SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, DC 20549

                               FORM 10-K

(Mark One)

X	Annual report pursuant to Section 13 or 15(d) of the Securities 
        Exchange Act of 1934  
	For the fiscal year ended December 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 0-12081

                   AQUILA BIOPHARMACEUTICALS, INC.
      (Exact Name of Registrant as Specified in Its Charter)

    Delaware                   (508) 628-0100             04-3307818
(State or Other Jurisdiction (Registrant's telephone   (IRS Employer 
of Incorporation or           number, including         Identification No.)
 Organization)                 area code)

           175 Crossing Boulevard, Framingham, MA	01702
          (Address of Principal Executive Offices)    (Zip Code)

Securities registered pursuant to Section 12(b) of the Act:  None

 Securities registered pursuant to Section 12(g) of the Act: 
           Common Stock, $.01 par value
              (Title of Class)

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.	
X    YES			NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements 
incorporated by reference in Part III of this Form 10-K or any amendment to 
this Form 10-K.	X

The aggregate market value of 6,850,836 shares of voting stock held by non-
affiliates of the registrant as of March 19, 1999 was approximately
$16,270,736 based on the last sale price of such stock on such date.

Indicated by check mark whether the registrant has filed all documents and 
reports required to be filed by Section 12, 13, or 15(d) of the Securities 
Exchange Act of 1934 subsequent to the distribution of securities under a plan 
confirmed by a court.	X YES		NO

Common Stock Outstanding as of March 19, 1999: 6,996,734 
shares.

DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the definitive proxy statement in connection with the annual meeting
of shareholders to be held May 13, 1999 are incorporated by reference into Part 
III of Form 10-K.


FIGHTING DISEASE THROUGH IMMUNE MODULATION

PART I

Item 1. Business.

Introduction

Aquila Biopharmaceuticals, Inc. ("Aquila" or the "Company") engages in 
discovery, development and commercialization of products to prevent, treat or 
control infectious diseases, autoimmune disorders and cancers.   Advances in 
biotechnology and immunology have enabled scientists to develop a new 
generation of products that specifically modulate the immune system to produce 
an effective immune response.  These technology advances are causing 
significant changes in the market for these products.  Historically, these 
products were generally low priced because they were used to prevent disease in 
healthy people (prophylaxis) and, due to the lack of product differentiation, 
companies generally competed on price.   However, development of products 
based on our current understanding of the immune system involves significant 
technological innovation that through patenting can result in increased profit 
margins. The market potential of these products is high since current 
understanding of the immune system allows expansion of the market to address 
new areas and the development of safer, more effective substitutions for older 
products. In addition, in today's approaches to disease management and with 
current cost management strategies, immunological products have been 
recognized as very effective contributors to controlling the total medical costs
of certain diseases. 

Aquila sells an animal healthcare product and conducts research and 
development involving two proprietary core technologies, the Stimulon(TM)family 
of adjuvants and the CD1 antigen presentation system.  The Company is 
currently advancing three products through clinical trials and supporting the 
clinical development efforts of six corporate partners involving nine other 
products.

The Stimulon(TM) family of adjuvants has been shown to enhance the quality and 
the quantity of the immune response to a variety of antigens, both in
pre-clinical studies and in a number of human clinical trials.  Use of the
Stimulon(TM) adjuvants is allowing scientists to design products that can
activate specific T cell responses and result in a new highly effective class of
vaccines for both therapeutic and prophylactic applications.  New applications
include diseases involving poorly immunogenic antigens such as polysaccharides
or populations, such as the elderly, whose immune systems have deteriorated
so that they do not respond to traditional approaches.  New therapeutic
products for treating people with diseases such as malaria, chronic hepatitis
infection, acquired immune deficiency syndrome ("AIDS") or various cancers,
where a cytotoxic T lymphocyte ("CTL") response is thought to be essential,
may be possible using the Stimulon(TM) adjuvants.

The CD1 antigen presentation system involves a powerful new approach to the 
development of immunological products. Until recently, it was believed that 
antigen presenting cells of the immune system processed and presented antigens 
as peptides through two mechanisms, the Class I and the Class II MHC 
pathways.  Recent discoveries have demonstrated that there is a third pathway, 
called the CD1 pathway, through which antigens with lipid tails are presented.  
Through its acquisition of VacTex, Inc., which operates as a wholly owned 
subsidiary, Aquila has exclusive license to this technology and is using the CD1
technology to advance the development of proprietary products to prevent and 
treat infectious diseases, cancers and autoimmune disorders.

Aquila's product development programs include the Quilimmune(TM) human health
products, the Quilvax(TM) products for animal health and the CD1 products.
Aquila's animal health product, Quilvax-M(TM) for controlling bovine mastitis, 
has undergone extensive testing in bovine immunogenicity and challenge trials.  
The Company plans to initiate formal USDA licensing trials in 1999.  Phase II 
clinical trials of Quilimmune-P(TM) for preventing Streptococcus pneumoniae ("S.
pneumoniae") infections in people over the age of 65 are underway.  The initial 
Phase II clinical trial for this product involving a single immunization showed 
no consistent, statistically significant differences between the product 
formulations and the control.  However, the safety profile of Quilimmune-P(TM) 
was good and the product will be evaluated in additional clinical trials using a
second immunization. A third potential product, to help control malaria 
infections incorporating the antigen SPf66 and the Stimulon(TM) adjuvant QS-21, 
has been studied in Phase I clinical trials and shown very compelling 
immunological results.  The Company is planning to evaluate the product's 
potential to provide protection from malaria infection.  The Company's first 
CD1 product, designed to prevent TB infection, is in animal testing.  Initial 
studies have shown that CD1- TB has the potential to significantly reduce 
colony bacterial counts after TB challenge.

  The Company's corporate partners are SmithKline Beecham p.l.c., Wyeth-
Lederle Vaccines and Pediatrics, a business group of Wyeth-Ayerst 
International, Inc., a subsidiary of American Home Products Corporation, 
Pasteur Merieux Connaught, Bristol Myers Squibb (Progenics 
Pharmaceuticals, Inc.), VaxGen, Inc., and NABI. 


Scientific Background

The human immune system is made up of several different cell types including 
antigen presenting cells ("APCs"), B cells and T cells.  In general, the role of
APCs is to process antigens from pathogens such as viruses, bacteria or
parasites into smaller fragments and to present the resulting proteins
(peptides), lipids, or carbohydrates to T cells.  Antigens can be processed
by APC's through three pathways, the MHC Class I, MHC Class II or the CD1
pathway.  Peptide fragments from antigens processed through the Class I
pathway are displayed on the surface of the APC by an immune system protein
called the MHC Class I protein and typically result in a cellular immune
response. In the cellular response, a  type of T cell called a cytotoxic T
lymphocyte (CTL) is activated. These cells recognize and kill infected cells
or cells transformed by cancer.  T helper cells and the cytokines they produce
are also important in generating a CTL response.  The specific activation of
cytotoxic T cells, called a CTL response, is thought to be very important in
products designed to treat or prevent diseases such as herpes, hepatitis, HIV
and malaria.  It is also thought to be critical for many immunotherapeutic
approaches to the treatment of cancer.  A different response, called the
humoral response, results when antigens processed by the Class II pathway
are displayed by MHC Class II proteins.  When a humoral response is stimulated,
B cells are activated by a specific type of T cell, called a helper T cell,
to produce antibodies which are specific for the antigen encountered.  Two
populations of T helper cells have been identified, Th-1 and
Th-2.  T helper cells secrete biologically active molecules called cytokines, 
which mediate the effects of immune system cells.  Th-1 and Th-2 T-helper cells 
secrete different types of cytokines and promote the synthesis of different 
classes of antibodies.  The antibodies produced by B cells will bind to and can 
neutralize the pathogens, bacteria, parasites and viruses, which have invaded
the body.  In the third pathway, antigens with lipid components processed
through the CD1 pathway, result in a cellular response similar to that of the
MHC Class I pathway. 

Traditional approaches for developing immune protection from infection in 
humans involved the use of animal viruses, or the use of attenuated or killed 
pathogens as vaccines.  For example, the injection of cowpox virus protects 
humans against smallpox infection.  Vaccines to protect against polio have been 
developed using either attenuated or killed polio viruses.  While these 
approaches are effective for some pathogens, there is a small but significant
risk of disease developing in people receiving these types of vaccines.  With
the advent of recombinant technology, scientists realized that safer products
could be created, using specific components of an organism rather than the
whole organism.  For example, the genes for the surface antigens from a
pathogen can be cloned using genetic engineering and used to make recombinant
proteins. The recombinant proteins are then used in a vaccine, to make a
so-called sub-unit vaccine.  Alternately the DNA coding for proteins can be used
in DNA vaccines.  Other specific cellular components have been used to 
stimulate disease specific responses, including proteins isolated from the 
pathogen itself, synthetic peptides, carbohydrates and lipoproteins.  

When these new subunit vaccines were first used, it was found that while a 
pathogen specific immune response was stimulated, this response was often not 
of the right quality or strong enough to provide protection from infection or 
disease.  As a result, immune modulation technologies have been developed that 
have been coupled with pathogen specific antigen approaches.  These methods 
for modulating the immune system include conjugation of the antigen to a 
carrier protein, the use of viral or bacterial vectors to carry specific genes, 
the use of cytokines or lymphokines to stimulate the immune system and the 
use of adjuvants.  Carrier proteins such as keyhole limpet hemocyanin (KLH) 
or the toxoids from diphtheria, tetanus and cholera have been used 
effectively. Viral vectors such as vaccinia, canary pox, or the bacteria BCG 
are under evaluation as carriers of disease specific genes to determine 
whether they stimulate a protective immune response.  Adjuvants that have 
been used or that are in development include aluminum hydroxide (alum); MF59, 
a product of Chiron Corporation and its affiliates ("Chiron"); monophosphoryl 
lipid A (MPL), a product of Ribi ImmunoChem Research, Inc. ("RIBI"); LeIF, a 
product of Corixa Corporation ("Corixa"); Adjumer, a product of AVANT 
Immunotherapeutics Inc. ("Avant"); and saponins from Quillaja saponaria such 
as QS-21.  These adjuvant technologies are not all the same, affecting the 
humoral and cell mediated pathways differently.  Aquila's StimulonTM family of 
adjuvants, QS-21 and QS-7, are purified, defined molecules, derived from a 
natural source.  They stimulate antigen specific responses and have been shown 
to promote both antibody and CTL immune responses in animals. 





Core Technologies

Aquila and its corporate partners are developing new products based on two core
technologies, the Stimulon(TM) family of adjuvants that specifically enhance
antibody and CTL responses, and proprietary CD1 processed antigens as well as 
other antigens specific for the target disease.

The typical development pathway for a disease specific product includes antigen 
identification, preparation of research quantities of the antigen, formulation 
studies, demonstration of a biological effect of a product containing the
antigen and development of commercial scale, product production procedures.
These developmental efforts can include those primarily accomplished within
the Company or technology licensed by the Company from outside sources, or a 
combination of both approaches. 

Aquila's ability to develop and produce proprietary disease specific antigens 
allows it to develop products targeted at specific applications and populations.
Company scientists have scientific expertise in: (1) recombinant DNA cloning 
methods; (2) mammalian, insect and bacterial cell expression; (3) extraction and
purification of compounds from natural sources and (4) carbohydrate and 
polysaccharide production.  Furthermore, Company scientists have 
demonstrated their expertise with a variety of antigens from both viral and 
bacterial pathogens including those that require high level bio-containment.

The CD1 Antigen Presentation System

In a breakthrough discovery, Michael Brenner, M.D. and Steven Porcelli, M.D., 
of Brigham and Women's Hospital and Harvard Medical School, found that lipid
containing antigens, in addition to proteins, can be processed and presented
to the immune system by antigen presenting cells.  These antigens are presented 
by a newly recognized antigen presenting system called the CD1 pathway.  The 
CD1 system involves a family of conserved mammalian proteins that are related 
to the MHC molecules.  The CD1 proteins bind and present antigens to T cells 
that are fundamentally different than those presented through the MHC system.  
The CD1 presented antigens contain a lipid component as part of their chemical 
structure.  Lipid containing antigens presented through CD1 stimulate the 
production of additional cytotoxic T cells that recognize and kill invading 
pathogens.  

Since the initial discovery of the CD1 system, a large and growing body of 
research has further characterized the CD1 pathway, suggesting that modulating 
the immune system with lipid antigens has therapeutic potential for a broad
range of diseases such as tuberculosis, type I diabetes, and cancer.  The
research has shown that the lipid antigen pathway can be used to activate
anti-tumor responses.  Recently researchers have determined the crystal
structure of mouse CD1 and the model provides a structural rationale that
supports its biological activity.  The three dimensional structure shows a
binding groove on CD1 that is attractive to lipids due to its hydrophobic
nature.  Researchers have found that certain lipids are recognized by the same
T cell receptors as their peptide counterparts.  CD1 lipid antigen presenting
proteins resemble MHC proteins in a number of ways, and it appears that they
arose from the same ancestral lineage as the MHC proteins.  These lipid and
glycolipid antigens provide the opportunity for the discovery of a whole new
set of products in infectious diseases, cancer and autoimmune disorders.

The Stimulon(TM) Family of Adjuvants

QS-21 is the lead Stimulon(TM) adjuvant.  It is a natural product, purified from
the bark of a tree which grows in South America, called Quillaja saponaria.  Up
to 10% of the bark from Quillaja is composed of saponins of which QS-21 is
typically one of the more predominant.  The bulk bark extract is available in
the United States.  The Company believes QS-21 is well suited to pharmaceutical 
development and formulation because it has good stability as a dried powder (at 
least 3 years), is water soluble, and, when rehydrated, is a clear liquid that
mixes easily with other vaccine components.  QS-21 is  compatible with alum and 
micro-particles that are used in many experimental product formulations.  QS-
21 is well characterized with a known molecular structure - distinguishing it 
from competing adjuvant candidates, which are typically emulsions or 
biologicals.  Because QS-21 is currently regulated by the FDA as a "constituent 
material" used in drug preparation, the FDA does not require licensure of 
facilities used for its manufacture.  A second Stimulon(TM) molecule, QS-7,
which has a slightly different safety and activity profile, is in development.
Patents have issued to Aquila with composition of matter claims covering QS-7
and QS-21, as well as two other identified saponins, QS-17 and QS-18.  The
Company has also been issued a patent for chemically modified saponins.  All
patents include the use of all of these molecules as adjuvants.  See "Patents
and Proprietary Rights".

The use of Stimulon(TM) adjuvants improves the quality of the immune response.  
Addition of QS-21 to antigens will generally broaden the type of antibody 
produced, increase the titer, or amount, of antibodies produced, and stimulate 
cell mediated responses.  It is potent and active at microgram doses when used 
with many types of antigens, including recombinant proteins derived from 
viruses and bacteria and free polysaccharide antigens from bacterial pathogens.
An unusual property of QS-21 not shared by other adjuvants is its ability both
to increase significantly the antibody response to free polysaccharide antigens
and to boost the titer further with a subsequent vaccination.

The Company believes that the performance of QS-21 will vary depending upon 
the nature of the antigen and the target population.  Initial human studies 
conducted by the Company's licensees and collaborators have focused on 
proving the safety of QS-21 and experimenting with different formulations and 
dose levels.  Aquila and its collaborators have completed over 30 studies to
date, and more than 1500 subjects have received QS-21 in various formulations.  
These studies have shown that the addition of QS-21 to product formulations 
improves the immune response to certain antigens, as evidenced by increased 
antibody titer. 

 Strategy

Aquila's objective is to create and commercialize products that modulate the 
immune system to prevent, control or treat infectious diseases, autoimmune 
disorders and cancers.  The Company intends to exploit its expertise in adjuvant
and antigen research to create products and develop them through Food and 
Drug Administration ("FDA") or United States Department of Agriculture 
("USDA") licensure, and to market products to end users, resellers or partners 
based on market attributes.  In addition, Aquila intends to support its
corporate partners' product development programs, further develop its
manufacturing capacity, and to in-license and develop related technology.

Exploit Expertise in Immunology

Aquila has developed unique expertise in understanding the molecular 
mechanisms involved in stimulating and tuning the immune response to specific 
antigens to allow the development of safe and effective therapeutic and 
prophylactic products.  The Company intends to continue to integrate its 
proprietary core technologies and to identify targeted applications of its 
technology.  In addition, the Company plans to broaden its expertise in research
and development involving different antigens including lipid antigens, 
recombinant proteins, peptides, polysaccharides and other classes of antigenic 
molecules.  Aquila's strategy is to acquire related products and technologies 
to supplement its scientific expertise, its capabilities and its product 
portfolio.

