1999, the Company obtained a $6 million  revolving line of credit from a
bank maturing  December 31, 1999. The interest rate on borrowings under the line
of credit will be LIBOR plus 265 basis points.  BioChem Pharma Inc.  ("BioChem")
an affiliate of the Company, has provided a guarantee for a line of credit which
may  remain  in place  for up to two  years.  Upon  drawing  down on the line of
credit,  BioChem will be entitled to receive  warrants to purchase up to a total
of 750,000 shares of the Company's  Common Stock. The warrants will be issued by
the Company  ratably as it draws down under the line of credit such that BioChem
will  receive a warrant for 125,000  shares of Common  Stock for each $1 million
drawn down by the  Company.  Each warrant will have a term of two years from the
date  of  issuance.   The  per  share   exercise  price  under  the  warrant  is
approximately  $5.14, which is the average of the closing price of the Company's
Common Stock on the American Stock Exchange over five trading days that began on


                                       12
<PAGE>

June 28 and ended on July 2,  1999.  Each  warrant  will  contain  anti-dilution
provisions and  registration  rights among other  provisions.  In July 1999, the
Company drew down $2 million under the revolving line of credit and  accordingly
issued warrants to purchase 250,000 shares of Common Stock to BioChem.

The Company could recognize up to approximately $1.6 million of interest expense
based upon the  issuance of these  warrants to purchase up to 750,000  shares of
common stock. The Company will incur expense on a prorata basis if less than all
of the warrants are issued.























                                       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 AND TIMING FOR FILING FOR AND OBTAINING REGULATORY  APPROVAL,  THE
PROSPECTS FOR AND TIMING OF MARKETING AND DISTRIBUTION OF VACCINE PRODUCTS,  THE
PROSPECTS FOR AND TIMING OF INCREASING  PRODUCTION CAPACITY AND EFFICIENCY,  THE
PROSPECTS FOR AND FACTORS AFFECTING FUTURE REVENUES AND PROFITABILITY, PROSPECTS
FOR REDUCED  PRODUCTION COSTS,  LIKELIHOOD OF ADDITIONAL  FUNDING UNDER LICENSE,
MARKETING,   DISTRIBUTION   AND/OR   DEVELOPMENT   AGREEMENTS  OR  FROM  FURTHER
FINANCINGS,  PROSPECTS FOR COMPLETING NEW BUSINESS  COLLABORATION  ARRANGEMENTS,
CASH REQUIREMENTS FOR FUTURE  OPERATIONS,  PROJECTED RESULTS OF OPERATIONS,  AND
PROJECTED CAPITAL  EXPENDITURES AND COST REDUCTIONS.  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 AND  FACILITIES BY REGULATORY  AGENCIES  INCLUDING THE U.S.
FOOD AND DRUG ADMINISTRATION ("FDA"); THE PRODUCTION OF VACCINES; THE TIMING FOR
AND EFFICIENCIES  RECOGNIZED FROM PRODUCT CAPACITY  IMPROVEMENTS;  THE NATURE OF
COMPETITION;  NEED FOR EFFECTIVE MARKETING;  DEPENDENCE ON SUPPLIERS,  INCLUDING
STATENS SERUM INSTITUT  ("SSI"),  AND  DISTRIBUTORS;  UNCERTAINTIES  RELATING TO
CLINICAL  TRIALS;  UNCERTAINTIES  RELATING TO  NEGOTIATING  AND  COMPLETING  NEW
BUSINESS  COLLABORATIONS;  AND THE TIMING AND NECESSITY FOR EXPENDITURES  AND/OR
COST  REDUCTIONS,  ALL AS  DISCUSSED  IN THE  COMPANY'S  FILINGS  WITH  THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC"),  INCLUDING THE 1998 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 marketing  authorization from the 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 markets
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  markets  Certiva(TM)  in the U.S. 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.  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.  In the first half of 1999,  both  Germany  and  Austria  issued  their
national marketing


                                       14
<PAGE>

authorizations  for the Company's  DTaP-IPV  vaccine  pending the  completion of
labeling issues related to distribution of the product.

         In  April  1999,  the  Company  announced  that  it  had  significantly
shortened  the  timeline  for  preparing  and  submitting  an  application   for
regulatory  approval to sell its group C meningococcal  conjugate vaccine in the
United Kingdom ("U.K.").  The Company anticipates that during the fourth quarter
of 1999 it will file with the U.K.  regulatory  authorities  the application for
approval of its group C meningococcal conjugate vaccine.

          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 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
Company,  do 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 June 1999, the Company retired $8.4 million of
the principal  amount of the 6.5% Notes in exchange for 550,000 shares of Common
Stock. The exchange was privately  negotiated with a single holder of the notes,
and resulted in the  recognition  of  approximately  $940,000 one-time  non-cash
expense  included in interest expense for the quarter ended June 30, 1999. As of
June 30, 1999, the principal amount of the outstanding notes was $75.3 million.

