UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(MARK ONE)

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 JULY 29, 1998 --  32,208,051
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...  25


PART II.   OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders..........  26

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


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



                                       2
<PAGE>




                          PART I. FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

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














                                       3
<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                              JUNE 30,        DECEMBER 31,
                                                                               1998              1997
                                                                          ----------------  ----------------
ASSETS                                                                      (UNAUDITED)
<S>                                                                              <C>               <C>     
CURRENT ASSETS:
  Cash and cash equivalents                                                      $ 18,335          $ 45,502
  Accounts receivable                                                               1,178               324
  Inventory                                                                         2,918             2,730
  Prepaid expenses and other current assets                                           840               615
                                                                          ----------------  ----------------
          Total current assets                                                     23,271            49,171
Property, plant and equipment, net                                                 28,440            31,428
Investment in affiliate, at market                                                  1,156               843
Deferred financing costs, net                                                       2,359             2,603
Cash restricted for lease obligation                                                5,654                 -
Other assets                                                                          579               463
                                                                          ----------------  ----------------
     TOTAL ASSETS                                                                 $61,459           $84,508
                                                                          ================  ================

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                                $ 3,048           $ 3,343
  Deferred revenue                                                                  3,280             3,999
  Obligation under capital lease, current portion                                   1,672             1,593
  Other current liabilities                                                         5,302             5,064
                                                                          ----------------  ----------------
         Total current liabilities                                                 13,302            13,999
                                                                                             
6.50% Convertible subordinated notes, due May 1, 2003                              83,734            83,734
Obligation under capital lease, net of current portion                              3,254             4,110
Deferred rent credit, net of current portion                                           17                12
                                                                          ----------------  ----------------
     Total liabilities                                                            100,307           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
    32,201,704 shares at June 30, 1998 and 31,936,539 shares at
    December 31, 1997                                                              80,640            78,509
  Cumulative comprehensive income excluded from net loss                              528               215
  Accumulated deficit                                                            (125,326)         (102,609)
  Loan receivable from officer                                                     (1,228)                -
                                                                          ----------------  ----------------
         Total shareholders' deficit                                              (38,848)          (17,347)
                                                                          ----------------  ----------------

     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                                  $61,459           $84,508
                                                                          ================  ================
</TABLE>

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


                                       4
<PAGE>


<TABLE>
<CAPTION>


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


                                                              THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                                   JUNE 30,                           JUNE 30,
                                                            1998              1997             1998             1997
                                                      -----------------  ---------------  ---------------- ---------------
<S>                                                            <C>                <C>             <C>             <C>    
REVENUES:
     Marketing, research and development agreements          $   1,148        $     695         $   1,719       $   1,225
     Product sales                                                  81              368               344             913
                                                      -----------------  ---------------  ---------------- ---------------
          Total revenues                                         1,229            1,063             2,063           2,138
                                                      -----------------  ---------------  ---------------- ---------------

OPERATING EXPENSES:
    Production                                                   4,185            4,327             9,166           8,634
    Research and development                                     4,490            4,838             8,533           9,515
    General and administrative                                   2,308            2,310             4,815           5,702
                                                      -----------------  ---------------  ---------------- ---------------
          Total  operating expenses                             10,983           11,475            22,514          23,851
                                                      -----------------  ---------------  ---------------- ---------------

OPERATING LOSS                                                  (9,754)         (10,412)          (20,451)        (21,713)

OTHER INCOME (EXPENSES):
    Interest and dividend income                                   402              857               956           1,750
    Interest expense                                            (1,605)          (1,693)           (3,222)         (3,392)
                                                      -----------------  ---------------  ---------------- ---------------
NET LOSS                                                     $ (10,957)       $ (11,248)        $ (22,717)      $ (23,355)
                                                      =================  ===============  ================ ===============

BASIC AND DILUTED NET LOSS PER SHARE                         $   (0.34)       $   (0.36)        $   (0.71)      $   (0.74)

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING                                                32,154           31,608            32,094          31,593