Create and Develop Products

Aquila has established a large number of corporate partnerships and a 
significant number of products are being developed through these partnerships.  
However, Aquila believes that it can also develop and retain significant value 
through its own product development efforts.  The Company has three products 
in clinical development: (i) Quilvax-M(TM) to control bovine mastitis for which 
final licensing trials are planned in 1999; (ii) Quilimmune-M(TM) for
controlling malaria, for which Phase I trials have been completed; and (iii)
Quilimmune-P(TM)for preventing pneumococcal infections in the elderly for
which Phase II trials are underway. The Company has completed the development
and licensure of one product, Quilvax-FeLV(TM) for preventing leukemia in cats.
See "Product Development Programs".

Aquila has a large number of ongoing academic collaborations involving other 
antigens.  A number of these are cancer vaccines.  In certain cases the Company 
has options to license related technology should it wish to accelerate the 
development of these products.  The Company intends to develop human 
products primarily but will exploit unique, significant product opportunities in
animal health.

Support Corporate Partners Programs

Aquila has entered into collaborative agreements with SmithKline Beecham, 
p.l.c., Pasteur Merieux Connaught, Wyeth-Lederle Vaccines and Pediatrics, 
VaxGen, Inc., NABI, Bristol-Myers Squibb and Progenics Pharmaceuticals, Inc. 
as well as a number of other biotechnology companies.  Aquila intends to use 
these partnerships to speed discovery and development of certain products 
which the Company does not have the resources or skills to develop.  These 
collaborations allow the Company to focus its own efforts on products which 
have different markets than those of interest to large pharmaceutical companies.
The Company has a number of potential licensing discussions underway and 
intends to continue to selectively license its technology.  See "Corporate
Partner Programs".

Develop Manufacturing Capacity

Aquila has retained rights to the manufacture of QS-21 on a worldwide basis in 
all of its licensing agreements, and has been producing QS-21 for clinical
trials for all of its partners and its product programs. In addition, the
Company operates a small production facility to supply FeLV antigens and
vaccine to its corporate partner Virbac S.A.  Aquila intends to continue to
develop manufacturing expertise and capacity to allow it to retain value from
the products that it develops.

In-license Related Technology

Aquila has been and will continue to be opportunistic by in-licensing products 
and technology related to immune modulation to supplement its product 
pipeline.  In addition to expanding the product portfolio, this strategy will
allow the Company to capitalize on newly developed technologies which are 
synergistic with the Company's existing technology base.

 Product Development Programs

Aquila's strategy is to develop products itself and in partnership with other 
companies. The Company has six products in development or commercialized.

           Quilimmune(TM) & Quilvax(TM) Product Development
Product                      Market              Status              Partner
Quilvax-M(TM)
Product to control bovine   31 million milk      Licensing trials   Aquila, N. 
mastitis                    cows in the U.S.     start in 1999.       America
(S. aureus & E. coli)       & Europe.                               Virbac S.A. 
                                                                      Europe.

Quilimmune-M(TM) (SPf66)    1-2 billion persons  Phase II trials  Collaboration
Product to control malaria  at risk.             in 1999.         with World
(Plasmodium falciparum)                                           Health 
                                                                  Organization.

Quilimmune-P(TM)            Adults>=65 years     Phase II trials     Aquila
Product to prevent          ~34 million in U.S.   ongoing.          worldwide
pneumococcal infections                                             rights.

Quilvax-FeLV(TM)           ~ 15 million cats     On market,        Virbac S.A.
Product to prevent feline  vaccinated per year.  Leucogen(R),      worldwide
leukemia                                         (Europe);         rights.
                                                Genetivac(R),
                                                  (U.S.).

CD1 - TB                 Affects 1/3 of world's  Preclinical         Aquila.
                            population.            research.


CD1 - Chlamydia         14 million young adults     Research          Aquila.
                         at risk per year, U.S.



Quilimmune-P(TM) for the Prevention of Pneumococcal Infections
 
Infections by S. pneumoniae cause serious disease in the elderly. Healthy adults
are not typically at risk for developing significant disease following exposure
to S. pneumoniae.  There are over 80 recognized serotypes of pneumococci, each 
with varying geographic and age-group prevalence.   Quilimmune-P(TM) is 
intended to be used to prevent pneumococcal infections in the elderly.

There are approximately 34 million people over the age of 65 in the United 
States ("U.S."), and an additional 36 million adults with immune compromising 
conditions who are at risk for developing disease caused by S. pneumoniae.   
Various strains of S. pneumoniae are responsible for most community-acquired 
cases of pneumonia (500,000 cases per year) and are the second most common 
cause of bacteremia (50,000 cases per year, with 25% mortality). It is estimated
that S. pneumoniae  causes 40,000 deaths in the elderly and 
immunocompromised adults each year.

The currently available vaccines, which were developed and approved in the 
early 1980s, cover the 23 serotypes which cause about 90% of infections in the 
U. S. and Europe.  The two vaccines approved in the U.S. are composed of 
purified capsular polysaccharides from each of the 23 serotypes.  These 
vaccines are under-utilized by the elderly for a number of reasons.  Reports in 
the medical literature and confirmed in Aquila's trials indicate that, using the
current vaccines, only 60 - 70% of healthy volunteers and 50 - 60% of the 
elderly respond with a 2-fold or greater increase in the level of specific 
antibody.  A number of side effects are caused by the current vaccines, 
including pain on injection, a sore arm, fever, and a general feeling of malaise
for a few days.  Because of these side effects, these traditional vaccines have
not been licensed for repeat use.  In addition, the antibody titers drop over a
number of years.  Typically after 3 or more years, the effective levels of
antibodies in vaccinees are quite low.  Furthermore, data has recently been
presented suggesting that the ability of the vaccine to elicit functional
antibodies decreases with age of the vaccine recipient.  Alternatively,
physicians have an option of treating patients who develop pneumonia with
antibiotics. However, strains of S. pneumonia that are resistant to several
classes of antibiotics have been isolated with increasing frequency over the
past few years.  With increased antibiotic resistance, the option of using
antibiotics may not be as effective, and physicians are moving towards
prevention as a therapeutic choice.  As a result there is an urgent need for
a more effective and safe pneumococcal vaccine for the elderly.

In animal studies Aquila scientists have shown that Quilimmune-P(TM), which 
contains 23 different capsular polysaccharides and QS-21, improves the immune 
response over that seen with the approved vaccine.  Many polysaccharides to 
which elderly mice do not typically respond become immunogenic with 
Quilimmune-P(TM).  In addition, antibody titers to many serotypes increases.
This effect was most pronounced following two immunizations.  

Aquila has completed a Phase I clinical trial involving a single immunization in
healthy young or middle aged adult volunteers.  Quilimmune-P(TM) was 
immunogenic in a fashion comparable to the control.  In addition, subjects who 
received Quilimmune-P(TM) formulated with lower than normal doses of antigen 
responded in a similar way.  These results were not unexpected since healthy 
adults, not elderly people, were used as subjects for the study. 

In a series of Phase II studies which began in 1998, Aquila is evaluating 
Quilimmune-P(TM) formulations that were shown to be well tolerated in the Phase 
I studies.  The first study, completed in October 1998,  was a prospective, 
randomized, double blind comparison of a single immunization of Quilimmune-
P(TM) to the currently licensed vaccine product in an elderly population.  The 
clinical endpoints were safety, quality and quantity of the immune response. 
Quilimmune-P(TM) was generally well tolerated; however, the differences between 
Quilimmune-P(TM) and the control vaccine in the frequency of a two-fold or 
greater increase in antibody titer following the single immunization were not 
consistent, and only reached statistical significance with one serotype. The 
Company plans to continue evaluation of Quilimmune-P(TM) in a Phase II clinical 
study evaluating a second immunization twelve months following the first.  

Quilvax-M(TM) for the Control of Bovine Mastitis

Bovine mastitis is an inflammation of a dairy cow's udder.  Two pathogens 
cause the majority of infections resulting in mastitis: Staphylococcus aureus
("S. aureus") and Escherichia coli ("E. coli").  Mastitis is the most costly
disease affecting the dairy industry.  The economic impact in the United States
of bovine mastitis is estimated to be $1.8 billion per year.  According to the 
National Mastitis Council, losses per cow per year are $184 (there are about 9.5
million dairy cows in the U.S.).  Mastitis in dairy cows results in lower milk 
quality and this lowers the economic value of the milk.  Many times when an 
animal develops mastitis, it is simply culled from the herd.  As a result, the 
farmer incurs costs due to animal treatment and replacement.  Dairies pay a 
premium for high milk quality.

There are a number of bovine mastitis vaccines on the market, but these are 
directed towards E. coli only.  Aquila's Quilvax-M(TM) bovine mastitis product
is bivalent, containing antigens for both S. aureus and E. coli, and is expected
to provide broader control of mastitis.

The S. aureus component of Quilvax-M(TM) is based on a patented cell surface 
protein from S. aureus called fibronectin binding protein.  Fibronectin binding 
protein is primarily responsible for attachment of S. aureus to host tissue, in
this case the epithelium of the bovine mammary gland.  It is believed that this 
attachment is a critical step in the disease process and results in the 
inflammation and tissue destruction that characterizes mastitis.  In the 
Company's Quilvax-M(TM) program, fibronectin binding protein is used as the 
target antigen for development of a beneficial immune response.  Antibodies 
directed against fibronectin binding protein may block the attachment of S. 
aureus to mammary gland tissue and may help kill infected cells through 
antibody-dependent mechanisms.

The Company has been making use of the ability to experimentally cause S. 
aureus mastitis by direct challenge of dairy cattle with bacteria deposited in
the mammary gland.  In a typical challenge experiment, the response of several 
groups of animals, both treated and non-treated controls, to a S. aureus 
challenge are compared.  Recent studies indicate that Quilvax-M(TM)is safe and 
that it reduces the inflammatory response that develops upon infection.  
Measurement of parameters that determine milk quality and the price dairy 
producers would receive for their milk indicates that milk from animals 
vaccinated with Quilvax-M(TM) would have a higher value than that from non-
treated controls.

The E. coli portion of Quilvax-M(TM) is modeled after the E. coli mastitis
products currently on the market.  The marketed products make use of a mutant
strain of E. coli that has slightly altered surface carbohydrate structure.
Quilvax-M(TM) makes use of a similar E. coli mutant.  Biochemical anlysis of
Quilvax-M(TM) and the marketed products indicate that the amount of active
component directed against E. coli present in Quilvax-M(TM) is similar to or
exceeds that present in the marketed products.

In order to receive authorization from the USDA to market Quilvax-M(TM), the 
Company must conduct formal efficacy trials for both the S. aureus and E. coli 
components of the product.  Following successful completion of these studies, a 
formal safety study using the product on working dairy farms is required.  The 
Company believes it could add a streptococcal component in a next generation 
product.

The research costs are 50% funded by Virbac.  The Company has retained 
exclusive marketing rights in North America while Virbac has exclusive 
marketing rights in Europe.  The parties share marketing rights in the rest of
the world.

Quilimmune-M(TM) for the Control of Malaria

According to estimates in published reports, about two billion people reside in 
malaria-infected areas.  The yearly incidence of malaria is estimated by the 
World Health Organization at 300 to 500 million cases, with a death toll of 1.5 
to 3 million persons. While anti-malarial drugs have been in use for decades, 
they are expensive and resistant malarial strains are becoming increasingly 
common.  The World Health Organization has identified malaria as a priority 
vaccine target in developing countries.

Aquila is involved in a number of programs to develop products to control 
malaria.  One of the programs is a collaboration with SmithKline Beecham,p.l.c. 
(see "Corporate Partner Programs").

In addition to this program, Aquila has a collaboration with the World Health 
Organization (WHO) on another malaria product involving the antigen SPf66.  
SPf66, a polymerized synthetic peptide developed by Dr. Manuel Patarroyo of 
the Institute de Inmunologia in Bogota, Colombia, contains sequences from 
proteins expressed during several stages of the parasite's life cycle. The
antigen has been tested with an alum adjuvant in several large clinical trials
in humans.  Protection was achieved from malaria in two of the trials in about
30% of the adults and children.  In two other trials  no protection was 
observed.  These mixed observations could be the result of several factors: 
different manufacturing processes were used for the SPf66; the design of the 
trials was different; the clinical definition of malaria varied between 
studies; and the study populations were different.  

Aquila has investigated the effectiveness of a Quilimmune-M(TM) product 
containing QS-21 and SPf66.  In a study in Aotus monkeys, 57% of the animals 
were protected from malaria on challenge after immunization with Quilimmune-
M(TM).  In this study, a control vaccine of SPf66 with alum (the product that 
was used in the human studies) gave 25% protection, which is comparable to 
the results obtained previously in humans.

A human clinical trial of Quilimmune-M(TM) has been completed.  In this Phase I 
trial,  about 90 volunteers enrolled in five groups received the different 
formulations of Quilimmune-M(TM), or the SPf66/alum product, or alum, or a 
control of QS-21 alone.  The clinical trial was designed as a dose escalation 
study to evaluate the different formulations.  Both two dose and three dose 
schedules were evaluated with immunogenicity measured as a function of 
antibody titer.  Safety data indicated that Quilimmune-M(TM) was generally well 
tolerated and very significantly increased the immune response after both two 
and three immunizations compared to the SPf66/alum control. Antibody titers of 
volunteers receiving Quilimmune-M(TM) were over 100 times higher than those of 
volunteers receiving the SPf66/alum control.   Two volunteers, however, who 
received Quilimmune-M(TM) developed severe allergic reactions after the third 
immunization.  Such reactions occasionally occur following immunization; 
these were quickly resolved following anti-allergic medication and 
corticosteriod therapy.  The Company intends to evaluate the protective 
potential of the enhanced immunogenicity resulting from immunization with 
Quilimmune-M(TM) in further trials.


Quilvax-FeLV(TM) for the Prevention of Feline Leukemia

Aquila has developed a recombinant sub-unit vaccine against the feline 
leukemia virus.  The product was approved in 1990 in the U.S. and 1991 in 
Europe.  The product is marketed by Virbac S.A. in Europe, Australia and Japan 
under the tradename Leucogen(R) and Virbac S.A. has indicated that it intends to
market the product directly in the U.S. in 1999.  Feline lukemia is a highly 
contagious and commonly fatal disease of cats.  Aquila's product was the first 
recombinant vaccine ever developed against a tumor-causing virus in mammals.  
A patent covering Quilvax-FeLV(TM) has been issued in the U.S. and a number of 
other countries.  Aquila manufactures bulk formulated product for the United 
States and Australian markets, and supplies Virbac with bulk antigen and 
adjuvant for further manufacture for the European and Japanese markets.  The 
product is the leading feline lukemia vaccine in Europe, and in an independent 
study was found to be the most effective of three leading feline lukemia 
products on the market.

CD1-TB 

Mycobacteria tuberculosis is one of the world's most prevalent infectious 
diesease pathogens.  It infects one third of all people and kills more
individuals, 2-3 million per year, than any other infectious agent.  Strains
of Mycobacteria tuberculosis that are multi drug resistant have been isolated
and their frequency is increasing.  Aquila's tuberculosis program is based on
research initated at the Brigham & Women's Hospital by Drs. Brenner and
Porcelli.  In their research work, Drs. Brenner and Porcelli discovered that
lipid antigens of Mycobacteria tuberculosis are presented to the immune system
by CD1.  Identification and characterization has show that these antigens have
lipid and carbohydrate components.  Initial immunization challenge studies have
been conducted in laboratory animals using a vaccine containing a mixture of
these lipid antigens in a formulation with QS-21.  Following immunization and
challenge, animals receiving the experimental vaccine had a significantly
reduced bacterial burden when compared to non-immunized controls.  Our ongoing
work, a collaborative effort between Brigham & Women's Hospital scientists and
Aquila scientists, is focused on identifying specific Mycobacteria tuberculosis
antigens that provide immunological benefit and demonstrating usefulness in
animal models as a prelude to human studies.

CD1-Chl

Chlamydia trachomatis is believed to be the world's most common sexually 
transmitted bacterial pathogen.  In the U.S., Chlamydia trachomatis remains the 
most common reportable infectious disease, and studies have linked infection by 
Chlamydia trachomatis to Pelvic Inflammatory Disease and infertility.  Aquila's 
research effort is concentrated on antigen discovery with a particular interest
in antigens presented to the immune system by CD1.