         In November  1998,  the Company  completed a private  placement  of $25
million  aggregate  principal  amount  of 4.5%  Convertible  Secured  Notes  due
November  13,  2003  ("4.5%  Notes").  The 4.5% Notes are  convertible  into the
Company's Common Stock at a conversion  price of approximately  $8.54 per share,
are secured by certain  assets of the Company,  and  otherwise  subordinated  in
right of payment to all existing and future senior  indebtedness of the Company,
do 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  November  13, 1999.  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 accrued
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 4.5% Notes were issued to
certain existing  shareholders,  affiliates and accredited investors,  including
BioChem Pharma Inc.  ("BioChem") and Phillip Frost,  M.D.,  which purchased 4.5%
Notes in the principal amount of $9 million and $4.25 million,  respectively. In
addition,  Societe financiere  d'innovation inc. ("Sofinov"),  a high technology
investment  fund that is a  subsidiary  of La Caisse  de depot et  placement  du
Quebec, purchased 4.5% Notes in the aggregate principal amount of $6.25 million.
Denis Dionne, a director of the Company, is the President of Sofinov.

           In July  1999,  the  Company  obtained  from a  commercial  bank a $6
million  revolving  line of credit  maturing  December  31,  1999.  BioChem  has
provided a  guarantee  for a line of credit  which may remain in place for up to


                                       15
<PAGE>

two years.  The  interest  rate on  borrowings  under the line of credit will be
LIBOR plus 265 basis  points.  Upon drawing down on the line of credit,  BioChem
will be entitled to receive warrants to purchase up to a total of 750,000 shares
of the  Company's  Common  Stock.  The  warrants  will be issued by the  Company
ratably as it draws down under the line of credit such that BioChem will receive
a warrant for 125,000  shares of Common Stock for each $1 million  drawn down by
the  Company.  Each  warrant  will  have a term of two  years  from  the date of
issuance. The per share exercise price under the warrant is approximately $5.14,
which is the average of the closing price of the  Company's  Common Stock on the
American  Stock  Exchange over five trading days that began on June 28 and ended
on  July 2,  1999.  Each  warrant  will  contain  anti-dilution  provisions  and
registrations rights among other provisions. In July 1999, the Company drew down
$2 million under the revolving line of credit and accordingly issued warrants to
purchase 250,000 shares of Common Stock to BioChem.  The Company could recognize
up to approximately  $1.6 million of interest expense upon the issuance of these
warrants to  purchase up to 750,000  shares of Common  Stock.  The Company  will
incur  this  expense  on a prorata  basis if less than all of the  warrants  are
issued.

         In August  1999,  the Company  entered into a contract for the sale and
leaseback  of its one  owned  facility.  The  sale  price  for the  facility  is
approximately  $2.1  million.  The lease for the facility will be for an initial
term of ten years with two five-year  renewal  options.  The initial base annual
rent under the lease is approximately  $240,000 with minimal annual escalations.
Closing  on  the   transaction   is  subject  to  customary  due  diligence  and
inspections.

         The  Company  had 303 and 296  employees  as of June 30, 1999 and 1998,
respectively.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 AND 1998

         In 1999, the Company  recognized total revenue of $1.7 million of which
approximately  $792,000  was from product  sales of  Certiva(TM)  to  government
agencies and to Abbott,  approximately $465,000 was from sales of product to SSI
and  approximately  $423,000 was under  collaborative  agreements.  Revenue from
collaborative  agreements  consists of  development  funding under the Company's
agreement   with  Abbott.   Revenue  in  1998  totaled  $1.2  million  of  which
approximately  $81,000 was from sales of product to SSI and the  remaining  from
collaborative agreements.

         Production  expenses were $5.6 million in 1999 compared to $4.2 million
in 1998.  The increase in these expenses in 1999 is primarily  attributable  to:
higher  material and labor expenses,  contractor  expenses,  FDA  post-marketing
surveillance  expenses,   write-offs  of  finished  product  due  to  production
failures;  and aP production  under  optimized  production  processes  that were


                                       16
<PAGE>

expensed  during the period.  These  increases  were  partially  offset by lower
depreciation  related  to the  use of an  accelerated  depreciation  method  for
equipment  acquired prior to 1998,  lower repair and maintenance  expenses,  and
increased  inventory levels.  Costs attributable to Certiva(TM)  production were
expensed  until  regulatory  approval was obtained in the third quarter of 1998,
however,   costs  attributable  to  aP  production  under  optimized  production
processes are being expensed until regulatory  approval is obtained for such new
processes. See "Projected Results From Operations."