</TABLE>

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


                                       5
<PAGE>


<TABLE>
<CAPTION>

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


                                                                              CUMULATIVE                                TOTAL
                                  SERIES A                                   COMPREHENSIVE                              SHARE-
                                 CONVERTIBLE                                     INCOME      ACCUM-        LOAN         HOLDERS'
                               PREFERRED STOCK           COMMON STOCK        EXCLUDED FROM   ULATED         TO          EQUITY
                            SHARES       AMOUNT        SHARES      AMOUNT      NET LOSS     DEFICIT       OFFICER      (DEFICIT)
                            ------       ------        ------      ------      --------     -------       -------      ---------
<S>                          <C>       <C>             <C>       <C>          <C>          <C>           <C>           <C>       
Balance,
  December 31, 1997          2,000     $   6,538       31,937    $  78,509    $     215    $(102,609)    $    --       $ (17,347)
Net loss                      --            --           --           --           --        (22,717)         --         (22,717)
Increase in market
  value of investment         --            --           --           --            313         --            --             313
                                                                                                                       ---------
Comprehensive income                                                                                                     (22,404)
Exercises of stock
  options                     --            --            259        1,992         --           --            --           1,992
Loan receivable from
  officer                     --            --           --           --           --           --          (1,228)       (1,228)
Shares issued under
  401(k) plan                 --            --              6          139         --           --            --             139
Balance,                 ---------     ---------    ---------    ---------    ---------    ---------     ---------     ---------
  June 30, 1998              2,000     $   6,538       32,202    $  80,640    $     528    $(125,326)    $  (1,228)    $ (38,848)
                         =========     =========    =========    =========    =========    =========     =========     =========

</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)

                                                                                     SIX MONTHS ENDED
                                                                                         JUNE 30,
                                                                                     1998           1997
                                                                                ------------   -------------
<S>                                                                               <C>             <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                      $ (22,717)      $ (23,355)
    Adjustments to reconcile net loss to net cash used in operating
    activities:
          Depreciation and amortization                                               4,083           5,430
          Amortization and reduction of deferred financing costs                        244             252
          Contribution of common stock to 401(k) plan                                   139             110
          Stock option compensation                                                       -           1,313
          (Increase) decrease in other assets                                          (116)             84
          Decrease in deferred rent                                                     (32)            (45)
          Cash flows (used in) provided by other working capital items               (2,006)          5,580
                                                                                ------------   -------------
              Net cash used in operating activities                                 (20,405)        (10,631)
                                                                                ------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                             (1,095)         (1,631)
                                                                                ------------   -------------
               Net cash used in investing activities                                 (1,095)         (1,631)
                                                                                ------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercises of stock options, net                                     1,992           2,252
    Loan to an officer related to the purchase of common stock                       (1,228)              -
    Principal payments on capital lease obligation                                     (777)           (729)
    Cash restricted for capital lease obligation                                     (5,654)              -
                                                                                ------------   -------------
               Net cash (used in) provided by financing activities                   (5,667)          1,523
                                                                                ------------   -------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                           (27,167)        (10,739)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       45,502          70,881
                                                                                ------------   -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                           $ 18,335        $ 60,142
                                                                                ============   =============
                                                                                
</TABLE>

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


                                       7
<PAGE>



<TABLE>
<CAPTION>

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

                                                                              SIX MONTHS ENDED
                                                                                  JUNE 30,
                                                                             1998           1997
                                                                           -----------   ----------
<S>                                                                            <C>         <C>    
CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

    (Increase) decrease in:
          Accounts receivable                                                $   (854)     $ 3,972
          Inventory                                                              (188)        (276)
          Prepaid expenses and other current assets                              (225)         (80)

    (Decrease) increase in: 
          Accounts payable                                                       (295)        (558)
          Other current liabilities                                              (444)       2,522
                                                                           -----------   ----------
    Net cash (used in) provided by other working capital items               $ (2,006)     $ 5,580
                                                                           ===========   ==========



 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest                                                     $  2,984      $ 3,148
                                                                           -----------   ----------