Corporate Partner Programs

In addition to Aquila's internal product development programs, the Company 
has six corporate partners who have licensed the Stimulon(TM) adjuvants for a 
variety of human diseases.  The six corporate partners are SmithKline 
Beecham, p.l.c., Wyeth-Lederle Vaccines and Pediatrics, Pasteur Merieux 
Connaught, Bristol Myers/Squibb, (Progenics Pharmaceuticals, Inc.), 
VaxGen, Inc. and NABI.  Three of the world's four largest vaccine 
manufacturers are using Aquila's adjuvants.  In return for rights to use 
Stimulon(TM) adjuvants for specific diseases, the corporate partners have agreed
to pay Aquila license fees, milestone payments, and royalties on product sales. 
Aquila has retained worldwide manufacturing rights for QS-21.  In addition to 
corporate partners, the Company has developed a number of academic 
collaborations to test potential product formulations containing QS-21.

SmithKline Beecham, p.l.c. ("SB") has licensed QS-21 for a number of 
different applications.  The world's leading manufacturer of Hepatitis B 
vaccine, SB is aggressively marketing its existing portfolio of vaccines, 
while developing new and improved products.  SB has completed a number 
of clinical trials of potential products containing QS-21 and is also 
investigating the use of combinations of different adjuvants.
 
In collaboration with the Walter Reed Army Institute of Research 
(WRAIR), SB reported in the New England Journal of Medicine (Stoute et 
al., NEJM, January 9, 1997, pp. 86-91) results of a Phase I human challenge 
study involving the testing of a potential malaria product formulated with 
different adjuvants.  The three different product formulations all contained 
a recombinant circumsporozoite malaria antigen fused to a hepatitis B 
surface antigen as a carrier protein.  The first formulation also contained 
MPL and alum; the second an emulsion of oil and water; and, the third was 
SBAS2, a proprietary SB adjuvant formulation containing QS-21 and other 
adjuvants. The study results showed that the first formulation was only 
weakly immunogenic compared to the other formulations.  Following a 
challenge with malaria carrying mosquitoes, the third formulation 
containing QS-21, was the only one to give significant protection from 
infection.  SB has initiated Phase II studies in Africa.

SB is developing TA-GW, a vaccine for genital warts which is licensed 
from Cantab Pharmaceuticals plc and has been reformulated with SBAS2.  
Phase I studies have been completed and a Phase I/II dose ranging study is 
underway.  SB is planning to initiate additional studies in 1999.

SB has completed Phase II studies of a therapeutic product for treating 
people chronically infected with hepatitis B, and is planning additional 
studies in 1999.  Phase I clinical studies of a therapeutic vaccine for treating
people with herpes infections have been completed.
 
Pasteur Merieux Connaught ("PMC") has licensed QS-21 for use in its 
HIV vaccine programs.  PMC has ongoing pre-clinical work on two 
potential HIV products and has started a Phase I clinical trial to evaluate a 
third HIV vaccine candidate.

Wyeth-Lederle Vaccines and Pediatrics ("Wyeth-Lederle") licensed QS-
21 in 1992 for use in five vaccines.  Wyeth-Lederle, formed as a result of 
the acquisition of American Cyanamid by American Home Products, is a 
leader in pediatric vaccines.  Wyeth-Lederle has completed a Phase I 
clinical trial using a product formulated with QS-21, and has informed the 
company that it intends to conduct additional clinical studies.  

Bristol Myers Squibb/Progenics Pharmaceuticals, Inc. 
("BMS/P")licensed QS-21 for use in certain therapeutic products for 
cancer.  BMS/P's most advanced program involves a vaccine called GMK 
which incorporates  QS-21 with a ganglioside preparation called GM2 to 
treat melanoma.  The pivotal Phase III study in high risk melanoma patients 
has passed the mid point in patient accrual.  Another Phase III trial 
commenced in 1997 and is being conducted outside the U.S.  A third trial in 
intermediate risk melanoma patients is planned.  A second cancer product, 
MGV, which contains QS-21 and the ganglioside GD2, is entering Phase 
II/III trials.  This product is expected to be applicable to a number of 
cancers.  Aquila has licensed Progenics to use QS-21 in exchange for a 
license fee, an equity interest in Progenics, and royalties, and has a supply 
agreement with BMS. 

VaxGen, Inc. (an early stage company whose major corporate shareholder 
is Genentech, Inc.) has licensed QS-21 for use in its HIV-1 vaccine 
program.  VaxGen has conducted a number of Phase I clinical trials in 
healthy volunteers with a product formulated with QS-21, under the 
auspices of the National Institutes of Health.  Volunteers received very low 
doses of gp120 antigen combined with QS-21 and/or alum.  These product 
formulations were well tolerated and  immunogenicity results were 
promising.  A fourth trial based on these product formulations was initiated 
in late 1998 and is ongoing.

NABI has licensed QS-21 for use in production of immunoglobulin for 
prevention and treatment of gram-negative and gram-positive bacterial 
infections.  NABI is currently evaluating its products in clinical trials 
without using adjuvants.  The Company is uncertain if or when NABI will 
commence clinical trials using QS-21.

                  PRODUCT CLINICAL DEVELOPMENT STATUS
               Pre-clinical  Phase I  Phase II  Phase III On Market  Partner
               Research    Feasibility Efficacy Licensing

Quilvax-FeLV   -------------------------------------------------     Aquila/
                                                                      Virbac
Melanoma (GM2) -----------------------------------------             BMS/
                                                                      Progenics
Quilvax-M (TM) --------------------------------                      Aquila
Hepatitis B    --------------------------------                      SB
Melanoma (GD2) --------------------------------                      BMS/
                                                                       Progenics

Quilimmune-P   --------------------------                            Aquila
Malaria (RTS,S)--------------------------                            SB
HPV            --------------------------                            SB/Cantab
Quilimmune-M
  (tm) (SPf66) ----------------------                                Aquila/WHO
HIV-1 (gp 160) ----------------------                                PMC
Herpes         ----------------------                                SB
Respiratory
 Virus         ----------------------                                Wyeth
HIV -1 (gp 120)----------                                            VaxGen
CD1-TB         -------                                               Aquila
CD1-Chl        ----                                                  Aquila


Manufacturing and Scale-up

As part of each Stimulon(TM) adjuvant licensing agreement, the Company has 
retained the right to be the exclusive supplier of Stimulon(TM) adjuvants.  The 
license agreements stipulate supply prices, within certain ranges.  Pursuant to 
the license agreements, the Company will also receive royalties on its
licensees' product sales.

The Company currently manufactures QS-21 for commercial animal health use 
and for use in human clinical trials. The Company has scaled the critical steps
of the process to produce a batch size suitable for large-scale commercial 
production up to 2,000,000 doses.

The FDA classifies QS-21 as a constituent material used in vaccine preparation. 
As a result, the FDA does not require licensure of facilities used for the 
manufacture of QS-21.  Aquila believes that this classification affords
flexibility in the timing of investment in commercial manufacturing facilities.
After the safety and effectiveness of QS-21 has been demonstrated, Aquila
expects to be in a position to reasonably project the capital investment
required and can adjust the scale of manufacturing as additional products
reach the market.

The Company also currently manufactures Quilvax-FeLV(TM) antigen and 
vaccine, which were licensed for sale in the U.S. by USDA in 1990 and for 
European sales in the European Community ("E.C.") in 1991.  The Company 
produces commercial quantities at the 400 liter fermentation scale.  Due to the 
relocation of its facilities, Aquila is currently re-validating and re-licensing
its facilities.

Patents and Proprietary Rights 

Aquila has pursued a policy of obtaining patent protection for its technologies 
both in the U. S. and in selected foreign countries.  The Company has filed or 
has rights to a number of U.S. patents and patent applications and their foreign
counterparts.  Aquila also relies on trade secrets, proprietary know-how, and 
continuing technical innovation to develop and maintain its competitive 
position.

Aquila's future success will depend, in part, upon its ability to develop
products and technologies and to obtain patent protection for its products and
technologies both in the U. S. and Europe. There can be no assurance that patent
applications owned or licensed by the Company will issue as patents; that patent
protection will be secured for any particular technology, or that, if issued,
such patents will be valid, or that they will provide the Company with
meaningful protection against competitors. There can be no assurance that the
patents will not be challenged or designed around by others.  Proceedings
brought against Aquila's patents could expose it to significant expense and the
risk of adverse determinations.

Aquila is not aware of any issued third party patents that would interfere with 
development of any of its products. There can be no assurance that Aquila will 
not infringe existing or future patents owned by others; that third parties will
not bring suit against Aquila for infringement of such patents.  There can be no
assurance that the Company could obtain necessary or desirable licenses on 
acceptable terms or that it could design around such patents.  Any litigation 
instituted by third party patent holders could expose Aquila to significant 
expense and the risk of adverse determination.  

QS-21 and Other Adjuvants

Aquila has three issued and five pending U.S. patents covering QS-21, QS-7, 
and the other principal fractions of Quillaja saponaria and methods of their use
in vaccines.  Comparable applications have been filed in appropriate additional 
jurisdictions, sixteen of which have issued.  The Company believes that the 
standard of purity specified in the patent for the saponin fractions is
necessary to achieve a safety profile acceptable for human use.  CSL
International ACN ("CSL") controls certain patents and patent applications
covering ISCOMS (immune stimulating complexes) prepared from crude saponin
fractions, lipids and various antigens.  The Company believes that its products
do not infringe CSL's U.S. patent due to process differences and formulation
techniques that avoid ISCOM formation.  The Company believes that its products
do not include ISCOM formation nor make use of ISCOM technology.  CSL and Seed
Capital Inc., another company with an interest in ISCOM technology, filed an 
opposition with the European Patent Office ("EPO") on the issuance of Aquila's 
QS-21 patent in Europe.  A hearing before the EPO was held in October of 
1998.   The Company prevailed against all points raised in the opposition.  CSL 
may appeal the EPO's decision and though the Company does not believe that 
CSL's claims have any merit or are likely to succeed, there can be no assurance 
that the Company will prevail in any future actions taken to attack the validity
of its patents.

CD1 Antigen Presentation System

Aquila holds a license to a broad patent covering a CD1 restricted immune 
response, a patent covering certain molecules presented through CD1 and has 
several pending patents on the CD1 technology.

Mastitis

Aquila exclusively licensed from Alfa Laval Agri AB certain base technology 
used in the bovine mastitis program.  This technology includes patents and 
patent applications on fibronectin binding proteins from S. aureus, E. coli and
S. dysgalactiae.  The Alfa Laval license calls for payment of an initial license
fee, royalties, and additional license fees as additional patents issue and
when Aquila commercializes the vaccines.  As part of the joint development
agreement with Virbac, Aquila arranged for Alfa Laval to grant a direct
license to Virbac in certain territories.

To date 11 patents have been issued in the U.S. related to fibronectin binding 
proteins, the genes that encode these proteins, related synthetic peptides and
the use of these materials for treating infections. 

Other Patents

Aquila holds U.S. patents on its Quilvax-FeLV(TM) vaccine and on drug delivery 
compounds.  Patents on methods of expressing and purifying proteins made in a 
baculovirus expression system have issued.  Aquila has a fully paid-up, royalty-
free license to U.S. Patent No. 4,734,362 and foreign counterparts (protein 
purification) in the vaccine, therapeutic and related research fields.  Aquila
has a fully paid-up, royalty-free license to U.S. Patent No. 4,753,873 in the
veterinary diagnostic field; and a non-exclusive sublicense to U.S. Patent No.
4,725,669 and U.S. Patent No. 5,068,174 (HIV-gp120-p27) in the vaccine,
therapeutic and related research fields.  Aquila also has several issued and
pending patents in the field of  Lyme Disease and Human Granulocytic
Ehrlichiosis.



Competition 

The biotechnology and pharmaceutical industries are subject to rapid and 
significant technological change.  Competitors of Aquila in the U. S. and abroad
are numerous.  They include, among others, major pharmaceutical and chemical 
companies, specialized biotechnology firms, universities and other research 
institutions.  There can be no assurance that Aquila's competitors will not 
succeed in developing technologies and products that are more effective than 
any which have been developed by the Company or may be developed by the 
Company or which would render the Company's technology and products 
obsolete and noncompetitive.  Many of these competitors have substantially 
greater financial and technical resources and production and marketing 
capabilities than Aquila.  In addition, some of Aquila's competitors have 
substantially greater experience than the Company in preclinical testing and 
human clinical trials of pharmaceutical products and in obtaining FDA and other 
regulatory approvals of products for use in healthcare.  Accordingly, Aquila's 
competitors may succeed in obtaining FDA approval for products more rapidly 
than could the Company.  There can be no assurance that Aquila's products 
under development will be able to compete successfully with existing products 
or products under development by other companies, universities and other 
institutions or that they will attain regulatory approval in the U. S. or
elsewhere. If Aquila commences significant commercial sales of its products,
it will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it may have less experience.  A significant amount
of research in the field is also being carried out at academic and government
institutions. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more aggressive in
pursuing patent protection and negotiating licensing arrangements to collect
royalties for use of technology that they have developed.  These institutions
may also market competitive commercial products on their own or in collaboration
with competitors and will compete with Aquila in recruiting highly qualified
scientific personnel.

Aquila is aware of certain programs and products under development by others 
which may compete with its programs and products.  Several companies, 
including Ribi ImmunoChem Research, Inc., Corixa, Avant and Chiron 
Corporation, are developing adjuvants and antigens.

Merck Laboratories, Wyeth-Lederle, SB, PMC and possibly others are in human 
clinical trials with conjugate pneumococcal vaccines and have existing non-
adjuvanted products on the market.  Several companies market mastitis vaccines 
for infections caused by E. coli.  The existence of products developed by these 
and other competitors, or other products of which Aquila is not aware or which 
may be developed in the future, may adversely affect the marketability of 
products developed by Aquila.

Aquila's adjuvant licensees are also licensees of Ribi, Corixa and Avant.

Government Regulation 

The FDA, the USDA, the Environmental Protection Agency, and comparable 
state and other agencies, including those in foreign countries, impose 
requirements governing the development, manufacture and marketing of certain 
of Aquila's products and products under development.  The regulatory process 
can take several years, involves lengthy and detailed laboratory and clinical 
testing, and requires substantial expenditures.  Human biologicals and 
pharmaceuticals, including vaccines, typically require three stages of clinical 
trials: Phase I to determine the preliminary safety of the product; Phase II
during which the efficacy of the product is preliminarily assessed and treatment
regimens refined; and Phase III (sometimes referred to as "pivotal trials")
during which final safety and efficacy data are generated.  Regulatory
approval is required prior to commencement of clinical trials.  The clinical
data, together with comprehensive manufacturing and facility information, is
filed with the FDA in a Product License Application ("PLA") and an Establishment
License Application, or in certain cases as a Biologics License Application, on
which the regulatory agencies base their approval decisions.  In some
instances, particularly in cases of life-threatening diseases for which there
is no effective treatment, the clinical trial phases may be combined, or
approval may be sought after completion of an expanded Phase II trial.

Because QS-21 is currently classified by the FDA as a constituent material used 
in drug preparation, the FDA does not require licensure of facilities used in
its manufacture.  Aquila believes that this affords investment flexibility in 
commercial manufacturing facilities.  Aquila has filed Biologics Master Files
for QS-21 with the FDA, which its licensees can reference as part of their own 
PLAs as they seek FDA approval.

There can be no assurance that, at the end of the regulatory process, approval 
will be obtained or that product developments by competitors in the interim 
will not have made Aquila's products obsolete or economically unfeasible.  
The extent of regulation which may arise from future legislative or 
administrative action cannot be predicted, nor can the potential impact of 
such future regulation, or changes in existing regulation, be predicted with 
any certainty.


Product Liability 

Aquila has potential liability risks that are inherent in the testing,
manufacturing and marketing of medical products.  The use of Aquila's products
or conduct of clinical trials may expose Aquila to product liability claims and
possible adverse publicity.  These risks also exist with respect to Aquila's
products, if any, that receive regulatory approval for commercial sale.  The
Company currently has limited product liability coverage for the clinical
research use of its products, which management believes is customary for
companies with products at this stage of clinical development.  There can be no
assurance that Aquila will be able to maintain its existing insurance coverage
or obtain additional insurance coverage at acceptable costs, if at all, or that
a product liability claim would not materially adversely affect the business or
financial condition of the Company.

Human Resources 

As of December 31, 1998, Aquila employed 47 full-time employees.  The 
employees are not represented by any labor unions, and the Company considers 
its relations with those employees to be good.  Aquila's scientific staff has 
expertise in many relevant areas and is augmented by consulting agreements 
with research scientists located at various academic institutions and 
commercial organizations.