         Research and development expenses were $3.9 million in 1999 compared to
$4.5  million  in  1998.  The  decrease  is  attributable   primarily  to  lower
depreciation  expenses related to the use of an accelerated  depreciation method
for equipment  acquired prior to 1998,  regulatory  consulting costs incurred in
1998  but not in 1999 in  seeking  FDA  approval  of  Certiva(TM),  lower  costs
associated with the new facility  obtained in the second quarter of 1998 because
in 1999 a smaller  portion of this facility was occupied by the research  group,
and lower clinical trial costs offset in part by higher labor cost attributed to
additional employees for product development projects.

         General and administrative  expenses were $2.6 million in 1999 compared
to $2.3 million in 1998.  In 1999,  there was an increase in labor costs as well
as increased  building costs associated with the new facility occupied beginning
in the third  quarter of 1998,  while the Company  incurred  rent expense on its
former headquarters  through July 1999. These increases were partially offset by
a  decrease  in  outside  marketing  related  costs,  which  was the  result  of
management's plan to reduce costs in the second quarter of 1999.

         Interest  and  dividend  income  decreased  to  $126,000  in 1999  from
$402,000 in 1998.  This  reduction is due primarily to a decrease in the average
cash balance.

         Interest expense increased to $2.8 million in 1999 from $1.6 million in
1998.  The  increase  is due  primarily  to the  approximate  one-time  non-cash
$940,000 expense  recognized on the conversion of $8.4 million  principal amount
of 6.5% Notes and  increased  debt  related to the 4.5% Notes  offset in part by
principal payments made on the equipment lease.

         The  factors  cited above  resulted  in a net loss of $13.0  million or
$0.40 per share in 1999 as compared to a net loss of $11.0  million or $0.34 per
share in 1998. The weighted-average number of common shares outstanding was 32.4
million for 1999 compared to 32.2 million for 1998. Without the $940,000 expense
recognized  on the  conversion  of the 6.5%  Notes the net loss  would have been
$12.1 million or $0.37 per share. The increase in the number of weighted-average
shares outstanding for 1999 as compared to 1998 is attributable primarily to the
exercise of stock options subsequent to June 30, 1998, and the conversion of the
6.5% Notes into 550,000 shares of Common Stock in June 1999.

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

         In 1999, the Company  recognized total revenue of $3.2 million of which
approximately  $1.6 million was from product sales of  Certiva(TM) to government
agencies and to Abbott,  approximately $828,000 was from sales of product to SSI
and  approximately  $788,000 was under  collaborative  agreements.  Revenue from
collaborative  agreements  consists of  development  funding under the Company's
agreement   with  Abbott.   Revenue  in  1998  totaled  $2.1  million  of  which
approximately  $344,000 was from sales of product to SSI and the remaining  from
collaborative agreements.



                                       17
<PAGE>

         Production expenses were $10.4 million in 1999 compared to $9.2 million
in 1998.  The increase in these expenses in 1999 is primarily  attributable  to:
higher  material and labor expenses,  contractor  expenses,  FDA  post-marketing
licensing  and  surveillance  expenses,  write-offs  of finished  product due to
production failures; and aP production under optimized production processes that
were expensed during the period.  These increases were partially offset by lower
depreciation  related  to the  use of an  accelerated  depreciation  method  for
equipment  purchased  prior  to  1998,  repair  and  maintenance  expenses,  and
increased  inventory levels.  Costs attributable to Certiva(TM)  production were
expensed  until  regulatory  approval was obtained in the third quarter of 1998;
however, costs attributable to Certiva(TM) production under optimized production
processes are being expensed until regulatory  approval is obtained for such new
processes.

         Research and development expenses were $7.6 million in 1999 compared to
$8.5  million  in  1998.  The  decrease  is  attributable   primarily  to  lower
depreciation  expenses related to the use of an accelerated  depreciation method
for equipment  acquired prior to 1998,  regulatory  consulting costs incurred in
1998 but not in 1999 in seeking FDA  approval  of  Certiva(TM),  lower  facility
related costs associated with the new facility obtained in the second quarter of
1998  because in 1999 a smaller  portion of this  facility  was  occupied by the
research  group,  lower clinical trial costs offset in part by higher labor cost
attributed to  additional  employees  for product  development  projects and the
reimbursement of expenses under a collaborative agreement in 1998.

         General and administrative  expenses were $5.1 million in 1999 compared
to $4.8  million  in 1998.  In 1999  there was an  increase  in  building  costs
associated  with the new facility  occupied  beginning  in the third  quarter of
1998, while the Company incurred rent expense on its former headquarters through
July 1999,  and an increase  in labor costs and  supplies  and  services.  These
increases  were  partially  offset by a decrease  in outside  marketing  related
costs,  which was the result of management's  plan to reduce costs in the second
quarter of 1999.