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


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


                                       8
<PAGE>




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



1. BUSINESS

The Company is engaged in the  research,  development,  production,  and sale of
vaccines for the  prevention of infectious  diseases in children and adults.  In
July 1998, the Company received  marketing  authorization from the U.S. Food and
Drug Administration ("FDA") to market its DTaP vaccine  (Certiva[TRADEMARK])  in
the United  States for the  prevention  of  diphtheria,  tetanus,  and pertussis
(whooping  cough).  Previously,  in 1996,  regulatory  approval  for a  European
formulation of Certiva[TRADEMARK] was granted in Sweden, and regulatory approval
of a combined  DTaP-IPV  (polio) vaccine was granted in Denmark.  In April 1997,
regulatory  approval  for the  Company's  monovalent  acellular  pertussis  (aP)
vaccine to vaccinate children was also granted in Sweden,  thereby expanding the
market for the Company's aP vaccine. In June 1998, the Company was advised that,
under the European mutual recognition  procedure,  the regulatory authorities in
Germany,   Austria,  Sweden  and  Finland  agreed  to  recognize  the  marketing
authorization   granted  by  Denmark  for  the  DTaP-IPV  vaccine.   The  mutual
recognition  procedure now requires that each of these  regulatory  authorities,
upon receipt of certain  prescribed  information,  issue the national  marketing
authorization  for the product.  The Company has appointed Chiron Behring GmbH &
Co.  ("Chiron")  to market and  distribute  the DTaP-IPV  product in Germany and
Austria.  Statens  Serum  Institut,  Copenhagen,   Denmark,  holds  the  product
registrations  and will market and  distribute  the product in the  Scandinavian
countries.

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.




                                       9
<PAGE>




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

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

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

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

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

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



                                       10
<PAGE>




2. PROPERTY, PLANT AND EQUIPMENT

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

3. INVENTORIES

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

                                         June 30,     December 31,
                                           1998            1997
                                           ----            ----
                                              (in thousands)
           Raw materials                $  2,692        $ 2,584
           Finished goods                    226            146
                                        --------        -------
                Total                   $  2,918        $ 2,730
                                        ========        =======



4. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following components:

                                             June 30,      December 31,
                                               1998            1997
                                               ----            ----
                                                    (in thousands)
Payroll and fringe benefits                $ 1,822          $ 1,488
Accrued interest                               952              959
Reserve for contract loss                      720              720
Accrued taxes                                  779              642
Accrued costs of clinical trials               210              269
Accrued consulting and professional fees       318              381
Other accrued liabilities                      501              605
                                          --------         --------
Total other current liabilities            $ 5,302          $ 5,064
                                           =======          =======




                                       11
<PAGE>




5.  RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE

In connection with an operating  lease for a 35,000 square foot  development and
production  facility,  the Company  entered into an agreement  that included the
purchase  and lease of  equipment  and  leasehold  improvements.  As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February  2001, but may be extended  through 2011.  Under
the terms of the equipment  lease,  there are certain  financial  covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes),  and certain other financial  ratios.  The equipment lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application of all financial covenants.  The letter of credit will decrease on a
monthly basis as the payments on the lease obligation are made and is secured by
a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted cash is $5.7 million at June 30, 1998.
The letter of credit will expire by its terms on November 1, 2000.

6.  STOCK OPTION COMPENSATION

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

7.  RELATED PARTY TRANSACTION

In April  1998,  the  Company  extended a loan to its  president  related to the
exercise of expiring  stock  options.  The loan is comprised of $1.0 million for
the exercise of the options and $217,000 for payment of withholding  taxes.  The
loan has been  made on a full  recourse  basis,  is for a six month  period,  is
collateralized  by  approximately  94,000 shares of common stock of the Company,
which at the time of the loan had a fair market  value of 125% of the  principal
amount of the loan. The loan accrues interest at a fair 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  OR  FROM  FURTHER
FINANCINGS,  CASH  REQUIREMENTS  FOR FUTURE  OPERATIONS,  AND PROJECTED  CAPITAL
EXPENDITURES.  READERS ARE CAUTIONED  THAT FORWARD  LOOKING  STATEMENTS  INVOLVE
RISKS,  UNCERTAINTIES,  AND FACTORS THAT MAY AFFECT THE  COMPANY'S  BUSINESS AND
PROSPECTS,  INCLUDING  WITHOUT  LIMITATION  THOSE DESCRIBED BELOW AS WELL AS THE
RISKS ASSOCIATED WITH:  OBTAINING  REGULATORY APPROVAL OF PRODUCTS BY REGULATORY
AGENCIES INCLUDING THE U.S. FOOD AND DRUG ADMINISTRATION ("FDA"); THE PRODUCTION
OF VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE
ON  SUPPLIERS,  INCLUDING  STATENS SERUM  INSTITUT  ("SSI");  AND  UNCERTAINTIES
RELATING TO CLINICAL TRIALS,  ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE
U.S.  SECURITIES  AND EXCHANGE  COMMISSION  ("SEC"),  INCLUDING  THE 1997 ANNUAL
REPORT ON FORM 10-K, TO WHICH THE READER'S ATTENTION IS DIRECTED.

