UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(MARK ONE)

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

                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                       OR

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

           For the transition period from ____________ to ____________

                         COMMISSION FILE NUMBER 1-10451

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

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

12103 INDIAN CREEK COURT, BELTSVILLE, MARYLAND               20705
----------------------------------------------               -----
(Address of principal executive offices)                    Zip Code)

Registrant's telephone number, including area code:  (301) 419-8400


--------------------------------------------------------------------------
(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 MAY 1, 1998 -- 32,054,892 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................  13

Item 3.    Quantitative and Qualitative Disclosures About Market Risk...  24


PART II.   OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K.............................  25


SIGNATURES .............................................................  26


                                       2
<PAGE>




          PART I.  FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

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


























                                       3
<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                                                       MARCH 31,  DECEMBER 31,
                                                                         1998         1997
                                                                       ---------  ------------
ASSETS                                                                (UNAUDITED)
<S>                                                                    <C>          <C>      
CURRENT ASSETS:
  Cash and cash equivalents                                            $  36,733    $  45,502
  Accounts receivable                                                        516          324
  Inventory                                                                2,512        2,730
  Prepaid expenses and other current assets                                1,260          615
                                                                       ---------    ---------
          Total current assets                                            41,021       49,171
Property, plant and equipment, net                                        29,991       31,428
Investment in affiliate, at market                                         1,093          843
Deferred financing costs, net                                              2,481        2,603
Other assets                                                                 601          463
                                                                       ---------    ---------
     TOTAL ASSETS                                                      $  75,187    $  84,508
                                                                       =========    =========

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                     $   3,621    $   3,343
  Deferred revenue                                                         3,678        3,999
  Obligation under capital lease, current portion                          1,632        1,593
  Other current liabilities                                                6,771        5,064
                                                                       ---------    ---------
         Total current liabilities                                        15,702       13,999

6.50% Convertible subordinated notes, due May 1, 2003                     83,734       83,734
Obligation under capital lease, net of current portion                     3,688        4,110
Deferred rent credit, net of current portion                                --             12
                                                                       ---------    ---------
     Total liabilities                                                   103,124      101,855

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:
  Preferred stock, no par value; unlimited shares authorized-
     Series A, convertible; issued and outstanding 2,000,000 shares;
     entitled to Can $2.50 per share in liquidation                        6,538        6,538
  Common stock, no par value; unlimited shares authorized; issued
    32,050,608 shares at March 31, 1998 and 31,936,539 shares at
    December 31, 1997                                                     79,429       78,509
  Cumulative comprehensive income excluded from net loss                     465          215
  Accumulated deficit                                                   (114,369)    (102,609)
                                                                       ---------    ---------
         Total shareholders' deficit                                     (27,937)     (17,347)
                                                                       ---------    ---------

     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                       $  75,187    $  84,508
                                                                       =========    =========
</TABLE>

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

                                       4

<PAGE>


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


                                                        THREE MONTHS ENDED
                                                            MARCH 31,
                                                        1998        1997
                                                      --------   ---------

 REVENUES:
     Marketing, research and development agreements   $    571    $    530
     Product sales                                         263         545
                                                      --------    --------
          Total revenues                                   834       1,075
                                                      --------    --------

OPERATING EXPENSES:
    Production                                           4,981       4,307
    Research and development                             4,043       4,677
    General and administrative                           2,507       3,392
                                                      --------    --------
          Total  operating expenses                     11,531      12,376
                                                      --------    --------

OPERATING LOSS                                         (10,697)    (11,301)

OTHER INCOME (EXPENSES):
    Interest and dividend income                           554         893
    Interest expense                                    (1,617)     (1,699)
                                                      --------    --------
NET LOSS                                              $(11,760)   $(12,107)
                                                      ========    ========

BASIC AND DILUTED NET LOSS PER SHARE                  $  (0.37)   $  (0.38)

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING                                        32,034      31,577

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

                                       5


<PAGE>


<TABLE>
<CAPTION>

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

                                          SERIES A                                       CUMULATIVE
                                         CONVERTIBLE                                    COMPREHENSIVE                  TOTAL
                                       PREFERRED STOCK            COMMON STOCK             INCOME         ACCUM-       SHARE-   
                                 ------------------------     ----------------------    EXCLUDED FROM     ULATED       HOLDERS'
                                  SHARES        AMOUNT         SHARES       AMOUNT        NET LOSS        DEFICIT      DEFICIT
                                 --------     ----------      --------    ----------    -------------  -------------  ---------
<S>                                <C>        <C>              <C>        <C>           <C>           <C>            <C>       
Balance, December 31, 1997         2,000      $   6,538        31,937     $  78,509     $     215     $(102,609)     $ (17,347)
  Net loss                          --             --            --            --            --         (11,760)       (11,760)
  Increase in market value
    of investment                   --             --            --            --             250          --              250
                                                                                                                     ---------
Comprehensive loss                                                                                                     (11,510)
Exercises of stock options          --             --             111           851          --            --              851
Shares issued under
  401(k) plan                       --             --               3            69          --            --               69

                               ---------      ---------     ---------     ---------     ---------     ---------      ---------
Balance, March 31, 1998            2,000      $   6,538        32,051     $  79,429     $     465     $(114,369)     $ (27,937)
                               =========      =========     =========     =========     =========     =========      =========