Scientific Advisory Board 

Aquila's Scientific Advisory Board consists of 7 individuals with recognized 
expertise in immunology and oncology.  The Scientific Advisory Board meets 
from time to time to discuss matters relating to the Company's current and long-
term scientific planning and research and development, and the individual 
members are available for consultation on an informal basis.  All members of 
the Scientific Advisory Board are employed by academic institutions, and may 
have commitments or consulting or advisory obligations to other entities that 
may limit their availability to Aquila.  These entities may be competitors of 
Aquila.  In certain circumstances, the academic institutions which employ the 
Scientific Advisory Board members may assert ownership rights to inventions 
or other technology that may result from advice provided to Aquila by such 
members.  In such circumstances, Aquila could seek to negotiate licenses to 
such inventions or technology, but there can be no assurance that the Company 
would be able to obtain such licenses on commercially reasonable terms.  No 
members of the Scientific Board are expected to devote more than a small 
portion of their time to Aquila's business.

The following persons are the current members of the Scientific Advisory 
Board:

Dr. Michael Brenner, M.D.
K. Frank Austen Professor of Medicine
Chief, Division of Rheumatology, Immunology & Allergy
Brigham and Women's Hospital
Smith Building, Room 225
One Jimmy Fund Way
Boston, MA 02115

John R. David, M.D.
Richard Pearson Strong Professor
Department of Immunology and Infectious Diseases
Harvard School of Public Health
665 Huntington Avenue
Boston, MA 02115

Robert Edelman, M.D.
Professor of Medicine and Pediatrics
Center for Vaccine Development
University of Maryland School of Medicine
685 West Baltimore Street, Room 480
Baltimore, Maryland 21201

Dr. Philip Livingston, M.D.
Clinical Immunology Service
Memorial Sloan-Kettering Cancer Center
1275 York Avenue
New York, NY 10021

Dr. Steven A. Porcelli, M.D.
Assistant Professor of Medicine
Division of Rheumatology, Immunology and Allergy
Smith Building, Room 516B
One Jimmy Fund Way
Boston, MA 02115

Dr. John Treanor, M.D.
Associate Professor of Medicine
University of Rochester Medical Center
Infectious Diseases Unit
601 Elmwood Avenue, Box 689
Rochester, New York 14642

Richard J. Whitley, M.D.
Professor of Pediatrics, Microbiology and Medicine
The University of Alabama at Birmingham
616 Children's Hospital
1600 Seventh Avenue South
Birmingham, Alabama 35233

Item 2.  Properties.

Aquila's operations are conducted in a leased manufacturing, research and 
office facility in Framingham, Massachusetts. 

Item 3.  Legal Proceedings.

None.

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

No matter was submitted to a vote of the security holders of Aquila during the 
fourth quarter of the fiscal year ended December 31, 1998.

Item 4.A. Executive Officers of the Registrant.

The following is a list of management of the Company, their ages, positions, 
offices and business experience, as of February 1, 1999:

Alison Taunton-Rigby, Ph.D., 54, has been President, Chief 
Executive Officer and Director since March of 1996.  Dr. Taunton-
Rigby served as President and Chief Executive Officer and a member 
of the Board of Directors of the Company's predecessor, Cambridge 
Biotech Corporation ("CBC") from April 1995 until October of 1996.  
From 1993 to 1994, she was President and Chief Executive Officer of 
Mitotix, Inc., a biopharmaceutical company.  Prior to joining Mitotix, 
Dr. Taunton-Rigby was Senior Vice President, Biotherapeutics, of 
Genzyme Corporation, where she had overall responsibility for 
Genzyme's biotherapeutics business.  Dr. Taunton-Rigby is a member 
of the Board of Directors of BIO, the national trade organization and a 
past Chair of and current member of the Emerging Companies Section.  
She is also a member of the Board of Directors and a past President of 
the Massachusetts Biotech Council, the trade organization representing 
Massachusetts biotechnology companies.  Dr. Taunton-Rigby received 
her doctorate in Chemistry from the University of Bristol in England, 
and is a graduate of the Advanced Management Program of the 
Harvard Business School.  She is a director of Synaptic Pharmaceutical 
Corporation.  She is also a member of the Bentley College Ethics 
Board.

Gerald A. Beltz, Ph.D., 47, is Senior Vice President of Research and 
Development of the Company.  Dr. Beltz served as Vice President of 
Research and Development of CBC from 1993 to 1996.  For ten years 
prior to assuming these positions, Dr. Beltz held various scientific 
positions with CBC.  Dr. Beltz was responsible for the initial 
development of Aquila's FeLV feline leukemia vaccine and CBC's 
HIV-1 diagnostic assays, and is the lead inventor on the patents 
covering these products.  Dr. Beltz received his B.S. from Beloit 
College, his M.A. and Ph.D. from Princeton University, and did his 
post-doctoral work at Harvard University.

Deborah B. Grabbe, 47, is Vice President of Manufacturing 
Operations of the Company.  Ms. Grabbe served as Vice President of 
Manufacturing Operations for CBC from 1995 until 1996.  She was 
Vice President of Regulatory Affairs and Product Quality for CBC 
from 1993 to 1994.  Prior to joining CBC in 1993, Ms. Grabbe was 
Director of Regulatory and Clinical Affairs and Director of Product 
Support for Behring Diagnostics, Inc.  From 1987 to 1988 she was 
Vice President of Operations at Biotechnica Diagnostics, Inc.  Ms. 
Grabbe holds a B.A. from Oberlin College and an M.S. from John A. 
Burns School of Medicine, University of Hawaii.  

James L. Warren, 53, joined Aquila in January of 1998 as Vice 
President of Finance, Chief Financial Officer and Treasurer of the 
Company.  From 1991 to January 1998, Mr. Warren was Vice 
President and Corporate Controller of Genzyme Corporation, a 
multinational biotechnology and health care product company.  From 
1984 to 1991, Mr. Warren was Vice President of Finance and 
Administration of Itek Graphics Corporation, Composition Systems 
Division, a supplier of composition software systems.  Mr. Warren 
holds a B.S. from the University of Tennessee and an M.B.A. from 
Boston University.


PART II

Item 5.  Market for Registrant's Common Equity and Related 
Stockholder Matters. 

The Company's common stock trades on the Nasdaq Stock Market under the 
symbol AQLA.  The prices quoted below for 1998 and 1997 represent sale 
prices as reported by the Nasdaq Stock Market.  The prices reported through the 
third quarter of 1996 represent bid prices for transactions reported by brokers
on the "OTC Bulletin Board" and in the so called "pink sheets", and reflect 
interdealer prices without retail mark-up, mark-down or commissions and may 
not necessarily represent actual transactions.  The prices reported through the 
third quarter of 1996 represent transactions in the stock of Cambridge Biotech 
Corporation ("CBC"), predecessor to Aquila, restated to give effect of an 
exchange of CBC stock at a ratio of one share of Aquila for each 7.569 shares 
of CBC.  Aquila's stock was deemed registered pursuant to Rule 12g-3(a) under 
the Securities Exchange Act of 1934 in October 1996 and began trading on 
Nasdaq on October 24, 1996.  As of March 19, 1999 there were 4,890 holders of 
record of Aquila's Common Stock.

                         1998                    1997              1996
Quarter           High        Low          High     Low        High     Low

1st               $ 8.63      $ 4.00       $ 7.50   $ 5.00     $12.31   $ 2.81
2nd               $ 7.38      $ 4.00       $ 6.38   $ 3.75     $ 9.44   $ 3.75
3rd               $ 4.50      $ 2.45       $ 5.75   $ 4.63     $ 6.13   $ 2.63
4th               $ 4.31      $ 2.06       $ 5.25   $ 4.06     $ 6.75   $ 3.25

The Company has not paid any dividends.


Item 6.  Selected Financial Data.

                       Aquila Biopharmaceuticals, Inc.
                        For the years ended December 31,
                 (Dollars in thousands except per share amounts)


                                       1998     1997     1996     1995     1994
Total revenues                      $ 5,597  $ 6,928  $ 6,573  $ 5,728  $ 5,010
Total expenses (1)                  (22,145) (10,564) (11,745) (12,242) (16,109)
Other income                          1,948    4,370    5,777    2,162      360
Total reorganization items(2)            --       --   (1,715)    (813)    (869)
                                     ______   ______   ______   ______   ______

Income/(loss) continuing operations (14,600)     734   (1,110)  (5,165) (11,608)
                                    _______   ______   _______  ______   ______
Income/(loss) discontinued
  operations (3)                         --      191    9,109      223  (10,668)
                                    _______   ______   _______  ______   ______
Income/(loss) before extraordinary
  loss (4)                          (14,600)     925    7,999   (4,942) (22,276)
                                    ________  ______   _______  ______   ______

Extraordinary loss                        --      --   (2,039)      --       --
                                    ________  ______   _______  ______   ______
Income/(loss)                      $(14,600)  $  925   $5,960  $(4,942)$(22,276)
                                    ========  ======   =======  ======   ======


Income/(loss) per weighted average
  number of common shares (diluted):


Continuing operations               $ (2.22)  $ 0.14   $(0.30)  $(1.50) $ (3.40)

At year end:
 Cash and marketable securities(5)  $15,156  $16,897  $17,675   $7,072  $ 8,538
 Working capital                    $11,891  $16,029  $16,157   $7,977  $ 8,886
 Total assets                       $24,628  $20,667  $26,312  $23,045  $28,503
 Long term debt                     $ 3,669  $   139  $ 4,056  $    --  $    --
 Total long term obligations        $ 3,894  $   364  $ 4,281  $12,168  $12,413
 Stockholder's equity               $15,653  $17,887  $16,917  $ 3,946  $ 8,668

____________
(1) 1998 includes $9.9 million charge for purchased incomplete technology.
(2) The Company recorded professional fee expense of $2.1 million, $1.2 million
and $0.6 million, and interest earned on cash resulting from Chapter 11
proceedings of $0.4 million, $0.4 million and $0.1 million in 1996, 1995 and
1994, respectively.  In 1994, the Company recorded $0.4 million as a provision
for rejected executory contracts.
(3) In 1996, the Company sold the enterics diagnostics business for $5.7 million
and the retroviral diagnostic business for $6.5 million, recording a combined
gain of $7.6 million.  In 1997, a gain of $0.2 million was recorded on the sale
of inventory from these businesses.  The Company's income from these businesses
was $1.5 million and $0.2 million in 1996 and 1995, respectively.  In 1994, the
Company recorded a loss from operations of $3.2 million and a loss of $7.5
million on the sale of its Irish subsidiary.
(4) The Company recorded an extraordinary loss of $2.0 million in 1996 upon its 
reorganization and emergence from Chapter 11 bankruptcy for issuance of shares
valued at $5.6 million in settlement of a shareholder class action suit offset
by forgiveness of debt of $3.8 million on pre-petition liabilities. 
(5) Cash and marketable securities balances reflect proceeds from the sale in
1996 of the Company's diagnostic businesses for a combined $12.2 million
proceeds, a paid up license fee of $3.3 million, and in 1997, net cash proceeds
from the sale of the Company's Rockville, Maryland property of $2.0 million.


Item 7.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations.

This discussion contains forward-looking statements within the meaning of 
Section 21E of the Securities Exchange Act of 1934, as amended.  These 
forward-looking statements represent the expectations of Aquila's management 
as of the filing date of this Form 10-K.  The Company's actual results could 
differ materially from those anticipated by the forward-looking statements due 
to risks and uncertainties such as general economic conditions; risks in 
product and technology development; delays in the regulatory process; 
difficulties in obtaining raw materials for the Company's products; failure 
of corporate partners to commercialize successfully products using the 
Company's technology; competition; the costs of acquiring additional 
technology; failure to obtain additional funding for planned activities; and 
other risks and uncertainties identified in this report on Form 10-K and in 
Aquila's Security and Exchange Commission filings and the exhibits thereto. 

Results of Operations.

The operating results of Aquila reflect its biopharmaceutical business.  The 
businesses operated by Aquila's predecessor, Cambridge Biotech Corporation 
("CBC"), are presented as Discontinued Operations in the Statements of 
Operations.   


1998 Compared to 1997

Revenues

Total revenues for 1998 were $5.6 million, a decrease of 19% from 1997.  
Product revenues were $1.0 million, a decrease of 28% from 1997.  Revenues 
from research and development were $4.6 million, a decrease of 17% from 
1997.

Product revenues were lower in 1998 due to the acquisition of a reseller by a 
competitor.  The Company's marketing partner, Virbac S.A., informed the 
Company that it has plans to respond to this competitive action.  However, 
until Virbac's plans are realized, product revenues are expected to remain at
the 1998 level. 

Revenues from research and development activities for 1998 were lower than 
1997 due, in part, to fluctuating shipments of the Company's StimulonTM 
adjuvant, QS-21, used in clinical trials by the Company's corporate partners.  
Also, the Company received $0.9 million in 1998 from its animal healthcare 
partner compared to $1.1 million in 1997.  This program, which is developing a 
product to treat bovine mastitis, has evolved from the research stage, during 
which all costs were shared, to the development and final licensing trial stage,
in which only certain costs are shared.   In 1998, the Company received $3.0 
million, the final scheduled license payment from a partner for use of 
Stimulon(TM).  In 1997, this payment was $3.5 million.   

Costs and Operating Expenses

Cost of sales was 101% and 78% in 1998 and 1997, respectively.  The higher 
cost of sales in 1998 was due to downtime caused by the move of the 
Company's corporate offices and all operations to new leased facilities,
partially offset by a price increase.  

Research and development expenses for 1998 were $17.4 million, including a 
charge of $9.9 million for incomplete technology as a result of the purchase of 
VacTex, Inc., ("VacTex") in April 1998.  The purchase price was charged to 
incomplete technology due to the early stage of the technology and the need to 
expend additional resources to develop the technology.   In 1998, the Company 
expended $0.9 million on the VacTex  research and development program.  This 
program is expected to be a long-term endeavor of the Company that will be 
evaluated periodically to determine spending levels.  Excluding the VacTex 
charge, research and development spending was $7.4 million compared to $5.0 
million in 1997, an increase of 48%.  The increase was due to clinical and 
licensing trial expenses, patent issuance expense, and spending on the CD1 
research programs acquired from VacTex. 

General and administration spending was $3.8 million compared to $4.5 million 
in 1997, a decrease of 16%.  The lower spending was a result of lower staffing 
levels, lower legal and professional fees, and lower facility costs.

Other Income

Other income was $2.0 million, a decrease of 55% from 1997.  In 1997, the 
Company had a gain of $2.3 million on the sale of real estate.  In 1998, 
royalty income, which is derived primarily from agreements from discontinued 
operations, was $0.5 million compared to $0.9 million in 1997.  Royalty income 
from these sources may continue to decline as new products replace products 
covered by the royalty agreements.  Miscellaneous income in 1998 was $0.5 
million compared to $0.1 million in 1997 and included $0.1 million from 
settlement of a lawsuit and $0.3 million from abatement of real estate taxes.
Net interest income was $0.9 million in 1998 compared to $0.6 million in 1997.  
The increase was due to higher interest expense in 1997 on a real estate 
mortgage retired upon sale of the property in November 1997. 

1997 Compared to 1996

Revenues

Total revenues for 1997 were $6.9 million, an increase of 5% over 1996.  
Product revenues were $1.3 million, an increase of 48% over 1996.  Revenues 
from research and development were $5.6 million for 1997, a decrease of 1% 
from 1996.

Product revenues in 1997 increased as a result of a price increase and higher 
unit sales of the Company's animal health product to the Company's marketing 
partner. 

Revenues from research and development for 1997 decreased due to the 
completion of NIH contracts in 1996 offset by increased shipments of the 
Company's StimulonTM adjuvant for use in partner's clinical trials.  One of the 
partners paid $3.5 million in each of 1997 and 1996 to maintain its license for 
use of QS-21.  In addition, the Company received $1.1 million in contract 
revenues from its bovine mastitis development partner compared to $1.2 million 
in 1996. 

Costs and Operating Expenses

Cost of sales was 78% and 165% in 1997 and 1996, respectively, with the 
improvement resulting primarily from volume generated, operating efficiencies 
and to a price increase in one product.

Research and development expenses for 1997 were $5.0 million, a decrease of 
4% from 1996.  The decrease was due to lower spending under contractual 
agreements with third parties for outside research studies in the Company's 
bovine mastitis program.
 
