UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q/A
(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, 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 NOVEMBER 3, 1999 - 32,870,350
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..........................................  27

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings....................................  30

Item 2.  Changes in Securities and Use of Proceeds............  30

Item 6.  Exhibits and Reports on Form 8-K.....................  31


SIGNATURES ...................................................  32



                                       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 nine
months ended  September  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)                          SEPTEMBER 30,           DECEMBER 31,
                                                                             1999                    1998
                                                                        ---------------         --------------
ASSETS                                                                    (UNAUDITED)
------
<S>                                                                    <C>                     <C>
CURRENT ASSETS:
  Cash and cash equivalents                                             $        1,917           $      22,953
  Accounts receivable                                                            1,729                   1,625
  Inventory                                                                      4,457                   4,067
  Prepaid expenses and other current assets                                        810                     998
                                                                       ----------------         --------------
          Total current assets                                                   8,913                  29,643
Property, plant and equipment, net                                              21,076                  25,315
Investment in affiliate, at market                                                   -                   1,554
Deferred financing costs, net                                                    2,566                   2,505
Cash restricted for lease obligation                                             3,624                   4,877
Other assets                                                                       858                     631
                                                                       ----------------         --------------
     TOTAL ASSETS                                                       $       37,037           $      64,525
                                                                       ================         ==============

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                      $        4,448           $       3,881
  Short term debt                                                                4,000                       -
  Deferred revenue                                                                   -                     850
  Obligation under capital leases, current portion                               1,927                   1,754
  Other current liabilities                                                      8,360                   5,848
                                                                       ----------------         --------------
         Total current liabilities                                              18,735                  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                          1,016                   2,356
Deferred rent credits, net of current portion                                      186                      76
                                                                       ----------------         --------------
     Total liabilities                                                         120,263                 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 32,859,581 shares at September 30, 1999
    and 32,216,096 shares at December 31, 1998                                  90,473                  80,824
  Additional paid-in capital                                                    13,047                  11,956
  Cumulative comprehensive income excluded from net loss                             -                     926
  Accumulated deficit                                                          193,284)               (159,218)
                                                                       ----------------         ---------------
         Total shareholders' deficit                                           (83,226)                (58,974)
                                                                       ----------------         ---------------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                        $       37,037           $      64,525
                                                                       ================         ===============

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                          - 4 -
<PAGE>


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

<CAPTION>
                                                                 THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                                    SEPTEMBER 30,                        SEPTEMBER 30,
                                                                 1999            1998                 1999           1998
                                                            --------------  --------------       --------------  -------------

<S>                                                         <C>              <C>                 <C>             <C>
 REVENUES:
      Product sales                                          $      1,173    $        501       $        3,589    $       845
      Marketing, research and development agreements                3,249           2,563                4,037          4,282
                                                            --------------  --------------       --------------  -------------
           Total revenues                                           4,422           3,064                7,626          5,127
                                                            --------------  --------------       --------------  -------------

 OPERATING EXPENSES:
     Production                                                     5,449           5,108               15,821         14,274
     Research and development                                       4,202           4,731               11,827         13,264
     Selling, general and administrative                            3,465           2,383                8,585          7,198
                                                            --------------  --------------       --------------  -------------
           Total operating expenses                                13,116          12,222               36,233         34,736
                                                            --------------  --------------       --------------  -------------

 OPERATING LOSS                                                    (8,694)         (9,158)             (28,607)       (29,609)

 OTHER INCOME (EXPENSE):
     Gain on sale of investment in affiliate                            -               -                  952              -
     Interest and dividend income                                      66             276                  446          1,232
     Interest expense                                              (2,193)         (1,571)              (6,857)        (4,793)
                                                            --------------  --------------       --------------  -------------
 NET LOSS                                                    $    (10,821)   $    (10,453)        $    (34,066)   $   (33,170)
                                                            ==============  ==============       ==============  =============

 BASIC AND DILUTED NET LOSS PER SHARE                        $      (0.33)   $      (0.32)        $      (1.05)   $     (1.03)

 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
      OUTSTANDING                                                  32,844          32,206               32,499         32,132

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                          - 5 -
<PAGE>


<TABLE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
(UNAUDITED)
<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                       -           -          -           -           -             -      (34,066)     (34,066)
Increase in market
  value of investment          -           -          -           -           -            26            -           26
Realized investment
  holding gain                 -           -          -           -           -          (952)           -         (952)
                                                                                                              ----------
Comprehensive loss                                                                                              (34,992)
Exercises of stock
  options                      -           -         58         169           -             -            -          169
Shares issued under
  401(k) plan                  -           -         36         252           -             -            -          252
Warrant expense                -           -          -           -       1,091             -            -        1,091
Conversion of 6.5%
  subordinated
  convertible notes
  into common stock            -           -        550       9,228           -             -            -        9,228
Balance,
                         --------   ---------   --------  ----------  ----------  ------------ ------------  -----------
  September 30, 1999       2,000     $ 6,538     32,860    $ 90,473    $ 13,047    $        -   $ (193,284)   $ (83,226)
                         ========   =========   ========  ==========  ==========  ============ ============  ===========


The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                          - 6 -
<PAGE>