         In March 1999,  the Company sold the  remaining  125,000  shares of its
investment in IVAX  Corporation  ("IVAX") Common Stock generating gross proceeds
of approximately $1.6 million and income of $952,000.

         Interest  and  dividend  income  decreased  to  $380,000  in 1999  from
$956,000 in 1998.  This  reduction is due primarily to a decrease in the average
cash balance.

         Interest expense increased to $4.7 million in 1999 from $3.2 million in
1998. The increase is due primarily to the $940,000  expense,  recognized on the
conversion of $8.4 million  principal  amount of 6.5% Notes,  and increased debt
related  to the 4.5%  Notes  offset in part by  principal  payments  made on the
equipment lease.

         The  factors  cited above  resulted  in a net loss of $23.2  million or
$0.72 per share in 1999 as compared  to a net loss of $22.7  million or $.71 per
share in 1998. The weighted-average number of common shares outstanding was 32.3
million for 1999 compared to 32.1 million for 1998.  Without the gain on sale of
the  investment in an affiliate and the expense  recognized on the conversion of
the 6.5% Notes,  the net loss would have been $23.2  million or $0.72 per share.


                                       18
<PAGE>

The increase in the number of  weighted-average  shares  outstanding for 1999 as
compared to 1998 is  attributable  primarily  to the  exercise of stock  options
after June 30, 1998, and the conversion of the 6.5% Notes into 550,000 shares of
the Company's Common Stock in June 1999.

LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK

         The Company's  cash  requirement  for operations for the second quarter
was $10.7 million as compared to $9.9 million in the first quarter of 1999.  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.

         At June  30,  1999,  the  Company  had cash  and  cash  equivalents  of
approximately  $2.1 million.  In addition,  the Company had  approximately  $4.1
million of  restricted  cash  pledged as  collateral  under the letter of credit
agreement,  which  will be  reduced  in amount as  payments  are made  under the
equipment lease described in Note 6 of the financial statements.  In March 1999,
the Company sold all 125,000  shares of its  investment in IVAX resulting in net
proceeds of approximately $1.6 million.

         PROJECTED RESULTS FROM OPERATIONS. The Company anticipates that it will
report a net loss of between $10 and $11 million for the third  quarter of 1999.
It will likely incur a quarterly  net  operating  loss in the fourth  quarter of
1999,  based upon  several  factors.  The  factors  included  in  assessing  the
projected  losses  are,  among  others:  limited  projected  revenues;   current
manufacturing  limitations;  the  costs  required  to  accelerate  the  group  C
meningococcal  conjugate  vaccine  program;  the timing and amount of  milestone
payments  under  existing  collaboration  agreements;  the  timing and amount of
up-front and other payments under anticipated license,  distribution,  marketing
and collaboration agreements; and the recognition of expense associated with the
issuance  of  warrants  to BioChem  under its line of credit  guarantee  for the
Company, all as more completely discussed in the following paragraphs.

         Quarterly  operating  results  will be  affected  by the  revenue  from
Certiva(TM)  sales, which began during the middle of the fourth quarter of 1998.
Revenues from the sale of Certiva(TM) and aP sales to SSI have been limited. The
reported net sales during the second  quarter of 1999, the first quarter of 1999
and the fourth quarter of 1998 were  approximately  $792,000,  $796,000 and $1.2
million,  respectively.  Although, the national marketing  authorization for the
sale and  distribution  of its DTaP-IPV  vaccine in Germany and Austria has been
completed,  labeling  amendments related to distribution of the product have not
been  finalized.  Until the labeling  issues are  resolved,  the Company will be
unable to sell any aP vaccine through Chiron Behring GmbH and Co., its appointed
distributor.  There can be no assurance  that this issue will be  satisfactorily
resolved,  or that if resolved,  any product  launch will  generate  significant
revenues in 1999. The Company  anticipates limited revenues from Certiva(TM) and
aP  during  the  remainder  of 1999 and into  2000  due to  production  capacity
limitations  for  Certiva(TM)  and aP, as  described  below,  and as the Company
changes  over  from  Certiva(TM)  and aP  production  to  produce  the  group  C


                                       19
<PAGE>

meningococcal  conjugate  vaccine  beginning  in the  fourth  quarter of 1999 in
anticipation of the commercial launch of the product in the United Kingdom.  The
Company anticipates filing in the fourth quarter of 1999 for regulatory approval
of the group C meningococcal conjugate vaccine.