</TABLE>










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


                                       6

<PAGE>


<TABLE>
<CAPTION>


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

                                                                           THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                           1998          1997
                                                                        ---------     ---------
<S>                                                                     <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Loss                                                            $(11,760)     $(12,107)
    Adjustments to reconcile net loss to net cash used in operating
    activities:
          Depreciation and amortization                                    2,042         2,683
          Amortization and reduction of deferred financing costs             122           126
          Contribution of common stock to 401(k) plan                         69            55
          Stock option compensation                                         --           1,313
          (Increase) decrease in other assets                               (138)           77
          Decrease in deferred rent                                          (24)          (21)
          Cash flows provided by other working capital items               1,057         5,523
                                                                        --------      --------
              Net cash  used in operating activities                      (8,632)       (2,351)
                                                                        --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                    (605)       (1,094)
                                                                        --------      --------
               Net cash used in investing activities                        (605)       (1,094)
                                                                        --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercises of stock options, net                            851         2,034
    Principal payments on capital lease obligation                          (383)         (360)
                                                                        --------      --------
               Net cash provided by financing activities                     468         1,674
                                                                        --------      --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                 (8,769)       (1,771)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            45,502        70,881
                                                                        --------      --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                $ 36,733      $ 69,110
                                                                        ========      ========
</TABLE>



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

                                       7

<PAGE>


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

                                                          THREE MONTHS ENDED
                                                               MARCH 31,
                                                          1998         1997
                                                        --------     --------

CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

   (Increase) decrease in :
         Accounts receivable                            $  (192)     $ 3,721
         Inventory                                          218         (192)
         Prepaid expenses and other current assets         (645)         (82)

   Increase in :
         Accounts payable                                   278          419
         Other current liabilities                        1,398        1,657
                                                        -------      -------
   Net cash provided by other working capital items     $ 1,057      $ 5,523
                                                        =======      =======



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest                                  $   132      $   172
                                                        =======      =======





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

                                       8

<PAGE>




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


1. BUSINESS

The Company is engaged in the  research,  development,  production,  and sale of
vaccines for the  prevention of infectious  diseases in children and adults.  In
1996,   regulatory   approval  of  the  Company's  acellular  pertussis  vaccine
formulated  as a DTaP  vaccine for the  prevention  of  diphtheria,  tetanus and
pertussis  (whooping cough) was granted in Sweden, and regulatory  approval of a
combined  DTaP-IPV  (polio)  vaccine was granted in Denmark.  In April 1997, the
Medical Products Agency of Sweden granted regulatory  approval for the Company's
monovalent  acellular  pertussis  (aP)  vaccine to vaccinate  children,  thereby
expanding the market for the Company's aP vaccine.  The Company has not received
approval  from  the  U.S.  Food and Drug  Administration  ("FDA")  or any  other
regulatory  authority  to  market  its DTaP  vaccine  or any  other  product  in
development.

2. SIGNIFICANT ACCOUNTING POLICIES

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

(b)  PERVASIVENESS  OF ESTIMATES.  The  preparation  of financial  statements in
conformity with GAAP requires  management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimates.

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

(d)  DEPRECIATION  AND  AMORTIZATION.  Prior to 1998,  depreciation of property,
plant and equipment,  with the exception of leasehold  improvements and an owned
facility,  was provided  using an accelerated  method over the estimated  useful


                                       9
<PAGE>




lives of the assets.  For property,  plant and equipment  purchased  after 1997,
depreciation will be provided using the straight-line  method over the estimated
useful lives.

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

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

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

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

2. PROPERTY, PLANT AND EQUIPMENT

In March 1998, the Company leased an  approximately  75,500 square foot facility
to be used for research,  development,  general and administrative functions and
for future  expansion of the Company's  operations.  The lease is for an initial
term of ten years, with two five-year  renewal options.  The initial base annual
rent under the lease is approximately  $981,000 with minimum annual escalations.
At the end of the fifth year of the initial  term,  the Company has the right to
terminate the lease for a specified fee. In addition,  the Company has an option
to  purchase  the  facility  during  specified  periods of the lease  term.  The
landlord   has  provided   the  Company  a  tenant   improvement   allowance  of
approximately  $1.4 million,  and will provide an additional $1.8 million to the
Company under a line of credit to fund improvement costs in excess of the tenant
improvement allowance.  Monthly payments under this line of credit would consist
of interest only  accruing at the simple  annual rate of 12.75%,  and the entire
unpaid principal  balance would mature in September 2000, unless extended by the


                                       10
<PAGE>




Company  up to March  2002.  The line of credit  also  would be  secured  by all
leasehold  improvements and related facility  enhancements  purchased with funds
provided  by the  landlord.  No funds  have been  drawn  down under this line of
credit.