<TABLE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
                                                                             NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                           1999           1998
                                                                      -------------   ------------
<S>                                                                   <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                           $   (34,066)    $  (33,170)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
        Gain on sale of investment in affiliate                               (952)             -
        Loss on disposal of property, plant, and equipment                     384              -
        Depreciation and amortization                                        4,691          6,117
        Amortization and reduction of deferred financing costs                 840            366
        Contribution of common stock to 401(k) plan                            252            216
        Debt conversion expense                                                940              -
        Increase in other assets                                              (227)          (183)
        Increase (decrease) in deferred rent                                    92            (29)
        Cash flows provided by (used in) other working capital items         2,010         (2,427)
                                                                      -------------   ------------
              Net cash used in operating activities                        (26,036)       (29,110)
                                                                      -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                    (2,686)        (1,320)
    Proceeds from sale of investment in affiliate                            1,581              -
    Proceeds from sale/leaseback                                             2,110              -
                                                                      -------------   ------------
               Net cash provided by (used in) investing activities           1,005         (1,320)
                                                                      -------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings under revolving credit facilities                             4,000              -
    Proceeds from exercises of stock options, net                              169          2,017
    Loan to a former officer related to the purchase of common stock             -         (1,228)
    Principal payments on capital lease obligations                         (1,427)        (1,180)
    Cash restricted for capital lease obligation                             1,253         (5,271)
                                                                      -------------   ------------
               Net cash provided by (used in) financing activities           3,995         (5,662)
                                                                      -------------   ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                  (21,036)       (36,092)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              22,953         45,502
                                                                      -------------   ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                               $     1,917     $    9,410
                                                                      =============   ============


The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                          - 7 -
<PAGE>


<TABLE>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
                                                                         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                     1999               1998
                                                                --------------     --------------

<S>                                                             <C>                <C>
CASH FLOWS PROVIDED BY (USED IN) OTHER WORKING CAPITAL ITEMS:

    (Increase) decrease in :
          Accounts receivable                                    $       (104)       $    (2,181)
          Inventory                                                      (390)              (390)
          Prepaid expenses and other current assets                       188               (307)

    Increase (decrease) in :
          Accounts payable                                                567               (299)
          Deferred revenue and other current liabilities                1,749                750
                                                                --------------     --------------
    Net cash provided by (used in) other working capital items   $      2,010       $     (2,427)
                                                                ==============     ==============



 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 Cash paid for interest                                          $      3,572       $      3,105
                                                                ==============     ==============

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

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

  Use of stock to exercise stock options                         $          -       $      3,429
                                                                ==============     ==============


The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                           - 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(REGISTERED)) in
the United  States for the  prevention  of  diphtheria,  tetanus,  and pertussis
(whooping  cough).  The  Company  markets  Certiva(REGISTERED)  in the  U.S.  to
government  purchasers,  including state governments and the Centers for Disease
Control and Prevention ("CDC").  Under a marketing agreement between the Company
and Abbott Laboratories ("Abbott"),  Abbott began to market  Certiva(REGISTERED)
in October  1998 to private  physicians  and managed  care markets in the United
States for immunization of infants and children. Abbott terminated the agreement
at the end of the  third  quarter  of  1999.  Previously,  in  1996,  regulatory
approval  for a  European  formulation  of  Certiva(REGISTERED)  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. Under a marketing agreement between the Company and
Chiron-Behring GmbH & Co. ("Chiron"),  Chiron was to market the DTaP-IPV vaccine
in Germany and Austria. In October 1999, Chiron notified the Company that Chiron
is seeking to terminate the  marketing  agreement in Germany and Austria for the
Company's DTaP-IPV vaccine.  Chiron alleges that the Company  misrepresented the
status of European regulatory approval of its products and fraudulently  induced
Chiron to enter into the  agreement.  Chiron has demanded that the Company repay
$3 million of  nonrefundable  payments that Chiron made under the agreement.  If
discussions directly with Chiron do not resolve the dispute, the Company intends
to challenge Chiron's effort to terminate. The agreement between the Company and
Chiron includes an arbitration  process for resolving any such dispute,  and the
Company will avail itself of that process and will vigorously contest and defend
against  the  claims  raised by Chiron.  The  Company  believes  that the claims
against  it are  without  merit,  that  the  Company  has  meritorious  defenses
available to it, and that certain counterclaims also may be available to it.

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


                                       9
<PAGE>

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
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  $0 and $1.6 million for
the three and nine months ended  September  30, 1999,  respectively,  and $0 for
each of the same  periods in 1998.  Product  sales to Europe were  approximately
$1.2 million and $2.0 million for the three and nine months ended  September 30,
1999, respectively, and approximately $501,000 and $845,000 for the same periods
in 1998. All products are 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 September  1999,  the Company  completed a  sale/leaseback  of its only owned
facility.  The  approximately  31,000 square foot  facility,  which is used as a
warehousing and testing facility was sold for approximately  $2.1 million with a
loss on the sale of $378,000.  The lease for the facility is for an initial term
of ten years, with two five-year  renewal options.  The initial base annual rent
under the lease is approximately $237,000 with minimum annual escalations.

In March 1998, the Company leased an  approximately  75,500 square foot facility
to be  used  for  research,  development,  selling, 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


                                       10
<PAGE>


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(REGISTERED) for sale in the United States were
capitalized,  except that costs attributable to  Certiva(REGISTERED)  production
under  non-regulatory  approved  optimization  production  processes  are  being
expensed  until  regulatory  approval is obtained  for such new  processes.  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,
                                     1999            1998
                                 ----------------------------
                                        (in thousands)

         Raw materials              $ 2,418        $ 2,509
         Work in process              1,753          1,024
         Finished goods                 286            534
                                    -------        -------
              Total                 $ 4,457        $ 4,067
                                    =======        =======

5. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following components:

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

Accrued interest                        $ 2,536        $ 1,103
Payroll and fringe benefits               2,838          1,702
Accrued taxes                               810          1,149
Reserve for contract loss                   720            720
Accrued consulting and professional fees    424            353
Accrued costs of clinical trials            245            216
Other accrued liabilities                   787            605
                                        -------        -------
Total other current liabilities         $ 8,360        $ 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


                                       11
<PAGE>


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
credit and the  corresponding  restricted  cash is $3.6 million at September 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 September 30, 1999.