BACKGROUND

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

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

         Under a marketing agreement between the Company and Abbott Laboratories
("Abbott"),  Abbott will market  Certiva[TRADEMARK]  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 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.

         The Company and Abbott are collaborating 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.  Under the agreement  with Abbott,  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.



                                       13
<PAGE>




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

         Under  supply  agreements,   the  Company  manufactures  the  acellular
pertussis   component,   and  SSI  manufactures  the  diphtheria,   tetanus  and
inactivated polio vaccine ("IPV") components for the DTaP and DTaP-IPV vaccines.
SSI is responsible  for the marketing and  distribution of the DTaP and DTaP-IPV
products  in  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 its territory.

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




                                       14
<PAGE>





          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. 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 June 30,  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
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  balance of the letter of
credit and the  corresponding  restricted cash is $5.7 million at June 30, 1998.
The letter of credit will expire by its terms on November 1, 2000.  In addition,
the Company has assumed the real estate leases  underlying  the facility,  which
are scheduled to expire in February 2001, but may be extended through 2011.

         The Company had 296 and 245  employees  as of June 30, 1998 and 1997,
respectively.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 AND 1997

         In 1998, the Company  recognized  $81,000 in revenue from product sales
to  SSI  and  $1.1  million  under   collaborative   agreements.   Revenue  from
collaboration agreements consists primarily of milestone payments under a supply
and  distribution  agreement  with  Chiron  and to a lesser  extent  development
funding under the Company's agreement with Abbott.




                                       15
<PAGE>





         Production  expenses were $4.2 million in 1998 compared to $4.3 million
in 1997.  The decrease in these  expenses in 1998 is primarily  attributable  to
decreases in materials and lower  depreciation  expense related to the use of an
accelerated  depreciation  method in prior  years.  The decrease in material and
depreciation costs were partially offset by higher labor expenses,  attributable
primarily  to  an  increase  in  the  number  of  employees.   Production  costs
attributable to a product are expensed until regulatory approval is obtained for
such product.

         Research and development expenses were $4.5 million in 1998 compared to
$4.8  million  in  1997.  The  decrease  is  attributable   primarily  to  lower
depreciation expense related to the use of an accelerated depreciation method in
prior years and to reduced  expenses for patent  filings.  These  decreases were
offset in part by higher  building costs  associated  with the new 75,500 square
foot leased facility. See "Liquidity and Capital Resources," below.

         General and administrative expenses were $2.3 million in 1998 and 1997.
There were no significant cost category changes from the previous period.

         Interest  and  dividend  income  decreased  to  $402,000  in 1998  from
$857,000 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 $11.0  million or
$0.34 per share in 1998 as compared to a net loss of $11.2  million or $0.36 per
share in 1997. The weighted-average number of common shares outstanding was 32.2
million for 1998  compared to 31.6 million for 1997.  The increase in the number
of  weighted-average  shares  outstanding  for  1998  as  compared  to  1997  is
attributable  primarily to the exercise of stock  options and the  conversion of
$2.5 million principal amount of convertible notes into 101,207 shares of common
stock in December 1997.

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

         In 1998, the Company recognized  $344,000 in revenue from product sales
to  SSI  and  $1.7  million  under   collaborative   agreements.   Revenue  from
collaboration agreements consists primarily of milestone payments under a supply
and  distribution  agreement  with  Chiron  and to a lesser  extent  development
funding under the Company's agreement with Abbott.