3. INVENTORIES

Inventories  are stated at the lower of cost  (first-in,  first-out)  or market.
Components  of  inventory  cost  include  materials,  labor,  and  manufacturing
overhead.  Production  costs  attributable  to  a  product  are  expensed  until
regulatory  approval is obtained for such  product.  Inventories  consist of the
following:

                                         March 31,    December 31,
                                           1998            1997
                                         ---------    ------------
                                              (in thousands)
           Raw materials                 $ 2,512        $ 2,584
           Finished goods                      0            146
                                         -------        -------
                Total                    $ 2,512        $ 2,730
                                         =======        =======



4. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following components:

                                            March 31,      December 31,
                                               1998            1997
                                            ---------      ------------
                                                    (in thousands)
Payroll and fringe benefits               $  1,776          $ 1,488
Accrued interest                             2,317              959
Reserve for contract loss                      720              720
Accrued taxes                                  642              642
Accrued costs of clinical trials               253              269
Accrued insurance costs                        391               46
Accrued consulting and professional fee        337              381
Other accrued liabilities                      335              559
                                          --------          -------
Total other current liabilities           $  6,771          $ 5,064
                                          ========          =======


5.  RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE

In connection with an operating  lease for a 35,000 square foot  development and
production  facility,  the Company  entered into an agreement  that included the
purchase  and lease of  equipment  and  leasehold  improvements.  As part of the
operating lease, the Company assumed the underlying real estate leases which are


                                       11
<PAGE>




scheduled to expire in February  2001, but may be extended  through 2011.  Under
the terms of the equipment  lease,  there are certain  financial  covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes),  and certain other financial  ratios.  The equipment lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application of all financial covenants.  The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted  cash deposit of an equal amount.  The letter of credit will expire
by its terms on November 1, 2000.

6.  STOCK OPTION COMPENSATION

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

7.  RELATED PARTY TRANSACTION

In April  1998,  the  Company  extended a loan to its  president  related to the
exercise  of an  expiring  stock  option.  The  principal  amount of the loan is
approximately  $1.2 million,  of which $1.0 million was used to pay the exercise
price of the option and the balance was used to pay the  associated  withholding
taxes.  The loan has been  made on a full  recourse  basis,  is for a six  month
period,  is  collateralized  by common stock of the Company having a fair market
value of 125% of the loan, and accrues interest at a market rate.










                                       12
<PAGE>




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

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

BACKGROUND

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

         In February  1996, the Swedish  Ministry of Health  granted  regulatory
approval to market the Company's  acellular  pertussis  vaccine  formulated as a
combined DTaP vaccine for the prevention of diphtheria,  tetanus,  and pertussis
(whooping cough). This marketing authorization was the first regulatory approval
for any of the Company's products. In April 1997, the Swedish Ministry of Health
granted regulatory  approval for the Company's  monovalent  acellular  pertussis
(aP)  vaccine  to  vaccinate  children,  thereby  expanding  the  market for the
Company's aP vaccine.  In addition,  the Danish National Board of Health granted
regulatory approval in September 1996 of a combined DTaP-IPV (polio) vaccine for
all  primary  and booster  doses for  infants  and  children  in  Denmark.  This
combination  vaccine,   which  combines  the  DTaP  vaccine  with  an  enhanced,
inactivated  polio  vaccine  ("IPV"),  was  developed  jointly by Statens  Serum
Institut ("SSI") and the Company.

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

         In 1995, 1996 and 1997, the Company has recognized development revenues
pursuant to agreements with  Pasteur-Merieux  Serums et Vaccins,  a wholly-owned
subsidiary  of  Rhone-Poulenc,  which  operates  in North  America  through  its


                                       13
<PAGE>




subsidiary Connaught Laboratories ("Pasteur Merieux Connaught"), under which the
Company  and Pasteur  Merieux  Connaught  will  jointly  develop  the  Company's
meningococcus  B vaccine.  Additional  funding may be provided to the Company by
Pasteur  Merieux   Connaught  under  the  terms  of  the  license  and  clinical
development  agreements.  See "Outlook,"  below. In addition,  during the fourth
quarter of 1996, the Company executed a supply and  distribution  agreement with
Chiron Behring covering the Company's DTaP and DTaP-IPV vaccines for Germany and
Austria.  The  Company  and Chiron  Behring are  presently  discussing  possible
modifications to this agreement.

         In the fourth  quarter of 1996,  the  Company  and Abbott  Laboratories
("Abbott")    signed   an   agreement    under   which   Abbott   would   market
Certiva[TRADEMARK],  the Company's  DTaP vaccine,  when approved by the FDA. The
marketing  agreement  also will allow  Abbott to market the  Company's  DTaP-HIB
(incorporating one of its Haemophilus  influenza type b vaccines),  DTaP-IPV and
DTaP-IPV-HIB  combination  vaccines,  which are under  development.  Abbott will
market Certiva[TRADEMARK] and the combination vaccines to private physicians and
managed  care  markets in the  United  States for  immunization  of infants  and
children.  The  Company  will  market  Certiva[TRADEMARK]  and  the  combination
vaccines to government  purchasers,  including state governments and the Centers
for Disease Control and Prevention ("CDC").

         The Company and Abbott will collaborate in the clinical  development of
the  combination  vaccines  and Abbott is providing  the Company  with  clinical
development  funding.  In  addition,  the Company  will  receive  payments  upon
achievement  of prescribed  milestones.  In September  1995, the Company filed a
product   license   application   with   the  FDA   for   approval   to   market
Certiva[TRADEMARK]  and FDA  approval  for the  vaccine  is  pending.  Under the
agreement with Abbott, following FDA approval, the Company will receive revenues
from  Abbott as it  purchases  Certiva[TRADEMARK]  and the  combination  vaccine
products for resale to the private pediatric market. See "Outlook," below.