                                       12
<PAGE>


8.    LINE OF CREDIT

In July 1999,  the Company  obtained from a bank a $6 million  revolving line of
credit  maturing  December 31, 1999.  The interest rate on borrowings  under the
line of credit is LIBOR plus 265 basis points.  BioChem Pharma Inc. ("BioChem"),
an affiliate of the Company,  has provided the  guarantee of the line of credit,
which will remain in place for a maximum of two years,  unless there is a change
of control such as the  contemplated  acquisition by the third party.  (See Note
9.) Upon drawing down on the line of credit by the Company, BioChem was entitled
to receive warrants to purchase up to a total of 750,000 shares of the Company's
Common Stock.  The warrants  were issued by the Company  ratably as it drew down
under the line of credit such that BioChem received a warrant for 125,000 shares
of Common Stock for each $1 million drawn down by the Company.  Each warrant has
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
contains   anti-dilution   provisions  and   registration   rights  among  other
provisions.  The  Company  drew down $4 million  and $2 million in the third and
fourth  quarters of 1999,  respectively,  under the revolving line of credit and
accordingly  has issued  warrants to purchase  750,000 shares of Common Stock to
BioChem.

The Company  will  recognize a total of  approximately  $1.6 million of interest
expense calculated using the Black-Scholes pricing model based upon the issuance
of these warrants to purchase up to 750,000 shares of common stock.  The Company
is recognizing interest expense over the life of the line of credit beginning at
the issuance date of the warrants and ending on December 31, 1999, the repayment
date for the line of credit.  The expense related to the issuance of the 500,000
warrants was $429,000 for the three months and nine months ended  September  30,
1999.

9.    SUBSEQUENT EVENT

On November 1, 1999, the Company finalized terms relating to a secured revolving
line  of  credit  from  Bank  of  America,  N.A.,  which  is  guaranteed  by  an
unaffiliated third party. The credit line made $5 million immediately  available
to the Company at an interest rate of LIBOR plus .625%. An additional  amount of
up to $25  million  will be  available  if the  Company  executes  a  definitive
acquisition  agreement  with  the  third  party,  with  whom the  Company  is in
exclusive  negotiations.  The line of credit is secured by all of the  Company's
otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.

The Company expects to complete negotiations  regarding a definitive acquisition
agreement  shortly,  although  there can be no assurances  that the Company will
enter  into  a  definitive  acquisition  agreement  or,  if it  does,  that  the
transaction  will  close.  Should the  Company  be unable to reach a  definitive
acquisition agreement by November 18, 1999 (unless otherwise extended by Bank of
America,  N.A.),  then the  Company  would be  required  to repay the initial $5
million  within 20 days of that date.  There are no assurances  that the Company
would be able to obtain additional  financing within that timeframe to repay the
$5 million or that such  financing,  if obtained,  would be adequate to fund the
ongoing operations of the Company.

                                       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,  THE
AVAILABILITY OF FUNDS UNDER EXISTING CREDIT  FACILITIES,  THE ABILITY TO SERVICE
THE  COMPANY'S  DEBT AND TO MEET THE  COMPANY'S  CASH FLOW NEEDS,  PROSPECTS FOR
PRODUCTION  CAPACITY,  REDUCED  PRODUCTION  COSTS,  AND THE  ABILITY TO CAMPAIGN
PRODUCTS THROUGH ITS PRODUCTION FACILITY, LIKELIHOOD OF ADDITIONAL FUNDING UNDER
LICENSE,  MARKETING,  DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS OR FROM FURTHER
FINANCINGS,  PROSPECTS  FOR AND  TIMING  FOR  ENTERING  INTO  AND  COMPLETING  A
DEFINITIVE  AGREEMENT FOR THE ACQUISITION OF THE COMPANY,  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  A
DEFINITIVE  AGREEMENT  FOR THE  ACQUISITION  OF THE COMPANY;  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(REGISTERED)  in the United  States for the
prevention of diphtheria,  tetanus,  and pertussis (whooping cough). The Company
markets  Certiva(REGISTERED)  in the U.S. to  government  purchasers,  including
state  governments and the Centers for Disease  Control and Prevention  ("CDC").
Under  a  marketing  agreement  between  the  Company  and  Abbott  Laboratories
("Abbott"),  Abbott  began to  market  Certiva(REGISTERED)  in  October  1998 to
private   physicians   and  managed  care  markets  in  the  United  States  for
immunization of infants and children. Abbott terminated the agreement at the end
of  the  third   quarter.   The  Company  is   currently   considering   selling
Certiva(REGISTERED)  in the United States to non-government  purchasers  through
direct  arrangements with distributors,  although no formal agreements have been
completed.

        Previously,  in 1996,  regulatory approval for a European formulation of
Certiva(REGISTERED) was granted in Sweden, and regulatory approval of a combined
DTaP-IPV  (polio)  vaccine  was  granted  in  Denmark. In April 1997, regulatory


                                       14
<PAGE>


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.  Under a  marketing
agreement between the Company and Chiron-Behring  GmbH & Co. ("Chiron"),  Chiron
was to market the  DTaP-IPV  vaccine in Germany and  Austria.  In October  1999,
Chiron  notified the Company that Chiron is seeking to terminate  the  marketing
agreement  in Germany and Austria for the  Company's  DTaP-IPV  vaccine.  Chiron
alleges  that the  Company  misrepresented  the  status of  European  regulatory
approval  of its  products  and  fraudulently  induced  Chiron to enter into the
agreement.   Chiron  has  demanded   that  the  Company   repay  $3  million  of
nonrefundable  payments  that Chiron made under the  agreement.  If  discussions
directly  with  Chiron do not  resolve  the  dispute,  the  Company  intends  to
challenge  Chiron's effort to terminate.  The agreement  between the Company and
Chiron includes an arbitration  process for resolving any such dispute,  and the
Company will avail itself of that process and will vigorously contest and defend
against  the  claims  raised by Chiron.  The  Company  believes  that the claims
against  it are  without  merit,  that  the  Company  has  meritorious  defenses
available to it, and that certain counterclaims also may be available to it.