         Production  expenses were $9.2 million in 1998 compared to $8.6 million
in 1997. The increase in these expenses in 1998 is primarily  attributable to an
increase  in the number of  production  employees  as the Company  prepared  for
regulatory approval of Certiva[TRADEMARK].  The increases were offset in part by
lower  depreciation  expense  related to the use of an accelerated  depreciation



                                       16
<PAGE>


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 $8.5 million in 1998 compared to
$9.5  million  in  1997.  The  decrease  is  attributable   primarily  to  lower
depreciation expense related to the use of an accelerated depreciation method in
prior years,  reduced  expenses  for clinical  trials,  and  reimbursements  for
expenses under a collaborative agreement. These decreases were offset in part by
higher labor expenses as a result of an increase in the number of employees.

         General  and  administrative  expenses  were  $4.8  million  in 1998 as
compared  to  $5.7  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 expenses as
a result of an increase in the number of employees.

         Interest  and dividend  income  decreased to $956,000 in 1998 from $1.8
million in 1997. This reduction is due primarily to a change in the average cash
balance.

         Interest expense decreased to $3.2 million in 1998 from $3.4 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 $22.7  million or
$0.71 per share in 1998 as compared to a net loss of $23.4  million or $0.74 per
share in 1997.  Without  the effect of the $1.3  million  non-cash  compensation
expense,  the loss in 1997 would have been $22.0 million or $0.70 per share. The
weighted-average  number of common shares  outstanding was 32.1 million for 1998
compared   to  31.6   million   for  1997.   The   increase  in  the  number  of
weighted-average shares outstanding for 1998 as compared to 1997 is attributable
primarily to the exercise of stock  options and the  conversion  of $2.5 million
principal  amount of  convertible  notes into 101,207  shares of common stock in
December 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's cash  requirement for operations was $11.8 million in the
second quarter of 1998 as compared to $8.6 million in the first quarter of 1998.
The Company's cash  requirement for operations is the net cash used in operating
activities  for the period being  reported less amounts  received under license,
marketing,  distribution  and/or development  agreements and further adjusted by
the timing of  proceeds  from the sale of an  investment  in an  affiliate.  The
increase in cash requirements  from the first quarter is attributable  primarily
to  a  semi-annual   interest   payment  of  $2.7  million  on  the  convertible
subordinated notes made during the second quarter of 1998. At June 30, 1998, the
Company had cash and cash equivalents of approximately  $24.0 million,  of which
$5.7  million  is  pledged as  collateral  under the letter of credit  agreement
described above,  and investment  securities in an affiliate with a market value
of $1.2 million. The


                                       17
<PAGE>




investment  consisted  of 125,000  shares of IVAX  Corporation  ("IVAX")  common
stock. The fair market value of such stock as of July 29, 1998 was approximately
$1.1 million.  This investment is volatile and therefore  subject to significant
fluctuations in value.

         The Company  anticipates  that cash  requirements for operations in the
third quarter of 1998 could be between  approximately  $9.0 and $10.0 million as
the  Company:  produces  its  acellular  pertussis  vaccine  for sale in Europe;
produces   Certiva[TRADEMARK]   for  sales  in  the  United   States;   produces
investigational  combination  vaccines  and  conjugate  vaccines;  and  conducts
clinical trials.  Quarterly cash  requirements for operations beyond this period
will depend  principally  upon the level and  efficiency of vaccine  production,
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],
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   generate   sales  of
Certiva[TRADEMARK]  on 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. Although the Company presently has no firm commitments or
agreements  with   respect  to  any  financing   alternative,   such  agreements
ultimately  may be reached,  possibly in the near term.  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 not exceed its projected cash  requirements for
operations,  that the Company will generate  sufficient  sales, 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 six months of 1998 were $1.1
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 $2 million to $6  million,  depending  upon the  ultimate  extent of the
expansions,  which  has not yet been  determined.  The  foregoing  is a  forward
looking  statement.  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 of further regulatory approvals
for existing products;  the anticipated timing of regulatory approval for 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.