         In May 1996,  the Company  completed  an offering of 6.50%  convertible
subordinated  notes in the principal amount of $86.25 million due in full on May
1, 2003. The net proceeds from this offering were  approximately  $82.7 million.
Interest on the notes is payable semiannually on May 1 and November 1 each year.
The notes are  convertible  into shares of the  Company's  Common  Stock,  at an
initial  conversion price of approximately  $24.86 per share. The notes also are
subordinated  to present and future senior  indebtedness of the Company and will
not  restrict  the  incurrence  of future  senior or other  indebtedness  by the
Company.  The notes 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 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. The Company has filed a registration  statement with the
SEC, which has been declared effective, registering resales of the notes and the
underlying  shares of Common  Stock.  In  December of 1997,  approximately  $2.5
million of the principal  amount of the notes were converted into 101,207 shares
of the Company's common stock. As of March 31, 1998, the principal amount of the
outstanding notes was $83.7 million.

         In  November   1996,   the  Company   acquired  a  35,000  square  foot
manufacturing  facility in Beltsville,  Maryland.  That acquisition included the
purchase and lease of equipment and leasehold improvements and the assumption of


                                       14
<PAGE>




real estate leases.  The total  acquisition cost for the equipment and leasehold
improvements was approximately  $24.9 million,  which included a cash payment of
$17.2 million.  The balance of $7.7 million is represented by an equipment lease
obligation  accounted for as a capital lease,  which expires in 2000.  Under the
equipment  lease  agreement  there are  financial  covenants  that  obligate the
Company to maintain  certain  minimum cash and  investment  balances,  a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes) and certain other  financial  ratios.  The equipment  lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application of all financial covenants.  The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a restricted  cash deposit of an equal amount.  The letter of credit will expire
by its terms on November 1, 2000. In addition,  the Company has assumed the real
estate leases underlying the facility, which are scheduled to expire in February
2001, but may be extended through 2011.

         The  Company had 274 and 224  employees  as of March 31, 1998 and 1997,
respectively, of which 268 and 220 were full time, respectively.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

         In 1998, the Company recognized  $263,000 in revenue from product sales
to SSI and $571,000 under collaborative  agreements.  Revenue from collaboration
agreements  consists  primarily of revenue  attributable to development  funding
under the Company's agreement with Abbott.

         Production  expenses were $5.0 million in 1998 compared to $4.3 million
in 1997. The increase in these expenses in 1998 is  attributable to increases in
labor  and  materials  as  the  Company  prepares  for  regulatory  approval  of
Certiva[TRADEMARK]  in  the  United  States.  The  increase  in  labor  cost  is
attributable primarily to an increase in the number of employees.  The increases
were offset  slightly  by lower  depreciation  expense  related to the use of an
accelerated depreciation method in prior years. Production costs attributable to
a product are expensed until regulatory approval is obtained for such product.

         Research and development expenses were $4.0 million in 1998 compared to
$4.7  million  in  1997.  The  decrease  is  attributable   primarily  to  lower
depreciation expense related to the use of an accelerated depreciation method in
prior years,  reduced  expenses  for clinical  trials,  and  reimbursements  for
expenses under a collaborative agreement. These decreases were offset in part by
higher  labor as a result of an increase in the number of  employees in addition
to increased consulting fees.



                                       15
<PAGE>




         General  and  administrative  expenses  were  $2.5  million  in 1998 as
compared  to  $3.4  million  in  1997.  The  decrease  is  primarily  due to the
recognition of a non-cash  compensation expense of approximately $1.3 million in
1997, offset in part by higher promotional  expense and higher labor as a result
of an increase in the number of employees.

         Interest  and  dividend  income  decreased  to  $554,000  in 1998  from
$893,000 in 1997.  This  reduction  is due  primarily to a change in the average
cash balance.

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

         The  factors  cited above  resulted  in a net loss of $11.8  million or
$0.37 per share in 1998 as compared to a net loss of $12.1  million or $0.38 per
share in 1997. The weighted-average number of common shares outstanding was 32.0
million for 1998  compared to 31.6 million for 1997.  The increase in the number
of  weighted-average  shares  outstanding  for  1998  as  compared  to  1997  is
attributable  primarily to the exercise of stock  options and the  conversion of
$2.5 million principal amount of convertible notes into 101,207 shares of common
stock in December 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's cash  requirement  for operations was $8.6 million in the
first  quarter of 1998 as  compared  to $10.5  million in the fourth  quarter of
1997.  The Company's  cash  requirement  for  operations is the net cash used in
operating  activities for the period being reported less amounts  received under
marketing,  research  and  development  agreements  and further  adjusted by the
timing of proceeds from the sale of an investment in an affiliate.  The decrease
in cash  requirements  from the fourth  quarter is  attributable  primarily to a
semi-annual  interest  payment of $2.8 million on the  convertible  subordinated
notes made during the fourth quarter of 1997. At March 31, 1998, the Company had
cash and cash  equivalents of  approximately  $36.7 million of which 5.9 million
was  pledged as  collateral  in April 1998 under the letter of credit  agreement
described above and investment securities in an affiliate with a market value of
$1.1 million.  The investment  consisted of 125,000 shares of IVAX common stock.
The fair market value as of May 5, 1998 was  approximately  $1.2  million.  This
investment  is volatile and therefore  subject to  significant  fluctuations  in
value.

