<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

    For The Year Ended December 31, 1997         Commission File No.  0-26034
    ------------------------------------         ----------------------------

                                  OraVax, Inc.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

                Delaware                               04-3085209
                --------                               ----------
    (State or Other Jurisdiction of                 (I.R.S. Employer
    Incorporation or Organization)                 Identification No.)

                   38 Sidney Street, Cambridge, Massachusetts           02139
                   ------------------------------------------         ----------
                    (Address of Principal Executive Offices)          (Zip Code)

       Registrant's telephone number, including area code: (617) 494-1339

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

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of Each Class
                          -----------------------------
                          Common Stock, $.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

         Yes X             No __

Indicate 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 the
Form 10-K. [X]

The aggregate market value of voting Common Stock held by nonaffiliates of the
registrant was $18,222,638, based on the last reported sale price of the Common
Stock on the Nasdaq consolidated transaction reporting system on March 13, 1998.

Number of shares outstanding of the registrant's class of Common Stock as of
March 13, 1998: 10,405,641



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                                        PART I

ITEM 1.  BUSINESS

     OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in
1990 and has its principal offices and laboratories at 38 Sidney Street,
Cambridge, Massachusetts (telephone: 617-494-1339) and manufacturing facilities
in Canton, Massachusetts.

     OraVax's mission is the discovery, development and commercialization of
biologic products for the prevention or treatment of human infectious diseases.
The Company's products are vaccines that stimulate the body's own immunity to
provide long term protection against disease, as well as antibody products that
provide immediate passive immunity to treat existing infections or to protect
against an acute disease risk. The Company employs both classical biologic
product methods and innovative technologies to produce therapeutics and
preventatives that meet the challenges of each infection and disease process.

     OraVax is currently pursuing four proprietary product development programs
which target diseases that have high rates of incidence, compelling
pharmaco-economic profiles, and against which no adequate therapeutic or
preventive antibody products or vaccines are currently available. The diseases
targeted by these products include, 1) peptic ulcers, gastritis and stomach
cancer, 2) viral pneumonia in children, 3) antibiotic-associated colitis, and 4)
a group of related viral diseases including Yellow Fever, Japanese encephalitis,
dengue, tick borne encephalitis and hepatitis C. The Company's product
candidates are designed to generate either mucosal or systemic immunity, as
appropriate to each specific disease target. The Company has developed a
portfolio of biologic production technologies appropriate to the biology of each
infectious agent.

     The Company's principal product candidates are the following:
<TABLE>
<CAPTION>

PRODUCT                   INDICATION              TECHNOLOGY            STATUS
CANDIDATE
<S>                       <C>                     <C>                   <C>
Helicobacter pylori       Prevention and          Recombinant protein   Phase II trials
(H. pylori) vaccines      treatment of peptic     vaccine
                          ulcers, gastritis and
                          stomach cancer

HNK 20 antibody           Prevention of           Monoclonal IgA        Phase III trials
                          pneumonia caused by     nosedrop antibody
                          respiratory syncytial
                          virus in high risk
                          children

CdVax vaccine and CdIG    Prevention/treatment    Toxoid vaccine and    Toxoid IND 1998
immune-globulin           of                      hyper-immune
                          antibiotic-associated   globulin
                          colitis

ChimeriVax(TM)            Prevention of           Chimeric live         IND 1998
Japanese encephalitis     infection by the        attenuated viral
(dengue, hepatitis C,     Japanese encephalitis   vaccine
TBE)                      virus

Arilvax(R) YF vaccine     Prevention of           Single - dose live    OraVax to facilitate
  (A product of Evans     infection by the        attenuated viral      US registration
     Medical, Limited)    Yellow Fever virus      vaccine               (already marketed in
                                                                        the UK and Europe)
                                                                        Phase III
</TABLE>

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     In addition to its proprietary products, OraVax has also been selected as
the manufacturer of certain live virus and bacterial vaccines for the US
Department of Defense, through a program known as the Joint Vaccine Acquisition
Program (JVAP). These vaccines include those against smallpox, tularemia, and
arboviral encephalitis. While these diseases are found in nature, the objective
of the program is to provide the US military with vaccines needed to protect
against the potential use of these microbes as biologic warfare agents.
Candidate vaccines developed by the Department of Defense will be transferred to
OraVax for advanced development and completion of the FDA approval process for
routine manufacture at OraVax's Canton, Massachusetts manufacturing facility.