General and administrative spending in 1997 was $4.5 million, a decrease of 
10% from 1996 due to a lower level of employment and to the reduction in legal 
fees incurred in connection with the Company's reorganization completed in 
1996.

Other Income

Other income in 1997 was $4.4 million, a decrease of 24% from 1996.  In 1997, 
the Company recorded a $2.3 million gain on the sale of its Rockville, Maryland 
real estate.  In 1996, the Company received a $3.3 million license fee payment 
for technology subsequently sold and $0.5 million in exchange for the 
Company's interest in a joint venture.  Royalty income, which is derived from 
agreements related primarily to discontinued operations, declined to $0.9 
million in 1997 from $1.4 million in 1996. 

Liquidity and Capital Resources

At December 31, 1998 Aquila had cash, cash equivalents and marketable 
securities of $15.2 million compared with $16.9 million at the end of 1997.  

In 1998, marketable securities increased $0.3 million while cash and cash 
equivalents declined $2.1 million.  Operating activities required $3.4 million 
primarily to fund the loss.  Investing activities required $6.9 million,
primarily for the fit-out of the Company's new leased facility. Financing
activities provided a total of $8.2 million, $3.6 from a private placement of
common stock and $5.0 million from a long-term loan partially offset by
repayment of a $0.2 million outstanding bank loan and payment of $0.4 million
on long-term debt.

In 1997, marketable securities increased by $1.0 million while cash and cash 
equivalents declined $1.8 million.  Operating activities in 1997 required $3.0 
million.  Investing activities generated cash from the sale of property of $6.1 
million while financing activities reflected the cash payment of $4.2 million 
to repay the mortgage on the property sold.

In 1996, cash increased by $2.3 million.  Operating activities required cash of 
$1.1 million.  Investing activities provided $3.4 million due to the sale of 
the diagnostic businesses for a combined $12.2 million with investment of $8.6 
million of the proceeds.  Financing activities in 1996 were virtually nil.

The Company has conducted a Year 2000 ("Y2K") review of its computer 
systems and of key vendors.  The Company believes that with the relocation to 
newly constructed facilities in September 1998 and the conversion to Y2K 
compliant business and financial software in the first quarter of 1998, the Y2K 
issue will not pose significant operational problems for the Company.  Y2K 
issues could adversely affect both revenues and costs if the Company were 
unable to carry-on its normal activities.  Audits of key vendors are performed 
for regulatory and supply assurance purposes in the normal course of business.  
These audits have not revealed any Y2K compliance issues with respect to 
vendor's ability to supply material critical to the Company's operations.  The 
Company's marketing partner is a French multi-national company and the 
Company has material transfer agreements with a number of companies, both 
domestic and foreign. There can be no assurance that any of these companies 
will be Y2K compliant.  Total amounts expended to date in connection with the 
Y2K issue are less than $0.1 million and future costs are expected to be nil.
The Company may consider carrying higher levels of raw material and finished 
goods inventory for the third and fourth quarter of 1999 to insure no 
interruption of supply.

The Company has entered into a new operating lease agreement for its executive 
offices, research laboratories and manufacturing facilities that commits the 
Company to aggregate future minimum lease payments of $11.0 million over 
the twelve year term of the lease.  In order to fit-out the facility covered by
the operating lease, the Company incurred debt of $5.0 million that has a term
of four years with aggregate payments of $6.0 million.

The Company has received a letter from CBC in February 1999 alleging that the 
Company must indemnify CBC under a Master Acquisition Agreement among 
the Company, CBC and bioMerieux, Inc. for potential losses from the 
termination of CBC's rights under a license agreement.  The Company is 
evaluating this claim and has not yet determined the effect, if any, the claim 
might have on the Company.

Aquila's revenues and expenses vary and will continue to vary.  Future revenues 
depend primarily upon the success of the Company's efforts to license its 
proprietary technology and enter into cost sharing programs, and its ability to 
market its products currently undergoing development or clinical trials.  
Aquila's expenses fluctuate primarily due to clinical trials, which take from
six months to two years, and require varying degrees of financial support.  
Revenues or operating results in any period will not necessarily be indicative
of results in subsequent periods.
 
Aquila expects that its available cash, investments, cash flow from research 
contracts and product sales will be sufficient to finance its planned 
operations and capital requirements for the next eighteen months.  Thereafter,
Aquila must raise significant additional capital in order to continue 
operations at current levels and to complete the commercialization of its 
proprietary programs.  Capital requirements could differ materially from 
those currently anticipated by management.  There can be no assurance that 
Aquila will be successful in raising additional capital.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk. 

Interest Rate Risk

The Company has one loan outstanding at December 31, 1998 that is subject to 
interest rate risk.  Additionally, in connection with a facility agreement, the 
Company maintains an investment of $0.8 million in a debt security as collateral
for a letter of credit.  Both of these investments are carried at cost, which 
approximates fair value at December 31, 1998.  These instruments are not 
leveraged and are not held for purposes of trading.  The debt carries an
interest rate of 13% and is payable as follows:

		(Dollars in thousands)
                 ____________________
	1999		$1,574		
	2000		$1,456
  	2001		$1,456
	2002		$1,525
                        ______
	Total		$6,011

The deposit has an implicit interest rate of 5.49% and matures in February 2001 
at which time proceeds of $0.9 million will be received.

Item 8.  Financial Statements and Supplementary Data. 

The financial statements filed as part of this Annual Report on Form 10-K are 
listed under Item 14 below.

Item 9.  Changes and Disagreements with Accountants on Accounting and 
Financial Disclosure.

None.

PART III

Item 10.  Directors and Executive Officers of the Registrant. 

Incorporated by reference to the Company's definitive proxy statement, 
"Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A, in 
connection with the 1999 Annual Meeting of Shareholders.  Information 
concerning executive officers of the Registrant is included in Part I of this 
Report as Item 4A - Executive Officers of the Registrant.

Item 11.  Executive Compensation.

Incorporated by reference to the Company's definitive proxy statement, 
"Proposal 1, Election of Directors - Executive Compensation", to be filed 
pursuant to Regulation 14A, in connection with the 1999 Annual Meeting of 
Shareholders.

Item 12.  Security Ownership of Certain Beneficial Owners and 
Management.

Incorporated by reference to the Company's definitive proxy statement, 
"Proposal 1, Election of Directors - Security Ownership of Certain Beneficial 
Owners and Management", to be filed pursuant to Regulation 14A in connection 
with the 1999 Annual Meeting of Shareholders.

Item 13.  Certain Relationships and Related Transactions.

Incorporated by reference to the Company's definitive proxy statement, 
"Proposal 1, Election of Directors", to be filed pursuant to Regulation 14A in 
connection with the 1999 Annual Meeting of Shareholders.

Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.

	(a)		Financial Statements.

	The following documents are filed as part of this report:

		1.	Report of Independent Auditors.

                2.      Consolidated Statements of Operations for each of 
                        the three years in the period ended December 31, 1998.

                3.      Consolidated Balance Sheets as of December 31, 1998
                        and 1997.

                4.      Consolidated Statements of Cash Flows for each of 
                        the three years in the period ended December 31, 1998.

                5.      Consolidated Statements of Shareholders' Equity for 
                        each of the three years in the period ended December 
                        31, 1998.

                6.      Notes to Financial Statements.

	(b)		Financial Statement Schedules.

			None required.

	(c)		Exhibits.

              2.1 Confirmed Reorganization Plan (consisting of 
                  Reorganization Plan, dated May 20, 1996, and 
                  modification date of July 15, 1996) (incorporated by 
                  reference to Exhibit 2 to current report on Form 8-K, 
                  dated July 18, 1996, File No. 0-12081).

              2.2 Agreement and Plan of Merger by and among Aquila 
                  Biopharmaceuticals, Inc., Aquila Acquisition, Inc. 
                  and VacTex, Inc. dated April 13, 1998 (incorporated 
                  by reference to Exhibit 2.1 to Form 8-K, dated April 
                  13, 1998, File No. D-12081).

              3.1 Amended and Restated Certificate of Incorporation, effective
                  July 25, 1996 (incorporated by reference to
                  Exhibit 2 to Form 8-K, dated July 18, 1996, File No. 
                  0-12081).

              3.2 Certificate of Amendment of Amended and Restated 
                  Certificate of Incorporation, effective March 24, 
                  1997 (incorporated by reference to Exhibit 3.2 to 
                  Annual Report on Form 10-K for fiscal year ended 
                  December 31, 1996, File No. 0-12081).

              3.3 By-laws (incorporated by reference to Exhibit 2 to 
                  Form 8-K, dated July 18, 1996, File No. 0-12081).

              4.1 Specimen Certificate representing common stock of 
                  the Company (incorporated by reference to Exhibit 
                  4.1 to Form 8-K, dated October 21, 1996, File No. 0-
                  12081).

              4.2 Form of Debenture (incorporated by reference to
                  Exhibit 4.1 to Form 8-K, dated April 13, 1998,
                  File No. 0-12081).

             o4.3 Master Loan and Security Agreement dated July 15,
                  1998 by Aquila Biopharmaceuticals, Inc. in favor of 
                  Transamerica Business Credit Corporation.

             *10.1 Contract Research and License Agreement with 
                   Virbac Laboratories, S.A. dated July 6, 1983 
                  (incorporated by reference to Exhibit 10.31 to 
                   Annual Report on Form 10-K for fiscal year ended 
                   December 31, 1983, File No. 0-12081).

             *10.1.1 Amendment to Agreement with Virbac Laboratories, 
                     S.A. (incorporated by reference to Exhibit 10.10.1 to 
                     Annual Report on Form 10-K for fiscal year ended 
                     December 31, 1988, File No. 0-12081).

              10.2 Lease for Framingham Massachusetts facility with 
                   NDNE 9/90 Corporate Center LLC as landlord 
                   effective September 9, 1998 (incorporated by reference to
                   Exhibit 10.1 to Form S-3/A No. 1 filed May 6, 1998, File
                   No. 0-12081).

             *10.3 License, Development and Supply Agreement with 
                   SmithKline Beecham, p.l.c., dated as of September 
                   11, 1992, as amended by Agreement dated as of 
                   March 31, 1993 (incorporated by reference to Exhibit 
                   10-17 to Annual Report of Form 10-K for fiscal year 
                   ended December 31, 1992, File No. 0-12081).

            tm10.4 Employment Agreement with Alison Taunton-Rigby, 
                   dated April 6, 1995 (incorporated by reference to 
                   Exhibit 10.17 to Annual Report on From 10-K for 
                   fiscal year ended December 31, 1995, File No. 01-
                   12081).

            tm10.5 Employment Agreement with Gerald A. Beltz, dated 
                   August 21, 1995 (incorporated by reference to 
                   Exhibit 10.18 to Annual Report on From 10-K for 
                   fiscal year ended December 31, 1995, File No. 01-
                   12081).

            tm10.6 Employment Agreement with Deborah Blackburn 
                   Grabbe, dated August 21, 1995 (incorporated by 
                   reference to Exhibit 10.19 to Annual Report on Form 
                   10-K for fiscal year ended December 31, 1995, File 
                   No. 01-12081).

            tm10.7 Employment Agreement with James L. Warren, 
                   dated January 17, 1998 (incorporated by reference to 
                   Exhibit 10.15 to Annual Report on Form 10-K for the 
                   fiscal year ended December 31, 1997, File No. 01-
                   12081).

              10.9 Master Acquisition Agreement by and among 
                   bioMerieux Vitek, Inc., Aquila Biopharmaceuticals, 
                   Inc. and Cambridge Biotech Corporation, dated as of 
                   April 4, 1996 (incorporated by reference to Exhibit 
                   10.1 to quarterly report on Form 10-Q for quarter 
                   ended June 30, 1996, File No. 0-12081).

              10.10 Asset Purchase Agreement between Meridian 
                    Diagnostics, Inc. and Cambridge Biotech 
                    Corporation, dated as of June 24, 1996 (incorporated 
                    by reference to Exhibit 2.1 to current report on Form 
                    8-K, dated June 24, 1996, File No. 0-12081).

              10.11 1996 Stock Award and Option Plan (incorporated by 
                    reference to Exhibit 10.12 to Annual Report on Form 
                    10-K for the fiscal year ended December 31, 1996, 
                    File No. 01-12081).

              10.12 1996 Directors Stock Award and Option Plan 
                    (incorporated by reference to Exhibit 10.13 to 
                    Annual Report on Form 10-K for the fiscal year 
                    ended December 31, 1996, File No. 01-12081).

              10.13 1996 Employee Stock Purchase Plan (incorporated 
                    by reference to Exhibit 10.14 to Annual Report on 
                    Form 10-K for the fiscal year ended December 31, 
                    1996, File No. 01-12081).

              10.14 1996 Employee Retention Agreements (incorporated 
                    by reference to Exhibit 10.2 to Quarterly Report on 
                    Form 10-Q for fiscal quarter ended September 30, 
                    1997).

              11.     Computation of Earnings Per Share.

              23.     Consent of PricewaterhouseCoopers,LLP
		
              27.     Financial Data Schedule.

	(b)	Reports on Form 8-K filed in the last quarter of 1998.
		None.
___________________________
o	Filed herewith as part of this Annual Report on Form 10-K.
*	Confidential treatment previously granted.
tm	Management contract or compensatory plan.



		


Report of Independent Accountants

In our opinion, the accompanying consolidated balance sheets and the related 
consolidated statements of operations,  shareholders' equity and cash flows 
present fairly, in all material respects, the financial position of Aquila 
Biopharmaceuticals, Inc. and its subsidiaries (the "Company") at December 31, 
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with 
generally accepted accounting principles.  These financial statements are the 
responsibility of the Company's management; our responsibility is to express an 
opinion on these financial statements based on our audits.  We conducted our 
audits of these statements in accordance with generally accepted auditing 
standards which require that we plan and perform the audit to obtain reasonable 
assurance about whether the financial statements are free of material 
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


								
							           
                                   /s/  PricewaterhouseCoopers, LLP

Boston, Massachusetts
February 11, 1999

                               AQUILA BIOPHARMACEUTICALS, INC.

                            Consolidated Statements of Operations
                               For the Years Ended December 31,

                                     1998              1997              1996
Revenue:				
    Product Sales              $     955,321        $ 1,319,260      $  890,180
    Research and development       4,642,088          5,608,977       5,682,932
                                   _________          __________      _________
                                   5,597,409          6,928,237       6,573,112
Cost and expenses:
    Cost of Sales                    969,484          1,023,268       1,467,820
    Research and development       7,447,359          5,019,775       5,250,502
    Purchased incomplete
       technology (Note 19)        9,927,227                ---             ---
    General and administrative     3,800,806          4,521,035       5,027,190
                                  __________         __________      __________
                                  22,144,876         10,564,078      11,745,512 

Other income, net
    (Notes 6 ,13 and 14)           1,947,832          4,370,107       5,777,032
                                  __________         __________      __________

Income/(loss) from continuing
   operations before 
   reorganization items and
   income tax benefit            (14,599,635)           734,266         604,632

Reorganization items (Note 1):
    Professional fees                     --                 --      (2,109,050)
    Interest earned on
       accumulated cash resulting
       from Chapter 11 proceedings        --                 --         394,272
                                  ____________        ___________     __________

    Total reorganization items            --                 --      (1,714,778)
                                  ____________        ___________     __________

Income/(loss) from continuing
   operations                    (14,599,635)           734,266      (1,110,146)

Discontinued operations (Note 3):
    Income from operations                --                 --       1,452,810
    Gain on sale                          --            191,250       7,656,683
                                  ___________         __________      _________

Income/(loss) before
    extraordinary loss           (14,599,635)           925,516       7,999,347

Extraordinary loss on
    Reorganization (Note 11)              --                 --      (2,039,816)
                                 ___________          __________      __________


Net Income/(loss)               $(14,599,635)       $   925,516    $  5,959,531
                                 ____________         __________      _________
    Unrealized holding gains on 
    available-for-sale securities     79,434                 --              --
                                 _____________        __________      _________

    Total other comprehensive
    income                            79,434                 --              --
                                  ____________        ___________     __________

Comprehensive Income/(loss)     $(14,520,201)       $   925,516    $  5,959,531
                                 =============        ============    ==========

Income/(loss) per weighted average
    number of common shares:
Basic earnings per share:
    Income/(loss) from continuing
      operations                 $     (2.22)       $      0.15    $      (0.30)
    Net Income/(loss)            $     (2.22)       $      0.18    $       1.60
Diluted earnings per share:
    Income/(loss) from continuing
      operations                 $     (2.22)        $     0.14     $     (0.30)
    Net Income/(loss)            $     (2.22)        $     0.18     $      1.60
	
Weighted average number of common
     shares outstanding:  Basic    6,580,602          5,003,703       3,717,441
                          Diluted  6,580,602          5,141,815       3,717,441

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

                         AQUILA BIOPHARMACEUTICALS, INC.