         The Company  anticipates  that cash  requirements for operations in the
second quarter of 1998 could be between approximately $12 and $13 million as the
Company: produces its acellular pertussis vaccine for commercial sale in Europe;
produces  Certiva[TRADEMARK] in anticipation of or following regulatory approval
in the United States and other territories; produces investigational combination
vaccines  and  conjugate  vaccines;   conducts  clinical  trials;  and  makes  a
semi-annual  interest payment on the convertible  subordinated notes.  Quarterly
cash requirements for operations beyond this period will depend principally upon
the level and efficiency of vaccine production, the timing of FDA approval for


                                       16
<PAGE>




Certiva[TRADEMARK],  level of sales of  Certiva[TRADEMARK] in the U.S., level of
product  sales in Europe as additional  approvals are obtained,  costs to market
Certiva[TRADEMARK]  following  approval,  the  level  of  expenditures  for  the
Company's ongoing research and development  program,  and the timing of interest
payments due on the  convertible  subordinated  notes  described  above.  If the
Company  does  not  obtain  FDA  licensure  and  generate  commercial  sales  of
Certiva[TRADEMARK]  in a timely basis, the Company will need to address its cash
requirements for operations through  significant  reductions in operating levels
and  through  the sale of debt or equity  securities,  among other means as more
fully  described  below.  There  are no  assurances  that  the  Company  will be
successful,  under these  circumstances,  in  significantly  reducing  operating
levels or in  placing  debt or equity  securities  on  favorable  terms or in an
amount  required  to meet its  future  cash  requirements  for  operations.  The
foregoing  are forward  looking  statements.  There are no  assurances  that the
Company will meet the projections for cash requirements for operations, that any
further  regulatory  approvals  will be  received,  that  the  milestones  under
existing marketing and research and development  agreements will be achieved, or
that, if such milestones are obtained,  they will  contribute  materially to the
quarterly  cash  requirements.   Failure  or  significant  delays  in  receiving
additional  regulatory approvals and meeting milestones would have a significant
adverse effect on the Company's future financial position.

         Total  capital  expenditures  for the first  three  months of 1998 were
$605,000.  Total projected  capital  expenditures for the second quarter of 1998
are expected to be less than $1.0 million. The Company is in the planning stages
of  expanding  its  manufacturing  capacity  for its vaccine  products  for both
clinical trials and for commercial  sale. Total projected  capital  expenditures
for 1998 for  facilities'  modifications,  equipment,  systems and other capital
additions  could  range  between $4 million to $8  million,  depending  upon the
ultimate  extent  of the  expansions,  which  has not yet been  determined.  The
foregoing  is a forward  looking  statement,  and the  amount of and  timing for
capital  expenditures  could fluctuate based upon a number of factors including,
without  limitation:  the magnitude of the changes in the facilities required to
meet demand for the Company's acellular  pertussis  products;  the equipment and
leasehold  improvements  required  in order to expand the  Company's  production
capacity  for  investigational  products;  the  anticipated  timing for  further
regulatory approvals of existing products; the anticipated timing for regulatory
approval  of future  products;  and  unanticipated  costs to  replace  or repair
existing   equipment  and  systems  in  order  to  keep  the  manufacturing  and
development   facilities   operational   or  in   compliance   with   regulatory
requirements.

         In March 1998, the Company leased an  approximately  75,500 square foot
facility  to be used  for  research,  development,  general  and  administrative
functions and for future expansion of the Company's operations. This facility is
replacing the Company's  existing research and development  facility,  which the
Company  vacated in April 1998, and a portion of its general and  administrative
offices  which the Company  intends to vacate  during 1998.  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 would
have the right to  terminate  the lease for a specified  fee. In  addition,  the
Company has an option to purchase the facility during  specified  periods of the
lease term.  The landlord  has  provided  the Company with a tenant  improvement
allowance  of  approximately  $1.4  million  for tenant  improvements,  and will
provide an additional $1.8 million to the Company under a line of credit to fund


                                       17
<PAGE>




improvement  costs  in  excess  of the  tenant  improvement  allowance.  Monthly
payments  under this line of credit would  consist of interest  only accruing at
the simple annual rate of 12.75%,  and the entire unpaid principal balance would
mature in September  2000,  unless extended by the Company up to March 2002. The
amounts  drawn from this line of credit  also would be secured by all  leasehold
improvements and related facility enhancements  purchased with funds provided by
the  landlord.  The lease  payments and  operating  costs for this  facility are
included  in, and not in addition  to, the  anticipated  cash  requirements  for
operations  described  above.  The Company  currently  anticipates  that capital
expenditures of approximately  $1.0-$2.0 million would be required to modify the
facility  to  accommodate  the  Company's  operations,  which  would  be  funded
primarily  by the $1.4  million  allowance  described  above.  This is a forward
looking  statement and the  additional  capital  expenditures  for this or other
facilities may vary substantially  depending upon a number of factors including,
among other  things,  the size of such  facilities,  the  equipment  and systems
requirements  for  the  facilities,   location,   zoning  and  other  government
restrictions and the magnitude of available financing.