         As noted above, quarterly operating results will be affected by various
manufacturing  limitations.  The  Company's  manufacturing  facility has limited
production  capacity  based  on  the  present  size,  configuration,  equipment,
processes and methods utilized to produce,  test and release Certiva(TM) and its
acellular  pertussis toxoid. In addition,  production  expenses are mainly fixed
and consist  primarily of expenses  relating to the operation of its  production
facility and  maintaining a ready work force.  Further,  from time to time,  the
Company experiences  disruptions and production failures.  These disruptions and
failures  increase  unit  production  costs as units are lost in the  production
process.  These  factors have  contributed  to higher  production  costs for the
Company's acellular  pertussis products,  which costs currently exceed their net
realizable value.  These excess costs are expensed in the quarter incurred.

         In order to  address  these  production  limitations,  the  Company  is
implementing a two-step enhancement program. First, the Company is modifying its
existing facilities and operations in a manner intended to significantly  expand
production  capacity and efficiency.  These  enhancements began during the first
quarter  and are on track to be  completed  in time for the  Company to file the
appropriate  documentation  with the FDA by the end of the third quarter of 1999
in seeking the approval for these  enhancements.  Following  completion  of this
first step,  the Company  believes  that the  manufacturing  facility  will have
substantially  increased  production  capacity and output. The second step is to
eliminate  bottlenecks  and streamline  and  strengthen the product  testing and
release  process  thereby  reducing  production  disruptions  and  failures  and
enhancing the reliability of the production process. This work will be performed
during the  remainder of 1999 and into early 2000.  Upon  completion  of both of
these programs,  the Company expects that unit production  costs will be reduced
significantly and that Certiva(TM) could be produced in sufficient quantities to
generate a gross profit based on current  known  pricing  arrangements,  current
competitive environment, and projected mix of customer purchases.

         As a result of a recent assessment of potential health risks related to
mercury  contained in food and drugs  conducted by the FDA, in cooperation  with
the Environmental Protection Agency, the continued use of thimerosal in vaccines
has been questioned.  Thimerosal is a mercury-containing  preservative  commonly
used in vaccines packaged in multi-dose vials. Thimerosal is approved for use by
the FDA and is currently  included in more than 30 licensed vaccines in the U.S.
Vaccines  containing  this  preservative  have been  administered to hundreds of
millions of children and adults worldwide, with no scientific or medical data to
suggest that it poses a public health risk. In July 1999, the Company decided to
follow the  developing  recommendations  of these  agencies  and move toward the
discontinued  use of thimerosal in  Certiva(TM).  The Company  intends to submit
data to the FDA on the  European  formulation  of  Certiva(TM),  which  does not
contain  thimerosal,  to facilitate the approval and  introduction in the United
States of a thimerosal-free  formulation of the product in single-dose syringes.
The Company is currently  evaluating the impact of this decision on the per unit
cost to produce Certiva(TM), as well as the impact to the current selling price.
The Company expects to submit data to the FDA on a thimerosal-free formulation


                                       20
<PAGE>

of  Certiva(TM)  before the end of the fourth  quarter of 1999,  and the Company
will work expeditiously with the FDA to obtain approval. The American Academy of
Pediatrics  has called  for the FDA to  expedite  the  review of  manufacturers'
supplemental  applications to eliminate or reduce the mercury content of vaccine
products.  The U.S. Public Health  Service,  the Centers for Disease Control and
Prevention,  and the American  Academy of Pediatrics  continue to recommend that
all  children  should  be  immunized  against  the  diseases  indicated  in  the
recommended  immunization  schedule. The Company will in the interim continue to
sell  previously  produced  thimerosal  containing  Certiva(TM)  that  it has in
inventory  and  has  begun  to   manufacture   thimerosal-free   Certiva(TM)  in
anticipation of regulatory approval.

         As a  function  of  the  two-step  enhancement  program  for  acellular
pertussis   production  and  testing  processes,   the  regulatory  work  for  a
thimerosal-free  Certiva(TM),  and the market  opportunities for a launch of the
group C meningococcal conjugate vaccine in 2000, the Company, beginning in early
fourth quarter 1999,  will produce its group C meningococcal  conjugate  vaccine
for sale in the U.K. in the facility  that is currently  producing  Certiva(TM).
All  costs  associated  with  this  production  effort  will be  expensed  until
regulatory approval is obtained. Because of the planned production of Meningitis
C vaccine in this facility,  neither acellular pertussis vaccine nor Certiva(TM)
will be manufactured until at the earliest,  the beginning of the second quarter
of 2000. Thus, sales of acellular pertussis  containing products will be limited
and may result in reduced sales in the second half of 1999 through the second or
third quarter of 2000.

         Under the guarantee  agreement  with BioChem for the $6 million line of
credit  obtained in July 1999,  the Company will issue warrants to BioChem as it
draws down on the line of credit.  In July,  the Company drew $2 million down on
this line of credit and issued a warrant to BioChem  for  250,000  shares of the
Company's Common Stock. The Company will recognize up to approximately  $550,000
of interest expense associated with the issuance of these warrants.  The Company
will incur additional  expense on a prorata basis should the remaining  warrants
be issued.