                           Consolidated Balance Sheets
                             As of December 31,

								         
                                                1998                     1997
Assets
Current Assets:
   Cash and cash equivalents                $  5,270,460           $ 7,352,450
   Marketable securities (Notes 2, 4 and 6)    9,885,090             8,551,591
   Accounts and other receivables
     (less allowance for doubtful accounts
      of $47,000 and $77,698, respectively)    1,027,711             1,625,145
   Inventories (Note 5)                          434,849               678,591
   Prepaid expenses and other current assets     353,448               237,973
                                              __________            __________
             Total current assets             16,971,558            18,445,750

Marketable securities (Notes 2, 4 and 6)              --               993,151
Investments (Note 6)                             319,500               394,500
Property, Plant, and Equipment, Net (Note 7)   6,372,345               613,730
Patents and Purchased Technology, Net (Note 8)   116,270               199,418
Other Assets (Note 14)                           848,726                20,912
                                              __________            __________
     Total Assets                            $24,628,399           $20,667,461
                                              ==========            ==========
Liabilities & Shareholders' Equity
Current Liabilities:
     Accounts Payable                        $   485,975           $   289,952
     Accrued Royalties                           134,263               149,572
     Accrued professional fees                   298,684               177,500
     Other accrued expenses (Note 9)           1,970,703             1,730,716
     Current maturities of long-term
        debt (Note 10)                         2,191,284                69,339
                                              __________            __________
             Total current liabilities         5,080,909             2,417,079

Deferred Revenue (Note 6)                        225,000               225,000
Long Term Debt (Note 10)                       3,669,494               138,678
                                              __________            __________
     Total Liabilities                         8,975,403             2,780,757
                                              __________            __________

Commitments and Contingencies (Note 14)

Shareholders' Equity (Note 15):
   Preferred stock, authorized:
      5,000,000 shares, none issued                   --                    --
   Common stock, par value: $.01 per share,
      authorized:  30,500,000 shares 
      issued:  6,992,483 and 5,007,527 shares
      in 1998 and 1997, respectively              69,924                 50,075
   Additional paid in capital                139,811,635            127,558,019
   Accumulated other comprehensive income         79,434                     --
   Treasury stock at cost: 7,631 and 10,526
     shares in 1998 and 1997, respectively       (34,339)               (47,367)
   Accumulated deficit                      (124,273,658)          (109,674,023)
                                            ____________           _____________
          Total Shareholders' Equity          15,652,996             17,886,704
                                            ____________           _____________

Total Liabilities and Shareholders' Equity $  24,628,399          $  20,667,461
                                            ============           =============
The accompanying notes are an integral part of these financial statements.
<TABLE>
                        AQUILA BIOPHARMACEUTICALS, INC.
                   Consolidated Statements of Cash Flows
                     For the Years Ended December 31,
<CAPTION>
                                                               1998          1997        1996
<S>                                                       <C>           <C>         <C>
Cash Flows From Operating Activities:
Net Income/(loss)                                         $(14,599,635) $  925,516  $ 5,959,531
Adjustments to reconcile net income/(loss) to net cash 
     used in operating activities:
        Depreciation and amortization                          292,650     402,555    3,448,192
        Provision (recovery) for doubtful accounts              40,000     (25,000)      50,000
        Purchased incomplete technology                      9,927,227          --           --
        Non cash compensation expense                               --      10,000       50,000
        Gain on sale of property, plant and equipment          (25,115) (2,340,983)          --
        Gain on sale of discontinued businesses                     --    (191,250)  (7,423,020)
        Loss from bankruptcy consummation                           --          --    2,039,816
        Issuance of common shares                                   --      15,871           --
        Receipt of investments                                      --          --     (169,500)
        Loss on disposition and write down of investments           --          --       11,164
	Changes in assets and liabilities, net of effects of 
  	     businesses purchased or sold:
        Accounts and other receivables                         557,434     765,774      347,936
        Inventories                                            243,742    (448,440)   1,262,592
        Deferred revenue                                            --    (917,600)  (1,780,454)
        Prepaid and other current assets                      (115,475)    540,954      (83,472)
        Accounts payable and other accrued expenses            265,186  (1,720,026)  (1,033,690)
        Settlement of liabilities subject to Chapter 11             --          --   (3,757,436)
        Minority interest                                           --          --       (8,989)
                                                           ___________  ___________  ___________
             Net cash used by operating activities         (3,413,986)  (2,982,629)  (1,087,330)
Cash Flows From Investing Activities:
        Purchases of available-for-sale securities        (20,693,209)          --           --
        Purchases of held-to-maturity securities                   --  (12,163,261)  (8,562,730)
        Proceeds from maturities of marketable securities  20,507,296   11,181,249      204,998
        Other noncurrent assets                              (737,814)      22,120       62,391
        Purchases of property, plant and equipment         (5,968,118)    (371,176)    (309,627)
	Proceeds from the sale of property, 
             plant & equipment, net                            25,115    6,100,583           --
        Patents and purchased technology                           --           --     (227,968)
        Proceeds from the sale of discontinued businesses          --      412,123   12,201,000
                                                           ___________  ___________  ___________
          Net cash (used)/provided by investing activities (6,866,730)   5,181,638    3,368,064
Cash Flows From Financing Activities:
        Issuance of stock                                   3,845,965       18,000           --
        Proceeds from debt                                  5,000,000      208,017           --
        Payment of debt                                      (647,239)  (4,184,667)     (24,394)
                                                           __________   __________    __________
          Net cash provided/(used) by financing activities  8,198,726   (3,958,650)     (24,394)
                                                           __________   __________    __________
Net increase/(decrease) in cash and cash equivalents       (2,081,990)  (1,759,641)   2,256,340
                                                           __________   __________    __________
Cash and cash equivalents at the beginning of the year      7,352,450    9,112,091    6,855,751
                                                           __________   __________    __________
Cash and cash equivalents at the end of the year           $5,270,460   $7,352,450  $  9,112,091
                                                           ==========   ==========    ==========
Supplemental disclosures:
Income taxes paid                                          $       --   $       --  $      4,231
Interest paid                                                  37,682      397,776        98,541
Issuance of treasury stock in settlement of liability          13,028           --            -- 
Issuance of warrants in conjunction with debt                  90,000           --            -- 
Stock received for Unearned License Fee                            --           --       225,000
Conversion of Chapter 11 liabilities into long term debt           --           --     4,021,220
Stock issued under incentive plan                                  --           --       503,055
Stock issued to creditors pursuant to Reorganization Plan          --           --       881,582
Stock issued in settlement of class action lawsuit                 --           --     5,625,000

</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
                                  AQUILA BIOPHARMACEUTICALS, INC.

                          Consolidated Statements of Shareholders' Equity
                       For the Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                               Additional            Accumulated Other
                                             Common Stock      Paid-In     Unearned  Comprehensive  Treasury 
                                        Shares      Amount    Capital   Compensation Income         Stock      Deficit      Total

<S>                                     <C>        <C>      <C>          <C>         <C>           <C>    <C>            <C>
BALANCE, DECEMBER 31, 1995              26,057,006 $260,570 $120,382,104 $( 138,088) $       0     $    0 $(116,559,070) $3,945,516
                                        __________ ________ ____________ ___________ _________     ______ ______________ __________
Stock exchanged with former shareholders
     pursuant to Reorganization plan   (22,614,701)(226,147)     226,147         --         --         --            --          --
Stock issued in settlement of class
     action shareholder lawsuit          1,250,000   12,500    5,612,500         --         --         --            --   5,625,000
Stock issued under incentive plan          111,790    1,118      501,937         --         --         --            --     503,055
Stock issued to creditors pursuant
     to Reorganization plan                195,905    1,959      879,623         --         --         --            --     881,582
Compensation expense recognized                 --       --       50,000         --         --         --            --      50,000
Forfeiture of discounted stock options          --       --     (138,088)   138,088         --         --            --          --
Stock held in Treasury related to disputed
     Chapter 11 claim                           --       --           --         --         --    (47,367)           --    (47,367)
Net income                                      --       --           --         --         --         --     5,959,531   5,959,531
                                         _________ ________ ____________ ___________ ____________  ______ ______________ __________
BALANCE, DECEMBER 31, 1996               5,000,000   50,000  127,514,223          0          0    (47,367) (110,599,539) 16,917,317
                                         _________ ________ ____________ ___________ ____________  ______ ______________ __________

Exercises of Options                         4,000       40       17,960         --         --         --            --      18,000
Stock issued to creditors
    pursuant to Reorganization plan          3,527       35       15,836         --         --         --            --      15,871
Compensation expense                            --       --       10,000         --         --         --            --      10,000
Net income                                      --       --           --         --         --         --       925,516     925,516
                                         _________ ________ ____________ ___________ ____________  ______ ______________ __________
BALANCE, DECEMBER 31, 1997               5,007,527   50,075  127,558,019          0          0    (47,367) (109,674,023) 17,886,704

Stock issued for private placement         769,000    7,690    3,543,520         --         --         --            --   3,551,210
Stock issued for employee stock purchase    11,331      113       48,724         --         --         --            --      48,837
Acquisition of Vactex, Inc.              1,150,000   11,500    8,326,000         --         --         --            --   8,337,500 
Exercises of Options                        54,625      546      245,372         --         --         --            --     245,918 
Warrants issued for debt obligation             --       --       90,000         --         --         --            --      90,000
Unrealized gain on available-for-sale securities--       --           --         --     79,434         --            --      79,434
Treasury stock issued in settlement of
      Chapter 11 claim                          --       --           --         --         --      13,028           --      13,028
Net loss                                        --       --           --         --         --          --  (14,599,635)(14,599,635)
                                         _________ ________  ___________  _________   ________    ________   ___________ __________
BALANCE, DECEMBER 31, 1998               6,992,483  $69,924 $139,811,635   $      0    $79,434   $(34,339)$(124,273,658)$15,652,996
</TABLE>
The accompanying notes are an integral part of these financial statements.

AQUILA BIOPHARMACEUTICALS, INC.

Notes to Consolidated Financial Statements

1.  Organization and Business

Aquila Biopharmaceuticals, Inc. (the "Company" or "Aquila"), organized in 1996
as a Delaware corporation, became the successor to Cambridge Biotech Corporation
("CBC") pursuant to the terms of a Reorganization Plan (the "Plan") that was
confirmed by the Bankruptcy Court in July 1996 and consummated in October 1996.
The Company engages in discovery, product development and commercialization of
products to prevent, treat or control infectious diseases, autoimmune
disorders and cancers.  The Company is subject to risks common to companies in
the biotechnology industry including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, the ability to raise additional
capital and compliance with FDA government regulations.

2.   Summary of Significant Accounting Policies

Principles of Consolidation - The Consolidated Financial Statements include
Aquila Biopharmaceuticals, Inc. and VacTex, Inc. ("VacTex") its wholly owned
subsidiary.  VacTex was acquired on April 14, 1998 (See Note 19).  All of the
Company's former subsidiaries, which were Biotech Research Laboratories, Inc.,
FSC, Cambridge Affiliated Corporation, collectively "the subsidiaries", were
disposed of or dissolved by the Company during the period from 1995 through
1996.  Results of operations of the former subsidiaries are included in the
accompanying consolidated financial statements as discontinued operations.
All significant intercompany transactions and accounts have been eliminated.

Segment Information - The Company has determined that its reportable segments
are development and manufacturing.  All research programs are aggregated in
the development segment. Revenues from the sale of the Company's commercial
product, the feline leukemia vaccine, the QS-21 material supplied to research
partners and license fees relating to these products are reported in the
manufacturing segment.  The Company allocates resources among segments
primarily on the basis of labor utilization. The Company's business is conducted
entirely within the United States.

The financial results of the Company's segments are presented on the same
accounting basis as the Company's consolidated results.  There are no
intersegment activities. The table below presents revenue and net income data
for the two segments for the years 1997 and 1998.  Segment information for
1996 is not reported because the Company's reporting systems did not
then compile segment information.  Asset information by segment is not
reported because the Company does not produce such information internally.

                                             Reconciling      Consolidated
        Development         Manufacturing      Items             Totals
    Revenue   Net Loss   Revenue  Net Inc.  Net Inc./Loss  Revenue Net Inc./Loss

                                  (Dollars in thousands)

1997 $1,134  $(4,962)  (1) $5,794  $2,548   (2) $  3,339   $  6,928  $    925  
1998 $  872  $(8,317)  (1) $4,725  $2,285   (2) $(8,568)   $  5,597  $(14,600)

(1) Includes non-recurring license fees of $3.5 million and $3.0 million in 1997
and 1998, respectively.  Total export sales of this segment were approximately
$1.4 million and $1.2 million in 1998 and 1997, respectively.
(2) Includes $2.3 million gain from the sale of real estate, net royalty
income of $0.9 million, net interest income of $0.6 million and rental income
of $0.5 million in 1997 and a charge for incomplete technology of $9.9 million,
net interest income of $0.9 million, net royalty income of $0.5 million and $0.3
million real estate tax rebate in 1998. 

One corporate partner has historically been the Company's principle source of
research and development revenue.  Research and development revenues from this
corporate partner, included in the manufacturing segment, represented 62%, 61%
and 53% of the Company's total revenue in 1998, 1997 and 1996, respectively.
This includes compensation to the Company for producing QS-21 clinical trial
material for use in its product development programs.  In 1998, this partner
made a payment of $3.0 million, the last scheduled payment under a license
agreement.

A marketing partner represents a substantial portion of the Company's product
sales and research and development revenue.  Product sales to this partner are
included in the manufacturing segment and represented 17%, 19% and 13% of total
revenues in 1998, 1997 and 1996, respectively.   Revenue from development
agreements with this partner are included in the development segment and
represented 16% of revenues in 1998 and 1997 and 18% of total revenue in 1996.

The Company depends on a number of corporate collaborators for reimbursement
for the supply of its adjuvant for use in their clinical trials and for
research revenues.

Basis of Presentation - Certain prior year amounts have been reclassified to
conform with current year presentation.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets and
liabilities, 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.  Such estimates include, but are not limited to,
valuation allowance against deferred tax assets and accounts receivable.
Actual results could differ from those estimates.

Cash and Cash Equivalents - The Company considers all highly-liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.  Cash equivalents include money market accounts, certificates of
deposit, commercial paper and short-term investments.

Marketable Securities -  The Company classifies its marketable securities at the
time of purchase in accordance with the Statement of Financial Accounting
Standards No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities".  At December 31, 1998, all marketable securities were
classified as available-for-sale except for one that was classified as
held-to-maturity.

Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk are primarily cash investments and
accounts receivable.  The Company restricts cash investments to financial
institutions and corporations with high credit standings.  Credit risk on
accounts receivable is minimized by the strong financial position of
the entities with which the Company does business.  Additionally, the Company
maintains reserves for potential credit losses. Write-offs for 1998, 1997 and
1996 were $72,620, $76,000 and $34,000, respectively.

Inventories - Inventories are stated at the lower of cost or market.  Cost has
been determined using standard costs which approximate the first-in, first-out
method.

Property, Plant and Equipment - Property, plant and equipment are recorded at
cost.  Depreciation for financial accounting purposes is computed  by the
straight-line method over their estimated useful lives.  The estimated useful
lives of the assets are as follows:

                                                           Useful Life
         Buildings                                             30
         Furniture, fixtures and equipment                   3 - 10
         Leasehold and building improvements          Lesser of Useful Life
                                                     or the Term of the Lease

Maintenance and repairs are charged to operations as incurred, whereas additions
and improvements are capitalized.  Upon retirement or disposal of assets, the
cost and the related accumulated depreciation are removed from the balance sheet
and any gain or loss is reflected in earnings.

Patents and Purchased Technology - Purchased technology related to the
acquisition of assets is recorded at fair market value at acquisition date.
Capitalized patent costs include product registrations and costs incurred for
the support and protection of existing patents.  Purchased technology and
patents are amortized on a straight-line basis over periods ranging
from three to seven years.

Revenue Recognition - Revenue from product sales is recognized at the time of
product shipment.  Revenue from research and development contracts is deferred
and recognized over the contractual periods as services are performed or as
distinct milestones are met.  The initial fee in alliance agreements is
recognized as revenue when a definitive agreement is reached and no contingent
factors are present.

Research and Development Costs - Research and development costs are charged to
operations as incurred.