         Cash requirements for operations and capital  expenditures for 1998 are
expected to be financed  through a  combination  of: cash and cash  equivalents;
fees and payments  from  existing  and/or new license,  marketing,  distribution
and/or development  agreements;  the exercise of stock options; the sale of debt
and/or equity  securities;  mortgage  financing;  lines of credit; and equipment
leases. The Company currently has no agreements or understandings  regarding any
of the debt or  equity  financing  options.  The  Company  believes  that it has
adequate cash resources to meet its 1998 funding requirements although there are
no  assurances  in this  regard.  Failure  or  significant  delays in  receiving
additional   regulatory  approvals  and  satisfying   milestones  would  have  a
significant  adverse effect on the Company's future operating results and future
financial position. The Company believes that in such event it would reduce cash
requirements for operations through significant  reductions in operating levels,
although  there are no  assurances  that the Company would be successful in this
regard.  This  paragraph  contains  forward  looking  statements and the factors
affecting the ability of the Company to meet its funding requirements and manage
its cash resources  include,  among other things: the timing of FDA approval for
Certiva[TRADEMARK];  the efficiency of the Company's production operations;  the
sales price for products  established by the Company and its  distributors;  the
magnitude and timing of product sales;  the magnitude and timing of any fees and
payments from license,  marketing,  distribution and/or development  agreements;
the magnitude of fixed costs; and the capital  expenditures  required to operate
and expand existing and future facilities.

OUTLOOK

         The Company  recognized a net loss of $11.8  million in the first three
months of 1998 and expects to incur a net loss of  approximately  $13 million in
the second  quarter  of 1998.  The  Company  anticipates  that the next  several
quarters  operating results may fluctuate  significantly  based upon a number of
factors  including,  among other  things:  the  magnitude  of product  sales for
distribution in Europe;  the timing of FDA marketing  clearance;  the timing for
the commercial  introduction of  Certiva[TRADEMARK];  the ability of the Company
and its distributors to compete against competitive  products,  several of which
have  been  approved,  and to  effectively  market  and sell  products  in their



                                       18
<PAGE>




respective territories; the sales prices established for products by the Company
and its distributors; the efficiency of the Company's production operations; the
timing of the payments under license, marketing, distribution and/or development
agreements  with third parties;  the ability of the Company to  manufacture  and
deliver  products  in  accordance  with  customer  orders;  the timing and costs
associated  with  clinical  trials and  post-licensure  testing of the Company's
products;  the  timing  and amount of  funding  that may be  received  under any
additional license,  marketing,  distribution and/or development agreements with
third  parties;  and the  timing  of and  amount  of  proceeds  from the sale of
additional investment  securities.  The foregoing are forward looking statements
and the factors  affecting its outcome are described herein as well as elsewhere
in this Management's  Discussion and Analysis of Financial Condition and Results
of Operations  including the first paragraph hereof,  and in the Company's other
filings with the SEC,  including  the 1997 annual  report on Form 10-K, to which
the reader's attention is directed.

         The quarterly operating results may also be affected by the quantity of
product  produced for sale since the production  expenses have been mainly fixed
and consist primarily of costs to operate the production facilities, to scale up
production and to maintain a ready work force.  To date, the Company has limited
experience  and success in  manufacturing  commercial  quantities of its vaccine
products and in operating its manufacturing  facilities.  From time to time, the
Company  experiences  disruptions  and  production  failures  and  there  are no
assurances  that the steps taken by the Company to address such failures will be
effective  or  that  such  failures  will  not  continue  in  the  future.  Such
disruptions  or failures  would have a material  adverse effect on the Company's
future  operating  results  and could  affect  the  Company's  ability to obtain
regulatory  approval  for  its  products  or the  timing  of such  approval.  No
assurances can be given that the Company will be successful in establishing  and
maintaining  consistent and continuous  commercial production of its vaccines in
sufficient  quantity  and  quality  or that it will be capable  of  producing  a
competitively  priced product for commercial  sale. The Company's  manufacturing
operations for  Certiva[TRADEMARK]  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.  In addition,  given its size and
configuration, such facility has limited production capacity. Accordingly, there
are no assurances that the Company will be able to produce sufficient quantities
of vaccine to meet market demand or achieve profitability.

         There  are no  assurances  that the  Company  will  meet the  operating
results projected,  that any further regulatory approvals will be received, that
any milestones will be achieved,  or if achieved,  that milestone  payments will
contribute materially to the quarterly operating results of the Company.