        On November 1, 1999, the Company  finalized  terms relating to a secured
revolving line of credit from Bank of America,  N.A.,  which is guaranteed by an
unaffiliated third party. The credit line made $5 million immediately  available
to the Company at an interest rate of LIBOR plus .625%. An additional  amount of
up to $25  million  will be  available  if the  Company  executes  a  definitive
acquisition  agreement  with  the  third  party,  with  whom the  Company  is in
exclusive  negotiations.  The line of credit is secured by all of the  Company's
otherwise  unencumbered  assets,  including  patents,  patent  applications  and
receivables.

        The Company  expects to  complete  negotiations  regarding a  definitive
acquisition  agreement  shortly,  although  there can be no assurances  that the
Company will enter into a definitive  acquisition agreement or, if it does, that
the transaction  will close.  Should the Company be unable to reach a definitive
acquisition agreement by November 18, 1999 (unless otherwise extended by Bank of
America,  N.A.),  then the  Company  would be  required  to repay the initial $5
million  within 20 days of that date.  There are no assurances  that the Company
would be able to obtain additional  financing within that timeframe to repay the
$5 million or that such  financing,  if obtained,  would be adequate to fund the
ongoing operations of the Company.

        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."). In October 1999, the U.K. National Health Service ("NHS") committed to
purchase 3 million doses in 2000 of NeisVac-C(TRADEMARK),  the Company's group C
meningococcal  conjugate vaccine. This commitment is  contingent  on  regulatory



                                       15
<PAGE>


approval of NeisVac-C(TRADEMARK) by the appropriate U.K. regulatory authorities.
The  Company  anticipates  that  during the fourth  quarter of 1999,  or shortly
thereafter,  it will file with the U.K.  regulatory  authorities the application
for  approval of  NeisVac-C(TRADEMARK).  The terms of the U.K.  tender  require,
among other things,  that the Company  reimburse the NHS and its  affiliates for
any costs  associated  with delays caused by the  Company  should the Company be
unable to meet agreed-upon  delivery schedules.  Beginning in the fourth quarter
of 1999, the Company will change over from Certiva(REGISTERED) and aP production
to produce the group C  meningococcal  conjugate  vaccine in anticipation of the
commercial launch of the product in the U.K.

        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 an approximately  $940,000  one-time non-cash
expense  included in interest expense for the quarter ended June 30, 1999. As of
September 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.


                                       16
<PAGE>


        In July 1999, the Company  obtained from a commercial  bank a $6 million
revolving line of credit maturing  December 31, 1999.  BioChem,  an affiliate of
the Company, has provided the guarantee of the line of credit, which will remain
in place for a maximum of two years, unless there is a change of control such as
the contemplated acquisition by the third party. The interest rate on borrowings
under the line of credit is LIBOR plus 265 basis  points.  Upon  drawing down on
the line of credit by the Company,  BioChem was entitled to receive  warrants to
purchase up to a total of 750,000  shares of the  Company's  Common  Stock.  The
warrants  were issued by the  Company  ratably as it drew down under the line of
credit such that BioChem  received a warrant for 125,000  shares of Common Stock
for each $1 million  drawn down by the  Company.  Each warrant has a term of two
years from the date of issuance. The per share exercise price under the warrants
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  contains
anti-dilution  provisions and registrations  rights among other provisions.  The
Company drew down $4 million and $2 million in the third and fourth  quarters of
1999,  respectively,  under the revolving line of credit and accordingly  issued
warrants to purchase 750,000 shares of Common Stock to BioChem. The Company will
recognize a total of  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 is recognizing  interest expense over the life of the line of credit
beginning at the issuance  date of the warrants and ending on December 31, 1999,
the repayment date for the line of credit.  The expense  related to the issuance
of the 500,000  warrants,  issued prior to September 30, 1999,  was $429,000 for
the quarter and nine months ended September 30, 1999.

        In September 1999, the Company  completed a  sale/leaseback  of its only
owned facility. The approximately 31,000 square foot facility,  which is used as
a  warehousing  and testing  facility was sold for  approximately  $2.1 million,
resulting in a non-cash loss on the sale of $378,000. The lease for the facility
is for an initial term of ten years,  with two five-year  renewal  options.  The
initial base annual rent under the lease is approximately  $237,000 with minimum
annual escalations.

        The Company had 274 and 290 employees as of September 30, 1999 and 1998,
respectively.

RESULTS OF OPERATIONS
---------------------

THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

        In 1999, the Company  recognized  total revenue of $4.4 million of which
approximately  $1.2  million was from sales of product to SSI and  approximately
$3.2  million  was   collaborative   agreement   development   funding  under  a
collaborative agreement with Pasteur Merieux Connaught ("PMC").  Revenue in 1998
totaled $3.1 million of which  approximately  $501,000 was from sales of product
to SSI and the remaining from collaborative agreements.

        Production  expenses  were $5.4 million in 1999 compared to $5.1 million
in 1998. The increase in these expenses in 1999 is primarily attributable to: aP
production  under optimized  production processes  that were expensed during the


                                       17
<PAGE>


period,  increased  sales of product  to SSI,  FDA  post-marketing  surveillance
expenses, and higher contractor testing expenses. These increases were partially
offset by lower repairs and maintenance,  lower material and labor costs,  lower
royalty expenses,  and lower  depreciation  related to the use of an accelerated
depreciation  method for equipment acquired prior to 1998. Costs attributable to
Certiva(REGISTERED)  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 $4.2 million in 1999 compared to
$4.7  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,  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 materials
and supply expenses offset in part by higher clinical trial expenses.