Income Taxes - The Company uses the asset and liability method of accounting
for income taxes.  Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities
using  current statutory tax rates.

Net Income/(Loss) Per Share - The Company applies Statement of Financial
Accounting Standards No. 128, ("SFAS 128") Earnings Per Share to compute loss
per share.  Under SFAS 128, basic EPS is calculated by dividing net earnings
(loss) by the weighted-average common shares outstanding during the period.
Diluted EPS reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to common
shares using the treasury stock method based upon the weighted-average fair
value of the Company's common shares during the period.

Common stock equivalents consisting of stock options and warrants have been
excluded from the computation of diluted earnings/(loss) per share in 1998 and
1996 since, with the Company in a loss position, inclusion would be
anti-dilutive. Warrants to purchase 60,680 shares of common stock with an
exercise price of $4.12 and a term of 5 years were outstanding at December 31,
1998. Options to purchase 1,091,560 and 712,655 shares of common stock at
weighted average exercise prices of $3.89 and $4.09, respectively, were
outstanding at December 31, 1998 and 1996, respectively.  Options to purchase
180,375 shares of common stock at a weighted average exercise price of $5.16
were outstanding at December 31, 1997 and not included in the computation of
diluted income per share in 1997 because their exercise price was greater than
average market price making inclusion anti-dilutive.

Basic and diluted earnings per share from discontinued operations were $0.04
and $2.45 for 1997 and 1996, respectively. Basic and diluted loss per share
from the extraordinary items in 1996 were $0.55.

3.   Discontinued Operations

During 1996, the Company disposed of two separate diagnostics businesses
encompassing the Company's diagnostic assets and operations for cash proceeds
of approximately $12.2 million.  Accordingly, the accompanying financial
statements include a gain from the disposal of $0.2 million and $7.6 million
in 1997 and 1996, respectively, and income from discontinued operations of
$1.5 million  in 1996.  Net revenue from discontinued operations was $0.4
million and $14.5 million in 1997 and 1996, respectively.

4.   Marketable Securities

Available-for-sale marketable securities are carried at fair market value based
on quoted market prices.  Held-to-maturity marketable securities are carried at
amortized cost, which approximates fair value.  At December 31, 1998
contractual maturities of marketable securities are within one year, except
for one government-backed obligation which has a fair market value of $1.0
million and a maturity term within two years.  Marketable securities consisted
of the following at December 31:
                                                    1998                1997   
Available-for-sale at fair market value		    (Dollars in thousands)
        Common stock                             $    139           $     --   
        Corporate debt securities                   6,746                 --   
        Government-backed obligations               2,000                 --   
Held-to-maturity at amortized cost
        Corporate debt security                     1,000              7,500
        Government-backed obligations                  --              1,000   
        Certificates of deposit                        --              1,000
                                                   ______             ______
Total                                             $ 9,885            $ 9,500  

Gross unrealized gains on available-for-sale securities were $79,434 at
December 31, 1998.

5.   Inventories

Inventories consisted of the following at December 31:
                                           1998             1997
                                         (Dollars in thousands)
Finished goods                             $ 231           $ 478
Work in process                              122             127
Raw materials and supplies                    82              74
                                          ______           _____
                                           $ 435           $ 679
                                          ======           =====
6.   Investments

The Company holds 270,000 shares of Protein Sciences Corporation stock as
payment for a paid up license and for royalties due and payable under terms
of a technology sublicense agreement.  In 1996, the Company recorded research
and development revenue of $0.1 million based upon an estimated fair market
value of $.35 per share.

The Company holds 45,000 shares of Progenics Pharmaceuticals, Inc. common stock
in partial payment of a license fee under an agreement executed in 1995.  In
1996, the Company recorded an investment of $0.3 million and deferred revenue
of $0.3 million, and recorded revenue of $0.1 million upon the achievement of
the first milestone under this agreement.  The balance of $0.2 million is
included in deferred revenue at December 31, 1998 and 1997.   In 1998, the
Company reclassified 11,250 shares of newly registered common stock from
Investments to Marketable Securities.  These shares were carried at a
cost of $75,000, have a market value of $139,219, and are classified as
available-for-sale securities.

In August 1996, the Company sold its share of a joint venture with BioNebraska,
which had been written off in 1995, for $0.5 million in cash and reported the
gain in Other Income.
 
7.   Property, Plant, and Equipment

Property, plant, and equipment consists of the following at December 31:       
                                                    1998             1997
                                                    ____             ____
                                                   (Dollars in thousands)
Furniture, fixtures, and equipment                $ 3,274          $ 6,191
Leasehold and building improvements                 5,112            6,124
                                                    _____            _____
Sub-total                                           8,386           12,315
Less accumulated depreciation and amortization  (   2,014)         (11,701)
                                                    _____           ______
                                                 $  6,372        $     614
                                                    =====           ======

Total depreciation and amortization expense during 1998, 1997 and 1996 was $0.2
million, $0.3 million and $2.6 million, respectively. In vacating its old
facility and moving to new facilities in September 1998, the Company disposed
of $9.9 million of fully depreciated equipment and leasehold improvements. The
new facility is represented by $0.7 million of equipment and $5.1 million of
leasehold improvements.  Interest cost of $0.1 million out of total interest
costs of $0.2 million was capitalized in 1998 in connection with the fit-out
of the Company's new facility in Framingham, Massachusetts.

8.   Patents and Purchased Technology 

Purchased technology and intangibles consist of the following at December 31:
                                        1998         1997
                                        ____         ____  
                                          (Dollars in thousands)
Purchased technology              $      240     $  3,451
Patents and patent support               746          746
                                         ___        _____
Sub-total                                986        4,197
Less accumulated amortization           (870)     ( 3,998)
                                         ___        _____
                                   $     116     $    199
                                         ===        =====
In 1998, the Company wrote-off $3.2 million of fully amortized technology no
longer utilized.  Total amortization expense was $0.1 million, $0.1 million
and $0.8 million in 1998, 1997 and 1996, respectively.

9.   Other Accrued Expenses
  
Accrued expenses consist of the following at December 31:

                                            1998             1997
                                            ____             ____
                                            (Dollars in thousands)
Fit-out of new facility                   $ 700          $      -
Research contract obligations               674               906
Compensation                                283               419
Charge for excess space                      --               163
Other                                       314               243
                                          _____             _____
                                         $1,971           $ 1,731
                                          =====             =====
10.  Debt

At December 31, 1996, the Company had a mortgage note payable of $4.2 million
collateralized by land, buildings and improvements with a net book value of
$3.8 million.  The outstanding balance on the mortgage note was paid in full
upon the consummation of the sale of the Aquila's Rockville, Maryland real
estate in November, 1997.

In August 1997, Aquila entered into a three year $1 million credit facility
fully collatorized by equipment purchased. In December 1998, the balance of
$138,000, including interest was paid and the credit facility terminated.

In April 1998, the Company issued $1.3 million of debt as part of the purchase
of VacTex, Inc. (See Note 19).  The debt bears interest of 7% and is due April
14, 1999.

In July 1998, the Company entered into a loan agreement (the "Agreement") with
Transamerica Business Credit Corporation. The Agreement made available $5.0
million for the build-out of the new facility in Framingham, Massachusetts and
for the purchase of new equipment.  The Agreement calls for interest at 13
percent with a repayment term of four years and a 10 percent balloon payment
at the end of the loan term.  Collateral for the loan consists of equipment and
leasehold improvements with a book value of $5.0 million.  Warrants to purchase
60,680 shares of the Company's common stock were issued in connection with the
loan agreement.  The warrants have an exercise price of $4.12 and a term ending
July 1, 2003. The warrants were valued at $90,000 and will be amortized over
the life of the loan.  As of December 31, 1998, the Company had borrowed $5.0
million and had $4.6 million outstanding under the loan.  Repayment of the loan
and related interest will require payments of $1.6 million in 1999 and $1.5
million in each of the years 2000 through 2002.

11.   Extraordinary Loss on Reorganization

In October 1996, the Company recorded an extraordinary loss of $2.0 million on
its reorganization and emergence from Chapter 11 Bankruptcy.  The major
components of this loss were as follows:

                                                (Dollars in thousands)
Recognition of expense related to issuance
   of 1,250,000 shares in settlement of
   shareholders class action                             $ 5,625
Recognition of costs incurred to restructure
   mortgage on Rockville real estate                         193
Forgiveness of debt on pre-petition liabilities          ( 3,778)
                                                         ________  
                                                         $ 2,040
12.  Income Taxes                                        ========

A reconciliation between the amount of reported income tax expense/(benefit)
and the amount computed using the U.S. federal statutory rate of 34% is as
follows for the years ended December 31:

                                              1998          1997      1996
Tax expense at federal
     statutory rates                          34.0%         34.0%     34.0%
Utilization of loss carryforwards            (34.0)%       (34.0)%   (34.0)%
                                             ______        ______    ______
Reported expense for income taxes              0.0%          0.0%      0.0%
                                             ======        ======    ======
                                                  	           
The components of the deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:

                                            1998            1997
Current:                                    (Dollars in thousands)
        Inventory                       $     44       $      62
        Other                                294             500
                                             ___             ___
Total current                                338             562

Noncurrent:                                                  
        Capital Loss Carryover             3,318           4,077
        Depreciation and Amortization         72           2,334
        Other                                635           1,079
        Federal and State NOL's           30,251          24,919
        Federal and State tax credits      1,617           1,246
                                          ______          ______
Total noncurrent                          35,893          33,655
                                          ______          ______
Sub-total                                 36,231          34,217
Less: valuation allowance                (36,231)        (34,217)
                                          ______          ______
Net deferred tax asset                 $       0    $          0
                                          ======          ======

Management has assessed the evidence relating to recoverability of the deferred
tax asset and has determined that it is more likely than not that the deferred
tax benefit will not be realized due to the uncertainty of future earnings.
Accordingly, a valuation reserve has been established for the full amount of
the deferred tax asset.

As of December 31, 1998, the Company had federal net operating loss (NOL)
carryforwards of approximately $79.0 million.  These loss carryforwards begin
to expire in the year 2000 and expire fully by the year 2013.  Utilization of
these NOL's may be limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986.  The Company has state loss carryforwards  of
approximately $34.0 million.  These state loss carryforwards begin to expire
in 1999 and expire fully by 2004.

13.  Other Income, Net

At December  31, Other Income, Net consists of the following:

                                            1998         1997           1996
                                            ____         ____           ____
                                                  (Dollars in thousands)
Gain on sale of Rockville real estate    $    --       $2,332      $       -
Royalty income, net                          527          854          1,395
Interest income/(expense), net               921          645            156
Rental income, net                            --          500            308
Miscellaneous income, net                    500           39            168
Paid up license fee                           --           --          3,250
Sale of joint venture                         --           --            500
                                           _____        _____          _____
                                         $ 1,948       $4,370         $5,777
                                           =====        =====          =====

In December 1998, the Company received $0.3 million (included in miscellaneous)
as a rebate of taxes paid on its former leased facility in Worcester,
Massachusetts.  In November, 1997, the Company sold the Rockville, Maryland
facilities for $6.5 million and recorded a gain of $2.3 million.  Proceeds
from the sale were used to retire the mortgage.  Royalty income represents
royalties earned under license and sublicense agreements related primarily to
diagnostic technologies, net of expenses due to third-party licensors.  Rental
income derived from rental of the Company's real estate in Rockville,
Maryland ceased upon the sale of the Rockville facilities.  The income from
litigation in 1996 includes $3.3 million received from Abbott Laboratories under
an amendment to a sublicense agreement which granted Abbott a fully paid-up
sublicense for the non-exclusive diagnostic use of certain HIV-related
technology, and $0.5 million received from BioNebraska in exchange for the
Company's share in a joint venture (see Note 6).

14.  Commitments and Contingencies

Leases - Costs incurred under facility leases are recorded as rent expense and
totaled $0.9 million, $1.2 million and $1.1 million in 1998, 1997 and 1996,
respectively. In 1998, the Company entered into a new operating, facility
lease agreement for its executive offices, research laboratories and
manufacturing facilities in Framingham Massachusetts.   The base lease
period for the new lease is twelve years and the lease contains renewal
options for two additional five-year periods.  In connection to the facility
lease, the Company maintains a fully collateralized letter of credit of $0.8
million.  No amounts have been drawn on the letter of credit.  As of December
31, 1998, the future minimum lease payments required under the operating lease
are as follows:

		Year Ending December 31,
                _________________________
                  (Dollars in thousands)
		1999		$    877
                2000                 877
                2001                 877
                2002                 896
                2003                 939
		Thereafter	   6,522
                                  ______
                Total            $10,988
                                  ======



	
Employment and Consulting Agreements - The Company has agreements with various
consultants and key employees, with terms ranging from one to three years.
These agreements provide for future aggregate annual payments of approximately
$1.0 million.  Costs incurred and charged to operations under these contracts
aggregated $1.3 million, $1.2 million and $1.3 million in 1998, 1997 and 1996,
respectively.

Other Agreements - The Company has licensed fibronectin binding technology from
a Swedish company, for use in mastitis research and development.  The Company
recorded $0.6 million of expense in 1998 for milestone payments relating to
patent issuance.  The agreement provides for additional payments upon the
first commercial sale of future vaccines at  $1.3 million per vaccine, and up
to $1.3 million upon the granting of additional patents in the United States
and Europe on the technology acquired.  

Contingencies - In November 1993, five civil actions were commenced in the
United States District Court, District of Massachusetts, against the CBC,
certain of its officers, and in three of the actions, the CBC's former auditors,
Deloitte & Touche, LLP ("Deloitte").  In February, 1996 the plaintiffs agreed
to settle all claims against the CBC and the individual defendants and pleadings
were filed with the United States District Court for the District of
Massachusetts for the purpose of approving the settlement.  The settlement was
approved by the court in July, 1996.  Under the terms of the Settlement, the
class members received 1,250,000 shares of Aquila common stock, and in the
fourth quarter of 1998, 90% of the recoveries from prosecution of claims against
the Company's former auditors, with the balance of $0.1 million in recoveries
paid to the Company

Deloitte appealed the United States Bankruptcy Court's order confirming the
CBC's reorganization plan.  In September 1998, the Court of Appeals granted a
motion to dismiss Deloitte's appeal, which was assented to by the Company.

In March 1995, an Adversary Proceeding was commenced by Institut Pasteur and
Genetic Systems Corporation against CBC alleging patent infringement and
asking for damages and injunctive relief.  In September 1995, summary judgement
was issued by the Bankruptcy Court upholding CBC's license to two patents and
ruling that CBC was infringing a third patent issued to Institut Pasteur.   CBC
was enjoined from manufacture and sale of such products and was obligated to
pay damages in the amount equal to 1% of net sales of such products for the
period July 7, 1994 through December 31, 1995.  The Bankruptcy Court ruled that
as of January 1, 1996, CBC had a royalty-bearing license conferring the right
to manufacture and sell such products.  Institut Pasteur appealed the Bankruptcy
Court's ruling and the United District Court's affirmation thereof to the
Federal Circuit Court of Appeals.  The parties have submitted briefs, argued
the case, submitted post-argument briefs and await the Court's decision.
While the final outcome of this issue cannot be determined with certainty,
the technology is part of a business that has been sold with the only
liability arising out of the conduct of the Company prior to the sale.
Accordingly, based on current information, management believes that any
adverse settlement will not have a material effect on the Company's financial
position or results of operations.


In 1998, using treasury stock valued at $13,028, the Company settled the last
claim previously identified as Liabilities Subject to Chapter 11 Proceedings. 

The Company has been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site.  The EPA will
generally impose joint and several liability upon each PRP at each site.  The
extent of the Company's required financial contribution to the cleanup of this
site is expected to be limited based on the number and financial strength of the
other named PRPs and the volume and types of waste involved which might be
attributed to the Company.

CSL International ACN ("CSL") and Seed Capital Inc., filed an opposition with
the European Patent Ofice ("EPO") on the issuance of the Company's Stimulon(TM)
patent in Europe.  A hearing before the EPO was held in October of 1998.  The
Company prevailed against all points raised in the opposition.  CSL may appeal
the EPO's decision and though the Company does not believe that CSL's claims
have any merit or are likely to succeed, there can be no assurance that the
Company will prevail in any future actions taken to attack the validity of its
Stimulon(TM) patents.

The Company has received a letter from CBC in February 1999 alleging that the
Company must indemnify CBC under a Master Acquisition Agreement among the
Company, CBC and bioMerieux, Inc. for potential losses from the termination of
CBC's rights under a license agreement.  The Company is evaluating this claim
and has not yet determined the effect, if any, the claim might have on the
Company.