         Finally,  future  operating  results are dependent  upon the amount and
timing of further  milestone and other  payments under existing and new license,
distribution  or  development  agreements.  During  1999,  the  Company  will be
continuing its development efforts for several products, including those covered
by existing marketing,  license and research agreements. The Company is entitled
under those  agreements  to milestone  payments upon  achievement  of prescribed
events. In addition,  the Company is entitled to be paid for certain  prescribed
development  costs as  incurred.  The  milestone  payments  under  the  existing
agreements  are tied to  measured  progress  in the  regulatory  process for the
Company's  combination  and group B  meningococcal  vaccines.  Although  initial
clinical development plans have been completed for these products,  and clinical
trials are projected to commence during 1999,  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.

         The foregoing  paragraphs include forward looking statements  including
statements  as to:  revenue  projections,  earnings  (losses) and  likelihood of
further  regulatory  approvals;  the  ability  of  the  Company  to  timely  and
efficiently  expand its production  capacity and lower unit costs; the timing of
group C meningococcal  conjugate vaccine production and regulatory filings;  and
the ability of the Company to address  production  failures,  among others.  The


                                       21
<PAGE>

factors that affect the level of future  revenues  from product  sales  include,
among other things, the ability of the Company and its distribution  partners to
effectively   position  the  Company's  products  against  competitive  products
(including safety,  efficacy, and pricing), the Company's ability to manufacture
and deliver products in accordance with customer  orders,  the timing and amount
of product orders,  and the timing of future product launches.  The factors that
affect  the  ability  of the  Company  to  timely  and  efficiently  expand  its
production capacity include,  among others, the adequacy of engineering designs,
the  manufacturing  experience  with  these  enhancements,   the  timeliness  of
regulatory review of modifications,  the acceptability of such  modifications to
the  applicable  regulatory   authorities,   and  the  ability  to  successfully
streamline and strengthen the product testing and release process.  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  and
reduced unit cost or will be acceptable to any  regulatory  agency.  The factors
affecting timing for  commercialization  of the group C meningococcal  conjugate
vaccine include, among other things,  successful changeover in the manufacturing
facility  and results of ongoing  clinical  trials.  In  addition,  there are no
assurances that the steps taken by the Company to address production disruptions
and  failures  and quality  testing  inefficiencies  will be  effective  or that
disruptions,  failures,  and  inefficiencies  will not  continue  in the future.
Production disruptions, failures or inefficiencies could have a material adverse
effect on the Company's future operating  results and could affect the Company's
existing  licenses as well as any  applications for approval for its products or
the timing of such approval. No assurances can be given that the Company will be
successful in maintaining consistent and continuous commercial production of its
products.  Further,  because the Company's manufacturing  operations are located
principally in one facility,  any condition or event that adversely  affects the
condition or operation of such facility would have a material  adverse affect on
the Company's financial condition and future results of operations.

         PROJECTED CASH  REQUIREMENTS FOR OPERATIONS.  The cash requirements for
operations  in the third  quarter of 1999 are projected to be between $9 and $11
million,  and between $40 and $44 million for 1999. This range could be affected
by the timing and amount of additional  cash  requirements  associated  with the
acceleration of the group C meningococcal conjugate vaccine development program.
The third quarter cash requirement is anticipated to be slightly lower than that
incurred in the second quarter of 1999 due primarily to the semi-annual interest
payment of $2.7 million on the 6.5% Notes and the approximately $600,000 payment
for the 4.5% Notes both paid in May 1999.  The  foregoing  is a forward  looking
statement and the factors  which affect the actual cash required for  operations
could  include,  among  other  things:  vaccine  production  levels;  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, which includes the acceleration of the
group C meningococcal conjugate vaccine program.  See "Funding Sources," below.


         CAPITAL EXPENDITURES.  Total capital expenditures for the first half of
1999 were $2.1 million which includes a $260,000 capital lease for equipment. As
noted above, the Company is expanding its manufacturing  capacity and efficiency
for its acellular  pertussis  toxoid and  Certiva(TM) and is planning to produce
the group C  meningococcal  conjugate  vaccine  beginning in the third or fourth
quarter of 1999. Total projected capital  expenditures for the remainder of 1999
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


                                       22
<PAGE>

equipment  purchases  required  in order to  produce  the group C  meningococcal
conjugate vaccine;  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.