                                       18
<PAGE>




         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 the Company  intends to move its general and
administrative  functions to the new facility  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,  and will provide an additional  $1.8
million to the Company,  if needed,  under a line of credit to fund  improvement
costs in excess of the tenant improvement allowance. Monthly payments under this
line of credit would consist of interest only accruing at the simple annual rate
of 12.75%,  and the entire  unpaid  principal  balance would mature in September
2000,  unless  extended by the Company up to March 2002.  The 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 total capital  expenditures  required to
modify  the  facility  to  accommodate  the  Company's   operations  would  cost
approximately  $1.4 million and be funded  primarily by the allowance  described
above. This is a forward looking statement.  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 and
into 1999 are expected to be financed through a combination of: the sale of debt
and/or equity  securities,  including the possible sale of securities to related
parties, affiliates, existing shareholders or other third parties; cash and cash
equivalents;  fees and payments  from  existing  and/or new license,  marketing,
distribution  and/or  development  agreements;  the  exercise of stock  options;
mortgage financing;  lines of credit; and equipment leases. Although the Company
believes that it has adequate  resources to meet its 1998 funding  requirements,
there  can be no  assurances  in this  regard.  The  Company  has been  actively
considering  and evaluating  the  advisability  and  feasibility of a variety of
financing  alternatives,  including the sale of debt and/or  equity  securities.
Although  the Company  presently  has no firm  commitments  or  agreements  with
respect to any financing alternative, the Company believes that one or more such
agreements  ultimately  may be reached with one or more of its related  parties,
affiliates,  existing shareholders or other third parties,  possibly in the near
term, although there can be no assurances in this regard. Failure or significant
delays in receiving  substantial  payments  under  existing  and/or new license,
marketing,   distribution  and/or  development  agreements  or  in  successfully
completing a debt or equity financing would have a significant adverse effect on
the Company's 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


                                       19
<PAGE>



that the Company would be successful  in reducing  operating  levels or that, if
operating  levels are reduced,  it would be able to maintain  operations for any
extended period of time. 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 and
without limitation: the ability of the Company successfully to complete the sale
of  its  debt  or  equity  securities;   the  magnitude  of  product  sales  for
distribution  in  Europe;   the  timing  for  the  commercial   introduction  of
Certiva[TRADEMARK];  the  magnitude  and timing of  product  sales in the United
States; the ability of the Company to compete against competitive  products both
directly  and  through  its  distributors;   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 any fees and payments from
existing and new license, marketing, distribution and/or development agreements;
the magnitude of fixed costs; and the capital  expenditures  required to operate
facilities.

OUTLOOK

         The  Company  recognized  a net loss of  $11.0  million  in the  second
quarter of 1998 and expects to incur a net loss of between $9 and $11 million in
the  third  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  for  the  commercial   introduction  of
Certiva[TRADEMARK];  the ability of the Company and its  distributors to compete
against  competitive  products and to  effectively  market and sell  products in
their 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  existing  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  the  Company's  future
operating  results  and  financial  condition  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.

         Prior to regulatory approval, costs to produce  Certiva[TRADEMARK]  for
sale in the United  States were  expensed as  incurred.  Beginning  in the third
quarter,  production  expenses for  Certiva[TRADEMARK]  will be  capitalized  in
accordance  with  generally  accepted  accounting  principles  and recognized as
expense when the product is sold.  Accordingly,  the quarterly operating results
may 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 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



                                       20
<PAGE>




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 any further regulatory approvals for its products or
the timing of such  approvals.  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, that product sales for Europe will be material,
that   Certiva[TRADEMARK]   will  be  effectively  or   successfully   marketed,
distributed  or sold in the United  States or that such  milestone  payments and
sales will affect materially the future operating results of the Company.

         PRODUCT  SALES.  As  described  above,  during  July 1998,  the Company
received FDA approval to manufacture and market Certiva[TRADEMARK] in the United
States.  Pursuant to a marketing and distribution  agreement between the Company
and Abbott,  Abbott will market  Certiva[TRADEMARK]  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.  The  Company   anticipates  that
Certiva[TRADEMARK] will be launched during the fourth quarter of 1998, or sooner
if possible, and 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  Certiva[TRADEMARK]  will  be  launched  in the
projected  timeframe,  that the  Company  and/or  Abbott  will be  effective  in
marketing and distributing Certiva[TRADEMARK],  or that the Company will achieve
profitability  based  solely on  revenues  from sales in the  United  States and
Europe of its presently approved products,  or from sales of any future vaccines
under  development.   The  factors  affecting  successful  commercialization  of
Certiva[TRADEMARK]  in the United States  include,  among  others:  successfully
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.