The Company has and is engaged in negotiations of various contracts with other
parties regarding issues generally incidental to the normal course of business.
While the outcome of these negotiations and the ultimate liability from these
discussions is difficult to determine, in the opinion of management any
additional liability will not have a material adverse effect on the Company's
financial position, liquidity, or results of operations.

15.  Stockholders' Equity 

Capital Stock - The Company has 5,000,000 shares of preferred stock and
30,500,000 shares of common stock authorized at December 31, 1998.  No terms
have been established for the preferred stock and none has been issued.

Exchange of Shares - Pursuant to the Reorganization Plan, an exchange of CBC
common shares for Aquila common shares was effected in October 1996 in the form
of 1 Aquila common share issued for every 7.6 CBC common shares held of record
on that date.  A total of 3,442,305 shares of Aquila common were issued in
exchange for 26,057,006 shares of  CBC common.

16.  Stock Based Compensation Plans 

The Company's 1996 Employee Stock Purchase Plan which was approved in 1997,
allows full time employees, as defined in this plan, to purchase the Company's
stock at 85% of the lesser of beginning or ending fair market value at six
month intervals.  Under this plan 200,000 shares of stock are authorized for
issuance of which 11,331 shares were issued in 1998 for gross proceeds of
$48,837.  A total of 188,669 shares remain available for issuance at December
31, 1998. No compensation expense has been recorded related to this plan.

At December 31, 1998, the Company had two stock option plans. Under the 1996
Stock Award and Option Plan (the "Employee plan"), the Company may grant
incentive stock options, nonqualified stock options, discounted stock options,
deferred stock awards, restricted stock awards, or Stock Appreciation Rights to
its employees for up to 2 million shares of common stock.  Under the 1996
Directors Stock Award and Option Plan (the "Directors plan"), the Company may
grant the same types of options and awards as under the Employee plan, except
that certain additional restrictions apply to the grant of Stock Appreciation
Rights under the Directors plan. Up to 200,000 shares of common stock may be
issued under the Directors plan.  In general, options granted under these plans
vest over 4 years and have maximum terms of 10 years.  The Company has applied
APB 25 and related interpretations in accounting for its plans.  Accordingly,
no compensation cost has been recorded for activity under these plans for
options issued to employees at fair market value.

The Company applies the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock based
Compensation, to these plans.  Accordingly, the Company has determined the
fair value of each option grant.  Had compensation expense for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates, as calculated in accordance with SFAS 123, the Company's net
income/(loss) and earnings/(loss) per share for the years ended December 31,
1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below:


                        1998                  1997                   1996
                ______________________ ____________________ ____________________
                           (Dollars in thousands except per share amounts)

                Net   Basic   Diluted  Net    Basic  Diluted   Net   Basic and
                ___   _____   _______  ___    _____  ________  ___   _________
                Loss  EPS     EPS      Income EPS    EPS      Income Diluted EPS
                ____  ___     ___      ______ ___    ___      ______ ___________
As Reported $(14,600)$(2.22)$(2.22)     $926 $0.18  $0.18     $5,960 $1.60
Pro Forma   $(15,185)$(2.31)$(2.31)     $532 $0.11  $0.10     $5,529 $1.49

The effects of applying SFAS123 in this pro forma disclosure are not indicative
of future effects.  SFAS123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.  The weighted average fair
value of options granted in 1998, 1997 and 1996 is $1.78, $3.08 and $2.65,
respectively.  The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively; expected
volatility of  63.6%, 63.74% and 72.94%, risk-free interest rates of  4.67%,
6.25% and 6.19%, expected lives of 5 years, 5 years and 4 years, and no
dividend yield.  The fair value of the employees' purchase rights was estimated
using the Black-Scholes model with the following assumptions in 1998 and 1997,
expected volatility of 63.74%, risk-free interest rate of 5.56%; expected life
of six months and no dividend yield.  The weighted average fair value of those
purchase rights granted in 1998 and 1997 was $0.82.

A summary of the status of the Company's two stock option plans as of December
31, 1998 and 1997 respectively, and changes during those years are presented
below:

                             1998                 1997               1996
                       ________________________________________________________
                                 Weighted            Weighted          Weighted 
                                 Average             Average           Average
                                 Exercise            Exercise          Exercise 
                        Shares   Price       Shares  Price     Shares  Price
                        ______   _________   ______  _________ ______  _________
Beginning outstanding  831,655    $ 4.28    712,655   $ 4.09      --   $     --
Options granted at
  fair market value    336,000      3.08    194,375     5.12   551,750     4.50
Options regranted below
  fair market value         --        --         --       --   173,405     2.80
Options exercised      (54,625)     4.51     (4,000)    4.50        --       --
Options forfeited      (21,470)     4.56    (71,375)    4.68   (12,500)    4.50
                       ________     ____    _______     ____   ________    ____
Balance, December 31, 1,091,560    $3.89    831,655   $ 4.28   712,655 $   4.09
                      =========     ====    =======     ====   =======     ====

The following table summarizes information about Aquila stock options
outstanding at December 31, 1998:

                     Options Outstanding                  Options Exercisable
___________________________________________________     ______________________
                         Weighted          Weighted                   Weighted
Range of     Number      Average           Average      Number        Average 
Exercise     Outstanding Remaining         Exercise     Exercisable   Exercise
Prices       At 12/31/98 Contractual Life  Price        at 12/31/98   Price
______       ___________ ________________  _____        ___________   ______

$2.13-$2.80    434,905       8.61          $2.77           173,405    $2.80
$3.06-$4.50    491,125       7.59          $4.46           351,750    $4.48
$4.63-$7.38    165,530       8.71          $5.15            51,710    $5.18
___________  _________       ____          _____           _______    _____
$2.13-$7.38  1,091,560       8.16          $3.89           576,865    $4.04

At December 31, 1998, there were 1,049,815 shares available for option grants.
Compensation expense of $10,000 and $50,000 was recorded in 1997 and 1996,
respectively, related to options granted to consultants during the year.  No
compensation expense was recorded in 1998. 

17.   Employee Benefits Plan 

The Company has a savings plan for its employees pursuant to Section 401(k) of
the Internal Revenue Code.   Substantially all employees can participate, and
the plan allows for a minimum deferral of 1% to a maximum deferral of 15%
percent of compensation, as permitted by law or as limited by the plan
administrator.  Commencing on January 1, 1997 the Company matches 25% of the
first 6% of the employees compensation contributed to the plan.  Any
contributions made by the Company are vested at 33% for each year of employment.
The amount charged to operations for the plan was $44,300 and $48,500 in 1998
and 1997, respectively.



18.  Agreements

The Company has a comprehensive agreement with a corporate partner that allows
the partner to use the Company's proprietary Stimulon adjuvant ("QS-21") in
numerous vaccines including hepatitis, lyme disease, human immunodeficiency
virus  (HIV), influenza and malaria.  The agreement grants exclusive worldwide
rights in some fields of use, and co-exclusive or non-exclusive rights in
others.  The Company recognized $3.0 million in license fees under this
agreement in 1998, and $3.5 million in 1997 and 1996.  The agreement calls
for royalties to be paid by the partner on its future sales of
licensed vaccines that include Aquila's adjuvant and for Aquila to
manufacture QS-21 for the partner.

The Company has product development agreements and supply agreements with a
corporate partner and a supply agreement with the partner's U.S. subsidiary
that cover a collaboration on the development of products for feline immune
deficiency virus ("FIV") and bovine mastitis and the supply of vaccine and
adjuvant for feline leukemia ("FeLV").  The Company recorded $0.9 million,
$1.1 million and $1.2 million in revenues under the product development
agreements during 1998, 1997 and 1996, respectively.  Sales to the partner
under the terms of the supply agreements were $1.0 million, $1.3 million
and $0.9 million in 1998, 1997 and 1996, respectively.  

As part of its program to develop, manufacture and market products for
detection, prevention and treatment of human and animal infectious diseases,
the Company entered into various agreements with the National Institute of
Health ("NIH").  Such agreements provided the Company with research and
development funding through 1996, assuming, in certain cases, achievement of
mutually defined milestones.  Revenue recorded under these agreements amounted
to $0.3 million in 1996.

19. Acquisition of VacTex

In 1998, with the acquisition of VacTex, the Company issued 1,150,000 shares
of common stock and $1.3 million in notes payable for all the outstanding
shares of VacTex.  The notes payable carry interest at 7% and are due April
14, 1999.  The acquisition has been accounted for using the purchase method.  

VacTex was a development stage company advancing the recent discovery of a
novel antigen presentation system.  At the date of acquisition, research had
been conducted in animals only and the linkage to protection in a human
vaccine had not been established.  This remains an active area of preclinical
research.  The time to human clinical trials and product approval is expected
to be typical for a biological development project and to entail the typical
risks.  Though the Company expects to expend a substantial portion of its
resources to develop this technology over the next several years, the pace
and level of development will largely be determined by the science, which is
complex.  Due to the early stage of the technology and the expected efforts
to develop it, the entire purchase price of $9.9 million, which included stock,
notes payable and assumed liabilities was charged to purchased incomplete
technology.

The following summary represents unaudited pro forma results of operations as
if the VacTex acquisition had occurred at the beginning of 1997.  These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have actually
resulted had the combination been in effect and are not intended to be
indicative of future results.

			Unaudited Pro forma
			       Year Ended

(Dollars in thousands except per share amounts)

                               1998                 1997
Revenues                 $   5,597                $  6,928
Net loss                 $ (14,790)               $    (74)

Basic loss per share     $   (2.25)               $  (0.01)
                                            



Signatures:

Pursuant to the requirements of Section 13 and 15(d) 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.

				Aquila Biopharmaceuticals, Inc.
                                     /s/ Alison Taunton-Rigby
March 22, 1999                 By: __________________________
					Alison Taunton-Rigby
					President, (Principal Executive Officer)


                                    /s/ James L. Warren
March 22, 1999                 By: __________________________
					James L. Warren
					Vice President - Finance, Treasurer
                                        and Chief Financial Officer
					(Principal Financial Officer)


March 22, 1999                        /s/ Melissa Morrison
                                 By:  __________________________
                                         Melissa Morrison
                                         Corporate Controller

Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

                Signature                               Title           Date
                /s/ Alison Taunton-Rigby
                _______________________              Director    March 22, 1999
		Alison Taunton-Rigby
                /s/ Elliott D. Hillback, Jr.
                _______________________              Director    March 22, 1999
                Elliott D. Hillback, Jr.
                /s/ Robert J. Carpenter
__              _____________________                Director    March 22, 1999
                Robert J. Carpenter
                /s/ Keith J. Dorrington
                _______________________              Director    March 16, 1999
		Keith J. Dorrington
                /s/ Jeffrey T. Beaver
                _______________________              Director    March 17, 1999
		Jeffrey T. Beaver



             Exhibit Index

              2.1 Confirmed Reorganization Plan (consisting of 
                  Reorganization Plan, dated May 20, 1996, and 
                  modification date of July 15, 1996) (incorporated by 
                  reference to Exhibit 2 to current report on Form 8-K, 
                  dated July 18, 1996, File No. 0-12081).

              2.2 Agreement and Plan of Merger by and among Aquila 
                  Biopharmaceuticals, Inc., Aquila Acquisition, Inc. 
                  and VacTex, Inc. dated April 13, 1998 (incorporated 
                  by reference to Exhibit 2.1 to Form 8-K, dated April 
                  13, 1998, File No. D-12081).

              3.1 Amended and Restated Certificate of Incorporation, effective
                  July 25, 1996 (incorporated by reference to
                  Exhibit 2 to Form 8-K, dated July 18, 1996, File No. 
                  0-12081).

              3.2 Certificate of Amendment of Amended and Restated 
                  Certificate of Incorporation, effective March 24, 
                  1997 (incorporated by reference to Exhibit 3.2 to 
                  Annual Report on Form 10-K for fiscal year ended 
                  December 31, 1996, File No. 0-12081).

              3.3 By-laws (incorporated by reference to Exhibit 2 to 
                  Form 8-K, dated July 18, 1996, File No. 0-12081).

              4.1 Specimen Certificate representing common stock of 
                  the Company (incorporated by reference to Exhibit 
                  4.1 to From 8-K, dated October 21, 1996, File No. 0-
                  12081).

              4.2 Form of Debenture (incorporated by reference to
                  Exhibit 4.1 to Form 8-K, dated April 13, 1998,
                  File No. 0-12081).

             o4.3 Master Loan and Security Agreement dated July 15,
                  1998 by Aquila Biopharmaceuticals, Inc. in favor of 
                  Transamerica Business Credit Corporation.

             *10.1 Contract Research and License Agreement with 
                   Virbac Laboratories, S.A. dated July 6, 1983 
                  (incorporated by reference to Exhibit 10.31 to 
                   Annual Report on Form 10-K for fiscal year ended 
                   December 31, 1983, File No. 0-12081).

             *10.1.1 Amendment to Agreement with Virbac Laboratories, 
                     S.A. (incorporated by reference to Exhibit 10.10.1 to 
                     Annual Report on Form 10-K for fiscal year ended 
                     December 31, 1988, File No. 0-12081).

              10.2 Lease for Framingham Massachusetts facility with 
                   NDNE 9/90 Corporate Center LLC as landlord 
                   effective September 9, 1998 (incorporated by reference to
                   Exhibit 10.1 to Form S-3/A No. 1 filed May 6, 1998, File
                   No. 0-12081).

             *10.3 License, Development and Supply Agreement with 
                   SmithKline Beecham, p.l.c., dated as of September 
                   11, 1992, as amended by Agreement dated as of 
                   March 31, 1993 (incorporated by reference to Exhibit 
                   10-17 to Annual Report of Form 10-K for fiscal year 
                   ended December 31, 1992, File No. 0-12081).

            tm10.4 Employment Agreement with Alison Taunton-Rigby, 
                   dated April 6, 1995 (incorporated by reference to 
                   Exhibit 10.17 to Annual Report on From 10-K for 
                   fiscal year ended December 31, 1995, File No. 01-
                   12081).

            tm10.5 Employment Agreement with Gerald A. Beltz, dated 
                   August 21, 1995 (incorporated by reference to 
                   Exhibit 10.18 to Annual Report on From 10-K for 
                   fiscal year ended December 31, 1995, File No. 01-
                   12081).

            tm10.6 Employment Agreement with Deborah Blackburn 
                   Grabbe, dated August 21, 1995 (incorporated by 
                   reference to Exhibit 10.19 to Annual Report on Form 
                   10-K for fiscal year ended December 31, 1995, File 
                   No. 01-12081).

            tm10.7 Employment Agreement with James L. Warren, 
                   dated January 17, 1998 (incorporated by reference to 
                   Exhibit 10.15 to Annual Report on Form 10-K for the 
                   fiscal year ended December 31, 1997, File No. 01-
                   12081).

              10.9 Master Acquisition Agreement by and among 
                   bioMerieux Vitek, Inc., Aquila Biopharmaceuticals, 
                   Inc. and Cambridge Biotech Corporation, dated as of 
                   April 4, 1996 (incorporated by reference to Exhibit 
                   10.1 to quarterly report on Form 10-Q for quarter 
                   ended June 30, 1996, File No. 0-12081).

              10.10 Asset Purchase Agreement between Meridian 
                    Diagnostics, Inc. and Cambridge Biotech 
                    Corporation, dated as of June 24, 1996 (incorporated 
                    by reference to Exhibit 2.1 to current report on Form 
                    8-K, dated June 24, 1996, File No. 0-12081).

              10.11 1996 Stock Award and Option Plan (incorporated by 
                    reference to Exhibit 10.12 to Annual Report on Form 
                    10-K for the fiscal year ended December 31, 1996, 
                    File No. 01-12081).

              10.12 1996 Directors Stock Award and Option Plan 
                    (incorporated by reference to Exhibit 10.13 to 
                    Annual Report on Form 10-K for the fiscal year 
                    ended December 31, 1996, File No. 01-12081).

              10.13 1996 Employee Stock Purchase Plan (incorporated 
                    by reference to Exhibit 10.14 to Annual Report on 
                    Form 10-K for the fiscal year ended December 31, 
                    1996, File No. 01-12081).

              10.14 1996 Employee Retention Agreements (incorporated 
                    by reference to Exhibit 10.2 to Quarterly Report on 
                    Form 10-Q for fiscal quarter ended September 30, 
                    1997).

              11. Computation of Earnings Per Share.

              23.     Consent of PricewaterhouseCoopers,L.L.P.
		
              27.     Financial Data Schedule.