         PRODUCT SALES. The Company anticipates additional revenues from product
sales during 1998 to one or more European distributors for sale and distribution
in select European  countries.  Any additional product approvals in Europe could
lead to increased  revenues from the sale of the Company's  acellular  pertussis
vaccine. There are no assurances that further product approvals will be obtained
in Europe  during 1998 or at all, or that once  obtained  the  products  will be
launched in a timely  manner or at all, or that if launched,  that the marketing


                                       19
<PAGE>




and  distribution  efforts will be  effective.  The Company does not control the
marketing and  distribution  efforts for its products in Europe and,  therefore,
the Company's revenues for product sales in those territories are dependent upon
the  timing,  implementation,  and  effectiveness  of the sales,  marketing  and
distribution efforts of others. Additionally, although the FDA Export Reform and
Enhancement Act permits a company to export vaccines  manufactured in the United
States  with  little or no prior FDA review and  approval,  the FDA  retains the
authority and ability to delay, suspend or terminate a manufacturer's ability to
commence or continue  such efforts.  This  authority may be exercised if the FDA
finds the product fails to meet prescribed  standards relating to manufacturing,
labeling, and promotional activities, among others. There are no assurances that
the FDA will  not,  at any time or from time to time,  seek to  delay,  defer or
suspend  the  Company's  export  activities  for  failure  to  meet  any  of the
prescribed  standards  of the  statute.  Any such  action  could have a material
adverse affect on the future results of operations.

         As  described  above,  during  1996,  the Company and Abbott  signed an
agreement  under  which  Abbott  would  market  Certiva[TRADEMARK]  and  certain
combination  vaccines  to private  physicians  and managed  care  markets in the
United States for immunization of infants and children.  The Company will market
these products to government  purchasers,  including  state  governments and the
CDC.  FDA  approval  of  the   Company's   product   license   application   for
Certiva[TRADEMARK]  is pending.  In January 1998, the Company was advised by the
FDA that  Certiva[TRADEMARK]  is on track for  completing  the  final  steps for
licensure.  In response to FDA's  request,  the Company  prepared and  submitted
additional  information in response to all of the outstanding  issues previously
raised by the  agency.  In recent  discussions  with the FDA,  the  Company  was
advised that  Certiva[TRADEMARK] is nearing completion of the review process for
licensure.  In  addition,  the  Company  and the FDA have  agreed to the product
labeling and the Company has  submitted  promotional materials to the agency for
review.  The FDA  informed the Company  that the only  remaining  steps prior to
granting market  clearance are completion of the FDA's review of the information
submitted  and  inspection  of the  Company's  facilities  and  operations.  The
inspection has been  scheduled to begin in the first half of May.  Following FDA
approval,  the  Company,  therefore,  anticipates  revenues  from  the  sale  of
Certiva[TRADEMARK] in the United States, to state governments and the CDC and to
Abbott for resale to private  physicians  and the managed  care  market.  If the
product is launched successfully in the United States by the Company and Abbott,
revenues from operations and the prospects for profitability would increase. The
foregoing are forward looking  statements,  and there are no assurances that the
Company will achieve  profitability  based solely on revenues from its acellular
pertussis  vaccine or any future  vaccines  under  development.  There can be no
assurance that the inspection of the Company's facilities and operations will be
initiated or completed in a timely manner,  the results from the inspection will
be satisfactory,  that information submitted will be acceptable to the FDA, that
the FDA will not raise additional issues or concerns, or that Certiva[TRADEMARK]
will  receive  regulatory  approval in a timely  manner or at all,  or that,  if
obtained,  the  Company  and/or  Abbott  will  be  effective  in  marketing  and
distributing  the  product.  The  principal  factors  affecting  the approval of
Certiva[TRADEMARK]  and its timing are  believed to be the  adequacy of the most
recent  information  submitted,   the  timeliness  of  the  FDA  completing  its
inspection  and  review of the  Company's  facilities  and  operations,  and the
adequacy of the systems,  procedures,  operations and facilities relating to the
product,  among other things. The factors affecting successful commercial launch
of Certiva[TRADEMARK] in the United States include, among others: successfully



                                       20
<PAGE>



participating   in  established   purchasing   programs  of  Federal  and  state
governments;  establishing  an identity and  reputation  for the Company and its
products;  creating an awareness among  pediatricians of the safety and efficacy
of  the  vaccine;  distinguishing  the  Company's  product  from  those  of  its
competitors;  establishing the Company as an effective and reliable  supplier of
vaccines;   establishing  efficient  and  consistent  production  of  sufficient
quantities of vaccine and establishing effective distribution channels.

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

         MARKETING,  RESEARCH & DEVELOPMENT  AGREEMENTS.  In December  1995, the
Company  signed a clinical  development  agreement  and license  agreement  with
Pasteur  Merieux-Connaught under which the parties agreed to jointly develop its
new conjugate  vaccine against Group B  meningococcal  infection for both adults
and pediatric  indications.  Through March 31, 1998, the Company  recognized $13
million of revenue from Pasteur Merieux-Connaught under these agreements. Future
fees and funding would be made upon  achievement  of  development,  clinical and
regulatory  milestones.  Total  remaining  fees and payments to the Company upon
achievement of all clinical and regulatory milestones amount to $39 million. The
time it may take to achieve future  milestones  cannot be predicted  accurately,
and there are no  assurances  that any  additional  milestones  will be met.  In
addition,  Pasteur  Merieux-Connaught may terminate these agreements in its sole
discretion at any time.