         FUNDING  SOURCES.  To  maintain  the  Company's  production,  research,
development  and growth at current  levels,  present cash and cash  equivalents,
expected  product sales of Certiva(TM)  and the Company's  other  products,  and
revenues  from  existing  collaborative  agreements  are not expected to provide
sufficient  cash to fund the  Company's  operations,  debt service  payments and
capital  expenditures  for the  remainder of 1999 and into 2000.  To address the
cash  needs,  the  Company  intends  to:  enter  into  new  license,  marketing,
distribution  and/or  development  agreements  that are  currently  under active
discussion;  complete a sale and lease-back of the Company's one owned facility;
and  obtain  one or more  lines of  credit,  which may be  secured  by  accounts
receivable, inventory or other assets of the Company. The Company has reached an
agreement  with BioChem  under which  BioChem will  guarantee up to a $6 million
line of credit with a commercial bank. The guarantee will remain in place for up
to two years. The current line of credit expires December 31, 1999. The proceeds
from the line of credit,  which the Company has begun to draw upon, will be used
to fund the  Company's  near  term cash  requirements  as it  completes  pending
negotiations on one or more strategic initiatives.  The Company believes that it
will meet 1999 cash requirements for operations through these efforts,  although
there are no assurances in this regard.  The foregoing  include  forward looking
statements,  and the  factors  that will  determine  the  timing  and  amount of
additional funding include, without limitation, the amount and timing of product
sales,  the amount and timing of payments under  existing and new  collaborative
agreements  and the  amount  and timing of any  proceeds  from other  previously
identified funding sources.

         In  addition,  the  Company  continues  its  ongoing  discussions  with
numerous  third  parties   regarding   various  business   arrangements.   These
discussions  involve  potential  transactions  ranging  from  single or multiple
product distribution,  license or other collaboration agreements for one or more
products to expedite commercialization timelines, which may include up-front and
milestone payments,  through a potential sale of part or all of the Company. The
Company has retained the services of an investment  banking firm to assist it in
connection with certain of its strategic discussions.  Given the status of these
negotiations, the Company believes it will be able to expeditiously complete one
or more of these  arrangements.  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.

         If the  Company is unable to  complete  the  transactions  noted  above
and/or  proceeds  from the  transactions  are  inadequate,  the Company would be
required to obtain  additional  funding  through the sale of debt and/or  equity
securities and/or reduce cash  requirements  through  significant  reductions in
operating  levels.  There can be no assurances  that the Company will be able to
obtain debt or equity  financing  on favorable  terms or in amounts  required to
meet future cash  requirements,  or that the  Company,  if  necessary,  would be
successful in reducing  operating  levels or effectively  controlling  costs, or
that if  operating  levels are  reduced,  the Company  would be able to maintain
operations for any extended period of time.



                                       23
<PAGE>

         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
described  elsewhere in this  management's  discussion and analysis of financial
condition and results of operations,  including in the first  paragraph  hereof,
and in 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

         At December 31, 1998, the Company and its  subsidiaries  had income tax
loss carry  forwards of  approximately  $30.0 million to offset future  Canadian
source  income and  approximately  $94.7  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 June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related  Information." The Company implemented SFAS No. 131
for the year ended December 31, 1998 and has  determined  that it currently does
not  have  reportable  segments.   Product  sales  in  the  United  States  were
approximately  $792,000  and $0 for the  quarters  ended June 30, 1999 and 1998,
respectively.  Product sales to Europe were  approximately  $465,000 and $81,000
for the quarters  ended June 30, 1999 and 1998,  respectively.  All products are
currently  being  manufactured  at the Company's one production  facility in the
United  States.  The production  process,  and ultimately  product  costing,  is
primarily the same for all of the Company's acellular pertussis vaccine products
sold in the  United  States  and  Europe.  Because  of  this,  and the  relative
consistency in selling prices, as well as the nature of the distribution methods
utilized by the  Company,  the  Company  does not  differentiate  and manage its
business along geographic lines.


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 recent internal
interim  assessment,   the  Company  believes  that  the  principal   management
information  system software that is currently being used is designed to be Year


                                       24
<PAGE>

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 has substantially completed the inventory of
its information technology and date-sensitive  systems. The Company is currently
completing the assessment  phases and has commenced the required  remediation of
noncompliant  systems 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 program might  ultimately  have on the Company's  systems and operations or
its future financial position or results of operations.

         The Company has communicated with  substantially 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.  The  Company is in the  process of  developing  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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company  does not have  significant  exposure to changing  interest
rates on invested cash at June 30, 1999.  The Company  invests in U.S.  Treasury
bills and investment grade commercial paper that have maturities of three months
or  less.  As a  result,  the  interest  rate  market  risk  implicit  in  these
investments  at June 30, 1999,  is low, as the  investments  mature within three
months.



                                       25
<PAGE>

         The Company had $25 million of 4.5% Notes at June 30, 1999,  which bear
interest at 4.5% per annum and mature in  November  2003.  The Company  does not
have significant  exposure to changing  interest rates related to the 4.5% Notes
because the interest rate on these notes is fixed.