                                       21
<PAGE>




         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
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.

         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 the
Company's new conjugate vaccine against Group B meningococcal infection for both
adults and pediatric indications.  Through June 30, 1998, the Company recognized
$13 million of revenue from Pasteur  Merieux-Connaught  under these  agreements.
Future  fees and funding  would be received  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.  At June 30, 1998,
total remaining  payments by Abbott to the Company under the agreement  amounted
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


                                       22
<PAGE>




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  $3
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  Company's  control.  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
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


                                       23
<PAGE>




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 June 30,
1997 and 1998, were not included in the computation of diluted loss per share as
their effect would be anti-dilutive. As a result, the basic and diluted loss per
share amounts are identical.

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

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY

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



                                       24
<PAGE>




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

         The Company  has  determined  that it has no exposure to  contingencies
related to the Year 2000 Issue for product it has sold. Based on the preliminary
internal  assessment,  the  Company has not  identified  any  material  costs or
expenditures  specifically  related  to  software  modifications  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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.



                                       25
<PAGE>




                           PART II. OTHER INFORMATION



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's 1998 Annual Meeting of Shareholders  was held on May 20, 1998. The
matters voted on and approved by the shareholders at the meeting,  together with
a tabulation of the respective votes, are as follows:

1.    ELECTION OF DIRECTORS.  The  following  individuals  were elected,  by the
      following  votes  to serve  as the  directors  of the  Company  until  the
      Company's next annual meeting of  shareholders,  or until their respective
      successors are duly elected and qualified or until their prior resignation
      or removal:

                  NAME                 FOR        WITHHELD
                  ----                 ---        --------

              Neil Flanzraich      28,722,545     181,354
              Francesco Bellini    28,614,789     289,110
              Phillip Frost        28,722,789     181,110
              Alain Cousineau      28,722,789     181,110
              Jonathan Deitcher    28,722,789     181,110
              Denis Dionne         28,614,789     289,110
              Gervais Dionne       28,722,789     181,110
              Lyle Kasprick        28,722,789     181,110
              Francois Legault     28,722,789     181,110
              Sharon Mates         28,722,789     181,110
              Richard Pfenniger    28,722,789     181,110

              There were no broker  non-votes or  abstentions in the election of
              directors. These individuals constitute the Company's entire Board
              of Directors.

2.    APPROVAL OF THE COMPANY'S 1997 SHARE OPTION PLAN. The Company's 1997 Share
      Option Plan was duly approved by the following vote:

                       FOR             AGAINST        ABSTAIN   BROKER NON-VOTES
                       ---             -------        -------   ----------------

                   24,337,921          209,878        29,720     4,326,380





                                       26
<PAGE>




3.    APPOINTMENT  OF  ACCOUNTANTS.  Arthur  Andersen LLP was duly  appointed as
      independent public accountants of the Company for the year ending December
      31, 1998, by the following vote:

                                         FOR          AGAINST     ABSTAIN
                                         ---          -------     -------

Appointment of Arthur Andersen LLP   28,837,377       50,262      16,260
as independent public accountants
of the Company

There were no broker  non-votes in the  appointment  of the  independent  public
accountants.














                                       27
<PAGE>





                           PART II. OTHER INFORMATION



ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits

            EXHIBIT NO.       DESCRIPTION
            -----------       -----------

            27                Financial Data Schedule


      (b)   Reports on Form 8-K

            None.


                                       28
<PAGE>



                                   SIGNATURES


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


                                          NORTH AMERICAN VACCINE, INC.
                                          ----------------------------
                                                (Registrant)


                                          By: /s/ Sharon Mates
                                              ----------------
                                              Sharon Mates, Ph.D.
                                              President


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














Date: August 14, 1998



                                       29