        Selling,  general and administrative  expenses were $3.5 million in 1999
compared  to $2.4  million  in  1998.  In 1999,  there  was an  increase  due to
compensation  costs  as part of an  employee  retention  program,  the  $378,000
non-cash loss on the sale of a Company-owned  building,  an increase in facility
costs  associated with occupying  space in the new facility,  and legal fees and
expenses  associated with litigation  related to the Company's  former president
and with partnering opportunities.  These were partially offset by a decrease in
outside  marketing  related  costs  and  the  termination  of the  lease  of the
Company's   former   headquarters  in  July  1999,  which  were  the  result  of
management's plan to reduce costs.

        Interest and dividend income  decreased to $66,000 in 1999 from $276,000
in 1998.  This  reduction  is due  primarily  to a decrease in the average  cash
balance.

        Interest expense  increased to $2.2 million in 1999 from $1.6 million in
1998. The increase is due primarily to the amortization of costs associated with
the issuance of 500,000 warrants under the BioChem line of credit guarantee,  as
well as increased debt as a result of the issuance of the 4.5% Notes,  offset in
part by the  conversion  of $8.4 million  principal  amount of the 6.5% Notes in
exchange for 550,000 shares of Common Stock in June 1999 and principal  payments
made on the equipment lease.

        The  factors  cited  above  resulted  in a net loss of $10.8  million or
$(0.33)  per share in 1999 and a net loss of $10.5  million or $(0.32) per share
in 1998.  The  weighted-average  number of common  shares  outstanding  was 32.8
million for 1999 compared to 32.2 million for 1998. Without the $429,000 expense
recognized on the issuance of warrants and the loss on the sale of the building,
the net loss would have been $10.0 million or $(0.30) per share. The increase in
the number of  weighted-average  shares outstanding for 1999 as compared to 1998
is  attributable  primarily  to the  conversion  of some of the 6.5%  Notes into
550,000  shares of Common Stock in June 1999 and to a lesser extent the exercise
of stock options after September 30, 1998.


                                       18
<PAGE>


NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

        In 1999, the Company  recognized  total revenue of $7.6 million of which
approximately  $1.4 million was from  product  sales of  Certiva(REGISTERED)  to
government  agencies and $200,000 was from sales to Abbott,  approximately  $2.0
million  was from sales of product to SSI and  approximately  $4.0  million  was
under collaborative  agreements.  Revenue for 1999 from collaborative agreements
consists  primarily of $3.2 million of  development  funding under the Company's
agreement  with PMC and  recognition  of  approximately  $800,000 of development
funding from Abbott. Revenue in 1998 totaled $5.1 million of which approximately
$845,000 was from sales of product to SSI and the remaining  from  collaborative
agreements. Revenue for 1998 from collaborative agreements consists primarily of
a milestone  payment and development  funding from Abbott and to a lesser extent
milestone payments under a supply and distribution agreement with Chiron.

        Production expenses were $15.8 million in 1999 compared to $14.3 million
in 1998. The increase in these expenses in 1999 is primarily attributable to: aP
production  under optimized  production  processes that were expensed during the
period,  a total of $806,000 of write-offs of finished product due to production
failures and to a lesser  extent  non-conforming  product as a result of a third
party shipping error, FDA  post-marketing  licensing and surveillance  expenses,
higher material and labor  expenses,  and contractor  expenses.  These increases
were partially offset by lower depreciation related to the use of an accelerated
depreciation  method for equipment purchased prior to 1998, and lower repair and
maintenance and royalty  expenses.  Costs  attributable  to  Certiva(REGISTERED)
production  were expensed  until  regulatory  approval was obtained in the third
quarter of 1998; however, costs attributable to  Certiva(REGISTERED)  production
under  optimized  production  processes  are  being  expensed  until  regulatory
approval is obtained for such new processes.

        Research and development expenses were $11.8 million in 1999 compared to
$13.3  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(REGISTERED),  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, and lower materials and supply expense, offset in part by
higher  labor costs  attributed  to a higher  average  number of  employees  for
product  development   projects  and  the  reimbursement  of  expenses  under  a
collaborative agreement in 1998.

        Selling,  general and administrative  expenses were $8.6 million in 1999
compared  to $7.2  million in 1998.  In 1999 there was an  increase  in building
costs  associated  with the new facility  occupied  beginning  late in the third
quarter  of 1998,  an  increase  in  deferred  compensation  costs as part of an
employee  retention  program,  the non-cash loss on the sale of a  Company-owned
building,  legal fees and expenses  associated  with  litigation  related to the
Company's former president and with partnering  opportunities,  and supplies and
services costs.  These increases were partially  offset by a decrease in outside
marketing related costs and the termination of the lease of the Company's former
headquarters in July 1999, which were the result of management's  plan to reduce
costs.


                                       19
<PAGE>



        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 $446,000 in 1999 from $1.2
million in 1998.  This  reduction is due  primarily to a decrease in the average
cash balance.

        Interest expense  increased to $6.9 million in 1999 from $4.8 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,  increased debt as a
result of the issuance of the 4.5% Notes,  the  amortization of costs associated
with  the  issuance  of  500,000  warrants  under  the  BioChem  line of  credit
guarantee,  offset in part by the conversion of $8.4 million principal amount of
6.5%  Notes in  exchange  for  550,000  shares of Common  Stock in June 1999 and
principal payments made on the equipment lease.

        The  factors  cited  above  resulted  in a net loss of $34.1  million or
$(1.05) per share in 1999 as compared to a net loss of $33.2  million or $(1.03)
per share in 1998. The weighted-average  number of common shares outstanding was
32.5  million for 1999  compared to 32.1  million for 1998.  Without the gain on
sale of the investment in an affiliate, the expense recognized on the conversion
of some of the 6.5% Notes,  the expense  recognized  on the  issuance of 500,000
warrants, and the loss on the sale of the building, the net loss would have been
$33.3   million  or  $(1.02)   per  share.   The   increase  in  the  number  of
weighted-average shares outstanding for 1999 as compared to 1998 is attributable
primarily to the conversion of some of the 6.5% Notes into 550,000 shares of the
Company's Common Stock in June 1999 and to a lesser extent the exercise of stock
options after September 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
----------------------------------------

        The Company's cash  requirement  for operations for the third quarter of
1999 was $8.2  million as  compared  to $10.7  million in the second  quarter of
1999.  The decrease is due  primarily to interest  payments made in May 1999 for
the 6.5%  and  4.5%  convertible  notes.  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 September  30,  1999,  the Company had cash and cash  equivalents  of
approximately  $1.9 million.  In addition,  the Company had  approximately  $3.6
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.