         Under the marketing and distribution agreement with Abbott, the Company
will  receive  clinical   development   payments  and  milestone  payments  upon
achievement  of  prescribed  clinical and  regulatory  events.  Total  remaining
payments by Abbott to the Company under the agreement amount to $26 million.  In
addition,  the  Company  will  receive  revenues  from  Abbott  as it  purchases
Certiva[TRADEMARK]  and the  combination  vaccine  products  for  resale  to the
private pediatric market in the United States.  There are no assurances that the
milestones   will  be  met,  that  the  quantities  of  Abbott's   purchases  of
Certiva[TRADEMARK] will be significant or as to the timing of such purchases, or
that Abbott will not  exercise its right to terminate  this  arrangement  at any
time with advance notice.

         In 1998, the Company  anticipates  that total receipts of license fees,
clinical   development   funding  and  milestone  payments  under  its  existing
marketing,  research  and  development  agreements  could  be  approximately  $5
million.  This is a forward  looking  statement  and the factors that affect the
timing of the license fee and milestone payments are in large measure outside of
the control of the Company.  The revenue recognized by the Company from clinical
development payments received from Abbott are and will be equal to the Company's
expenditures in the clinical development program for  Certiva[TRADEMARK] and the
combination  vaccines up to a specified amount.  Accordingly,  such revenues are
likely to  fluctuate  from  quarter to  quarter  and would have no effect on net
operating results. The factors that affect the timing of these expenditures, and
therefore the revenues to be recognized therefrom,  are subject to uncertainties
related to the planning,  commencement and completion of clinical trials and the
regulatory  approval  process.   There  are  no  assurances  that  the  clinical
development funding from Abbott will be sufficient to fund all of the Company's

                                       21
<PAGE>





expenditures in the clinical development program for  Certiva[TRADEMARK] and the
combination vaccines.

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

TAX AND OTHER MATTERS

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

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

         In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share." SFAS No. 128 is effective  for financial  statements  issued for periods
ending after  December 15, 1997.  The Company has  implemented  SFAS No. 128 for
1997 and 1998.  SFAS No. 128  requires  dual  presentation  of basic and diluted
earnings per share. Basic loss per share includes no dilution and is computed by
dividing net loss  available  to common  stockholders  by the  weighted  average
number of common  shares  outstanding  for the  period.  Diluted  loss per share
includes  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted  into common stock.
Options,  warrants and convertible securities that were outstanding at March 31,
1997 and 1998, were not included in the computation of diluted loss per share as
their effect would be anti-dilutive. As a result, the basic and diluted loss per
share amounts are identical.



                                       22
<PAGE>




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

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits rather than four to define the applicable year.  Management has
initiated a company-wide  program to prepare the Company's  computer systems and
programs  for the  year 2000.  Based on a recent  preliminary  internal  interim
assessment,  the Company  believes  that the  principal  management  information
system software that was recently  purchased and is currently being  implemented
is designed to be Year 2000  compliant.  The Company  intends to test the system
for Year 2000 compliance, and therefore until tested thoroughly, there can be no
assurances  in this  regard.  The  Company  also uses  various  "off the  shelf"
software  applications  throughout  the Company for the storage and  analysis of
various  types  of  data  that  management  is  dependent  upon  for  day to day
operations.  Management's preliminary assessment is that the modifications to or
replacement   of  the   Company's   existing   software  to  achieve  Year  2000
qualification  should not have a material  adverse  effect on future  results of
operations.  This is a forward  looking  statement and until further testing and
analysis  is  completed,  there  can be no  assurance  given  that the  existing
software  is  Year  2000  compliant  or the  costs  necessary  to  achieve  such
compliance  will not be  material  to the future  results of  operations  of the
Company.

         The Company has not communicated with all of its significant  suppliers
to determine  the extent to which the Company is  vulnerable to failures by such
third parties to remediate their own Year 2000 issues.  The Company is unable to
ensure that the suppliers cost to obtain Year 2000 compliance will not be passed
on to the Company.  Further,  there are no assurances  that the systems of other
companies  on which the  Company's  systems  rely will be timely  converted.  In
addition,  there are no  assurances  that the  failure by such other  companies'
systems to comply,  or compliance in a manner that is not  compatible to Company
systems, would not have a material, adverse effect on the Company.

         The Company  has  determined  that it has no exposure to  contingencies
related to the Year 2000 Issue for product it has sold.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.



                                       23
<PAGE>




                           PART II. OTHER INFORMATION



ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits

            EXHIBIT NO. DESCRIPTION

            10.37       Lease  Agreement  dated as of  March  25,  1998  between
                        ARE-10150  Old  Columbia,  LLC  and  the  Company  [with
                        certain confidential information deleted therefrom].

            27          Financial Data Schedule


      (b)   Reports on Form 8-K

            The Company  filed the  following two reports on Form 8-K during the
            quarter ended March 31, 1998:

            (1)   On January 9, 1998,  the Company filed with the Securities and
                  Exchange  Commission a Current Report on Form 8-K under Item 5
                  updating  the  license  application  review  process  for  the
                  Company's DTaP vaccine Certiva[TRADEMARK] with the FDA.

            (2)   On January 29, 1998, the Company filed with the Securities and
                  Exchange  Commission a Current Report on Form 8-K under Item 5
                  reporting that the demand  registration  right held by BioChem
                  for its shares of Company Common Stock had been extended until
                  January 17, 2001.























                                       24
<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/ Sharon Mates
                                                --------------------------
                                                Sharon Mates, Ph.D.
                                                President


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














Date: May 8, 1998





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