         The Company  had $75.3  million of 6.5% Notes at June 30,  1999,  which
bear  interest at 6.5% per annum and mature in May 2003.  The  Company  does not
have significant  exposure to changing  interest rates related to the 6.5% Notes
because the interest rate on these notes is fixed.

         The Company  drew down $2 million  under a revolving  line of credit in
July 1999. The loan bears interest at LIBOR plus 265 basis points which was 7.9%
per annum  through  September  17,  1999 at which time a new  interest  rate and
period will be determined.  The entire  principal  balance on the line of credit
must be repaid no later than  December  31,  1999.  The Company has  exposure to
changing  interest  rates  related to the $2  million  loan but does not deem it
material due to the time limitations on the borrowing.

         The Company has not  undertaken  any actions to cover  interest  market
risk and is not a party to any interest rate market risk management activities.

         A hypothetical ten percent change in the market interest rates over the
next year would not materially impact the Company's earnings or cash flow as the
interest  rates on the Company's  long-term  convertible  debt are fixed and its
revolving line of credit and cash investments are short term. A hypothetical ten
percent change in the market interest rate over the next year, by itself,  would
not have a material adverse effect on the fair value of the Company's  long-term
convertible debt, revolving line of credit or its short-term cash investments.

         The Company does  principally all of its  transactions in U.S.  dollars
and currently has limited payment  obligations in Swedish Krona;  however,  such
obligations are not material to the Company's operations.














                                       26
<PAGE>


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On June 23, 1999, the U.S. District Court,  District of Maryland,  dismissed all
claims  filed by Sharon  Mates,  the  Company's  former  president,  against the
Company,   the  two  named  directors  and  affiliate,   BioChem  Pharma,   Inc.
("BioChem").  In July 1999,  Dr.  Mates filed a notice of appeal of the District
Court's decision to the United States Court of Appeals for the Fourth Circuit.

The lawsuit was filed by Dr. Mates in November 1998 and included  claims against
the Company  and two  directors  for,  among other  things,  abusive  discharge,
defamation,  interference with business  relations,  and breach of contract.  In
December  1998,  the Company  responded by filing a motion to dismiss  seeking a
court  order  dismissing  all  claims on the basis that the  allegations  in the
complaint are not recognizable under applicable law.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On June 17, 1999,  the Company  retired $8.4 million of the principle  amount of
the 6.5%  convertible  subordinated  notes in exchange for 550,000 shares of the
Company's  Common Stock,  in reliance on Section  3(a)(9) of the Securities Act.
See Part I, Item 2 Management's  Discussion and Analysis of Financial  Condition
and Results of Operations.

In July 1999 the Company obtained a $6 million revolving line of credit maturing
December 31, 1999. The interest rate on borrowings under the line of credit will
be LIBOR plus 265 basis  points.  BioChem,  an  affiliate  of the  Company,  has
provided a guarantee, which will remain in place for up to two years, for a line
of credit from a bank. Upon drawing down on the line of credit,  BioChem will be
entitled to receive  warrants to purchase up to a total of 750,000 shares of the
Company's  Common Stock in reliance on Section 4 (2) of the Securities  Act. The
warrants  will be issued by the Company  ratably as it draws down under the line
of credit such that BioChem will receive a warrant for 125,000  shares of Common
Stock for each $1 million  drawn down by the  company.  Each warrant will have a
term of two years from the date of issuance.  The per share exercise price under
the warrant is approximately $5.14, which is the average of the closing price of
the Company's Common Stock on the American Stock Exchange over five trading days
that  began on June 28 and ended on July 2,  1999.  Each  warrant  will  contain
anti-dilution  provisions and registrations  rights among other  provisions.  In
July 1999 the Company drew down $2 million  under the  revolving  line of credit
and accordingly  issued  warrants to purchase  250,000 shares of Common Stock to
BioChem.












                                       27
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits

               Exhibit No. Description

                    10.42  Common Stock  Purchase  Warrant  dated July 21,
                           1999 issued to BioChem.

                    10.43  Letter  Agreement  dated July  1, 1999  between
                           the Company and BioChem.

                    10.44  Line of Credit Agreement dated July 12, 1999.

                    27     Financial Data Schedule



         (b)   Reports on Form 8-K


               On June 17,  1999,  the  Company  filed with the  Securities  and
               Exchange  Commission  a Current  Report on Form 8-K under  Item 5
               reporting that the Company retired  approximately $8.4 million of
               its  6.5%  convertible  subordinated  notes in  exchange  for the
               issuance of 550,000 shares of the Company's  Common Stock, no par
               value.






















                                       28
<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: August 11, 1999






                                       29