        PROJECTED RESULTS FROM OPERATIONS.  The Company anticipates that it will
report a net loss of between $14 and $16 million for the fourth quarter of 1999.
It will likely  incur a quarterly  net  operating  loss in the first  quarter of
2000,  based upon  several  factors.  The  factors  included  in  assessing  the
projected losses are, among others:  limited  projected revenue primarily due to
limited   Certiva(REGISTERED)  inventory   on  hand  and   the  changeover  from


                                       20
<PAGE>


Certiva(REGISTERED)  to  group  C  meningococcal  vaccine  production;   current
manufacturing  limitations;  the  costs  required  to  accelerate  the  group  C
meningococcal  conjugate  vaccine  program;  the timing and amount of  milestone
payments  under an existing  collaboration  agreement  with PMC;  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 sales
of the  remaining  inventory of  Certiva(REGISTERED).  Revenues from the sale of
Certiva(REGISTERED)  and aP  sales  to  SSI  have  been  limited.  The  reported
Certiva(REGISTERED)  net sales  during the third,  second and first  quarters of
1999 were approximately $0, $800,000, and $800,000, 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 issue
and the termination issue with Chiron,  the Company's  appointed  distributor in
Germany and  Austria,  are  resolved,  the  Company  will not be able to sell aP
vaccine  to be  formulated  as  DTaP-IPV  in those  countries.  There  can be no
assurance  that  these  issues  will  be  satisfactorily  resolved,  or  that if
resolved,  any product launch will generate significant revenues in 1999 or into
2000. The Company anticipates limited revenues from  Certiva(REGISTERED)  and aP
during the  remainder  of 1999 and into 2000 due to limited  inventory  of those
products, the termination of the marketing and distribution agreement by Abbott,
and because the Company changed over from  Certiva(REGISTERED) and aP production
in  August  1999 to start  production  of the  group C  meningococcal  conjugate
vaccine 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, or shortly  thereafter,  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 its  commercial
products and its  acellular  pertussis  toxoid.  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  addition,   the  Company  has  not   manufactured  the  group  C
meningococcal  vaccine on a commercial scale in this facility,  and there can be
no assurance that there will not be disruptions or product failures.

        In order  to  address  these  production  limitations,  the  Company  is
implementing  a two-step  enhancement  program with respect to its production of
Certiva(REGISTERED)  and aP  vaccines.  First,  the  Company  has  modified  its
existing facilities and operations in a manner intended to significantly  expand
production   capacity  and   efficiency.   The  Company  filed  the  appropriate
documentation with the FDA in the fourth 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


                                       21
<PAGE>


Certiva(REGISTERED) and aP 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
off-line  during the  remainder  of 1999 and into early 2000,  while the group C
meningococcal vaccine is being produced in the facility. Upon completion of both
of these  programs,  the  Company  expects  that unit  production  costs will be
reduced  significantly  and  that  Certiva(REGISTERED)   could  be  produced  in
sufficient  quantities to generate a gross profit based on the  currently  known
pricing arrangements and competitive environment, and with the Company's primary
focus on governmental sales.

        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
United States.  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(REGISTERED).  The
Company  intends  to  submit  data to the  FDA on the  European  formulation  of
Certiva(REGISTERED),  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(REGISTERED),  as
well as the impact on the current  selling price.  The Company expects to submit
data to the FDA on a thimerosal-free  formulation of Certiva(REGISTERED)  before
the end of the fourth  quarter of 1999 or shortly  thereafter,  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(REGISTERED)  that it has
in inventory to  government  purchasers  and possibly  through  distributors  to
private    physicians   and   has   begun   to    manufacture    thimerosal-free
Certiva(REGISTERED) 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(REGISTERED),  and the market opportunities for a launch
of the group C meningococcal  conjugate vaccine in 2000, the Company,  beginning
in late fourth quarter 1999,  will produce its group C  meningococcal  conjugate
vaccine  for  sale  in  the  U.K.  in  the  facility  that  had  been  producing
Certiva(REGISTERED).  All costs  associated with this production  effort will be
expensed  until  regulatory  approval  is  obtained.   Because  of  the  planned
production of group C meningococcal conjugate vaccine in this facility,  neither
acellular pertussis vaccine nor  Certiva(REGISTERED)  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


                                       22
<PAGE>


2000 due to limited product inventory. Sales could be limited in the second half
of 2000 if the enhanced  production and testing  processes  do n0t work properly
upon startup of acellular  pertussis  production and/or the Company is unable to
reach agreements with suitable  distributors for these products in the U.S. and,
if necessary, in Germany and Austria.

        Under the  guarantee  agreement  with BioChem for the $6 million line of
credit  obtained  in July 1999,  the Company  issued  warrants to BioChem as the
Company drew down on the line of credit. The Company drew down $4 million and $2
million  in the third  and  fourth  quarters  of 1999,  respectively,  under the
revolving line of credit and  accordingly  issued  warrants to purchase  750,000
shares of  Common  Stock to  BioChem.  The  Company  will  recognize  a total of
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
recognizes interest expense over the life of the line of credit beginning at the
issuance  date of the warrants and ending on December  31, 1999,  the  repayment
date for the line of credit.  The expense related to the issuance of the 500,000
warrants,  issued  through the third quarter of 1999, was $429,000 for the three
months and nine months ended September 30, 1999.

        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 and into 2000, the Company
will be continuing its development  efforts for several products,  including the
one covered by the existing  agreement  with PMC. The Company is entitled  under
the PMC agreement to milestone  payments upon  achievement of prescribed  events
and is entitled to be paid for certain prescribed development costs as incurred.
The milestone  payments under the PMC agreement are tied to measured progress in
the regulatory process for the Company's group B meningococcal vaccine. Although
initial  clinical  development  plans have been completed for this product,  and
clinical trials are projected to commence in early 2000, there are no assurances
that such  milestone  events will occur during 2000, 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); timing and likelihood
of  further  regulatory  approvals;  the  ability  of the  Company to timely and
efficiently   expand  its   production   capacity   and  lower  unit  costs  for
Certiva(REGISTERED);  the  prospects  for and  timing  of group C  meningococcal
conjugate  vaccine  production  and  regulatory  filings;  the prospects for and
timing of milestone payments under an existing collaborative  agreement; and the
ability  of  the   Company   to  address   production   failures   relating   to
Certiva(REGISTERED)  production, among others. The factors that affect the level
of future revenues from product sales include,  among other things,  the ability
of the Company to obtain  distribution  partners for  pertussis  products in the
U.S. and, if necessary,  Germany and Austria,  and for the group C meningococcal
vaccine in the U.K., 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  pertussis and group C meningococcal  vaccine 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


                                       23
<PAGE>


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  prospects for and timing of
milestone payments under an existing collaborative  agreement include regulatory
authorization  to  commence  clinical  trials and  adequacy  of  clinical  trial
results.  The  factors  affecting  timing for  commercialization  of the group C
meningococcal   conjugate  vaccine  include,  among  other  things,   successful
changeover in the  manufacturing  facility,  results of ongoing clinical trials,
and expedited UK regulatory  review.  In addition,  there are no assurances that
the steps taken by the Company to address  production  disruptions  and failures
and  quality  testing   inefficiencies  for  both  the  pertussis  and  group  C
meningococcal  vaccines  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 fourth quarter of 1999 are projected to be between $13 and $15
million.  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 fourth quarter cash requirement is
anticipated  to be higher than that  incurred  in the third  quarter of 1999 due
primarily to the semi-annual  interest payment of $2.4 million on the 6.5% Notes
and the  approximately  $600,000 payment for the 4.5% Notes both due in November
1999. The above cash  requirements do not include the repayment of the revolving
line of credit,  guaranteed  by BioChem,  which expires  December 31, 1999,  the
balance of which was $6 million at  November  5,  1999.  The  foregoing  include
forward looking statements 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 nine
months of 1999 were $2.9 million  which  includes a $260,000  capital  lease for
equipment.  As noted above, the Company has expanded its manufacturing  capacity
and efficiency for its acellular pertussis toxoid and Certiva(REGISTERED) and is
planning to produce the group C meningococcal conjugate vaccine beginning in the
fourth quarter of 1999. Total projected  capital  expenditures for the remainder
of 1999 for minor  ongoing  facilities'  modifications,  equipment,  systems and
other  capital  additions are  approximately  $800,000.  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 equipment  purchases  required in order to produce the group C meningococcal
conjugate vaccine; and the amount and timing of unanticipated costs to replace


                                       24
<PAGE>


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(REGISTERED)  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 obtained a secured revolving line of credit from Bank of
America,  N.A. The Company has received $5 million under the line of credit.  An
additional amount of up to $25 million will be available if the Company executes
a definitive  acquisition agreement with the unaffiliated third party, with whom
the Company is in exclusive negotiations. The line of credit has been guaranteed
by the third party and is secured by all of the Company's otherwise unencumbered
assets, including patents, patent applications and receivables.

        Should the Company be unable to reach a definitive acquisition agreement
by November 18, 1999 (unless otherwise extended by Bank of America,  N.A.), then
the Company would be required to repay all  outstanding  indebtedness  under the
borrowing  agreement  within 20 days of that date.  There are no assurances that
the Company would be able to obtain  additional  financing within that timeframe
to repay the $5 million or that such financing,  if obtained,  would be adequate
to fund  the  ongoing  operations  of the  Company.  If the  Company  signs  the
definitive  acquisition  agreement and secures the  additional  $25 million,  it
believes  that it will meet 1999 and first  quarter 2000 cash  requirements  for
operations  with this line of credit,  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  satisfaction  of  certain  conditions  to  the  signing  of  a
definitive acquisition agreement with the third party.

        If the  Company is unable to  complete  the  transaction  with the third
party noted above,  the Company would be required to obtain  additional  funding
through a borrowing  arrangement with one or more of its affiliates, 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 in
amounts  required to meet future cash  requirements  and the amounts  owed under
outstanding lines of credit in the timeframe  required,  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.

        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.


                                       25
<PAGE>


TAX AND REPORTING MATTERS
-------------------------

        At December 31, 1998,  the Company and its  subsidiaries  had income tax
loss carry  forwards of  approximately  $38.2 million to offset future  Canadian
source  income and  approximately  $93.2  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.  There were no product sales in the United States
for the quarters  ended  September  30, 1999 and 1998,  and  approximately  $1.6
million and $0 for the nine months  periods  ended  September 30, 1999 and 1998,
respectively.  Product  sales  to  Europe,  which  were  all  made to SSI,  were
approximately  $1.2 million and $501,000 for the quarters  ended  September  30,
1999 and 1998, respectively, and approximately $2.0 million and $845,000 for the
nine months ended  September 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.

        The  Company  has  been   notified  by  the  American   Stock   Exchange
("Exchange")   that  it  was  considering   delisting  the  Company  because  of
non-compliance  with its listing  requirements.  The  Exchange  has deferred its
judgment on delisting until it has reviewed the Company's  Annual Report on Form
10-K for the year ending December 31, 1999. If the proposed transaction with the
potential  acquiror is not entered  into or  consummated,  then the Exchange has
requested that the Company provide it with additional  information regarding its
financial condition.

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 an  internal
assessment,  the Company  believes  that the  principal  management  information


                                       26
<PAGE>


system  software  that is  currently  being  used 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  has  completed  the  inventory  of  its
information   technology  and  date-sensitive  systems  and  has  completed  the
assessment  phases and has substantially  completed the required  remediation of
noncompliant,  mission-critical systems to achieve Year 2000 qualification. This
process is nearing  completion;  however,  the Company is unable at this time to
assess  the  impact,  if any,  that  non-compliant  systems or  equipment  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  finalizing  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  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  September  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 September  30, 1999,  is low, as the  investments  mature
within three months.


                                       27
<PAGE>


        The Company had $25 million of 4.5% Notes at September  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 September 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  has drawn down a total of $6 million in three  equal draws
under the  revolving  line of  credit  guaranteed  by  BioChem.  The loans  bear
interest at LIBOR plus 265 basis points,  which are currently  between 8.06% and
8.09%.  Each draw under the line is an individual  revolving  loan. New interest
rates and  periods  will be  determined  when  these  loans  mature.  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 $6
million of debt but does not deem it material due to the time limitations on the
borrowing.

        The Company drew down $5 million in November 1999 under a revolving line
of credit  guaranteed  by a third party.  The loan bears  interest at LIBOR plus
 .625%.  The Company has exposure to changing  interest  rates  related to the $5
million of debt 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 and Danish Kroner;
however,  such  obligations  are not material to the  Company's  operations.  In
addition,  the  Company's  contract with the NHS in the U.K. is  denominated  in
British  pounds  sterling.  The  Company  intends to reduce risk due to possible
changes in exchange  rates  between the  currencies  by entering  into a hedging
transaction before the effective date of the contract.



                                       28
<PAGE>


                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
        -----------------

Sharon Mates, the Company's former president,  continues to pursue her appeal of
the  judgment  that the Company had  obtained  its favor from the U.S.  District
Court in  Maryland.  The appeal is pending in the U.S.  Court of Appeals for the
Fourth Circuit. Dr. Mates's original counsel,  however, has withdrawn from their
representation,  causing Dr. Mates to apply for an extension of time to find new
counsel and file her brief.  On October 15, 1999, the Fourth Circuit granted Dr.
Mates's motion, giving her until November 18, 1999, to file her brief.

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  filed a motion to  dismiss  on the basis that the
allegations  in the complaint did not state any claim under  applicable  law. In
June 1999, the U.S. District Court in Maryland dismissed all claims filed by Dr.
Mates,  as well as the  claims  filed  against  the two named  directors  and an
affiliate,  BioChem  Pharma Inc.  ("BioChem").  In July 1999,  Dr. Mates filed a
notice of appeal.

In October 1999,  Chiron-Behring GmbH & Co. ("Chiron") notified the Company that
Chiron is seeking to terminate  the  marketing  agreement in Germany and Austria
for  the  Company's   DTaP-IPV   vaccine.   Chiron   alleges  that  the  Company
misrepresented  the status of European  regulatory  approval of its products and
fraudulently  induced  Chiron to enter into the  agreement.  Chiron has demanded
that the Company  repay $3 million of  nonrefundable  payments  that Chiron made
under the  agreement.  If  discussions  directly  with Chiron do not resolve the
dispute,  the Company  intends to challenge  Chiron's  effort to terminate.  The
agreement  between the Company and Chiron  includes an  arbitration  process for
resolving  any such  dispute,  and the Company will avail itself of that process
and will vigorously  contest and defend against the claims raised by Chiron. The
Company believes that the claims against it are without merit,  that the Company
has meritorious  defenses  available to it, and that certain  counterclaims also
may be available to it.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
        -----------------------------------------

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 is
LIBOR plus 265 basis points.  BioChem, an affiliate of the Company, has provided
the guarantee of the line of credit, which will remain in place for a maximum of
two  years,  unless  there  is a  change  of  control  such as the  contemplated
acquisition  by the third  party.  The  Company  issued to BioChem  warrants  to
purchase a total of 500,000 shares of the Company's  Common Stock in reliance on
Section 4(2) of the  Securities  Act,  related to draws of $4 million  under the
line of credit through  September 30, 1999. An additional  250,000 warrants have
been issued by the Company to BioChem for the draw of the  remaining  $2 million
under the line during the fourth quarter of 1999. Each warrant has a term of two
years from the date of issuance. The per share exercise price under each 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  contains
anti-dilution provisions and registrations rights among other provisions.



                                       29
<PAGE>



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
        --------------------------------

        (a)  Exhibits

             Exhibit No.     Description


                  10.45      Common Stock Purchase  Warrant No. W-2 dated August
                             26, 1999

                  10.46      Common Stock Purchase Warrant No. W-3 dated October
                             28, 1999

                  10.47      Revolving  Credit Facility  Letter  Agreement dated
                             November  1, 1999 by and  between  Bank of America,
                             N.A. and North American Vaccine, Inc.

                  10.48      Fee Letter  dated  November  1, 1999

                  10.49      Security  Agreement dated as of November 1, 1999 by
                             and between North American  Vaccine,  Inc. and Bank
                             of  America,   N.A.

                  10.50      Security  Agreement  dated as of  November  1, 1999


                  10.51      Patent  and  Trademark   Assignment   and  Security
                             Agreement  dated  as of  November  1,  1999  by and
                             between North  American  Vaccine,  Inc. and Bank of
                             America,    N.A.

                  10.52      Patent  and  Trademark   Assignment   and  Security
                             Agreement  dated  as  of  November  1,  1999

                  10.53      Guaranty  Agreement  dated  November  1, 1999

                  10.54      Reimbursement  Agreement  dated  as  of November 1,
                             1999

                  27         Financial Data Schedule



        (b)  Reports on Form 8-K

             None



                                       30
<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:  March 9, 2000



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