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BUSINESS STRATEGY

     Developing OraVax's Technology Platform. The Company has recruited a staff
of experienced scientists, technicians and managers representing the range of
skills the Company believes will be necessary to identify, evaluate and develop
commercial technologies and product opportunities. In addition, the Company has
developed collaborations and contracts with universities, government
institutions and corporations to complement and extend its internal resources
and assist in product development. The Company continues to build upon its
understanding of the human immune system, passive antibody preparations and
vaccine formulations, and to pursue product candidates that leverage the
Company's technology and know-how.

     Identifying Medically and Economically Important Disease Targets. OraVax
focused its development efforts on diseases that are preventable or treatable by
either active (vaccine) or passive (antibody) immunity, have near-term
commercialization potential and present large market opportunities. The
Company's focus has been on diseases of the mucosal surfaces and has been
broadened to include a series of arboviral (insect borne) diseases addressable
by single-dose live viral vaccines. The Company considers medical need, product
differentiation, market research and the potential for pharmaco-economic
advantages during product selection and throughout development.

     Commercializing Products Efficiently. The Company evaluates and selects
product commercialization strategies on a product-by-product basis. In March
1995, the Company formed a joint venture (the "Merieux Joint Venture") with
Pasteur Merieux Serums & Vaccins S.A., now Pasteur Merieux Connaught
("Merieux"), to develop H. pylori therapeutic and preventive vaccines, to
acquire complementary technology, marketing and distribution expertise and
financial support for vaccines that the Company believes have global commercial
prospects. In June 1996, the Company appointed CSL Limited as exclusive
distributor of the Company's monoclonal IgA antibody against viral pneumonia in
children, in Australia and selected other Southern Hemisphere countries. The
Company is currently seeking corporate partnerships to assist in
commercialization of HNK20 in the U.S. and Europe. The Company recently
completed manufacture of its CdVax vaccine (for the prevention of
antibiotic-associated diarrhea and colitis) at the Center for Applied
Microbiology Research in England, and is seeking a partner for use of the
vaccine in production of a hyper-immune globulin. The Company is pursuing
clinical development with its own funds, supplemented with NIH SBIR grants and
NIH clinical funding.

     In November 1997, the Company acquired exclusive U.S. sales, marketing and
distribution rights to the Arilvax(R) Yellow Fever vaccine from Evans Medical, a
subsidiary of Medeva, PLC. The Company believes it can market this product
effectively, with a small sales force, since the market is currently restricted
to the U.S. military and to physicians and travel medicine clinics approved by
State Health Departments. The Company's current strategy for commercialization
of the Japanese encephalitis (JE), dengue and related vaccines is to form
marketing partnerships with U.S. or European multinational pharmaceutical
companies for use in the traveler and military markets. The Company also seeks
regional partners for the manufacture and sale of the vaccines in countries
where the corresponding diseases are endemic. The vaccines acquired under the
Department of Defense contract will be sold principally to the U.S. military
through the JVAP program, to other military as approved and to the limited
civilian markets directly or through partner companies in the JVAP program.

     Manufacturing Strategy. The Company's strategy is to share manufacturing
rights with its partners on a regional basis. OraVax has retained the rights to
manufacture H. pylori vaccines in the U.S., and its partner, Pasteur Merieux is
expected to manufacture the vaccines for Europe at its facilities in Lyon,
France. Depending on the future circumstances of this product development
program, OraVax may expand its manufacturing capacity, subcontract manufacturing
to third parties or source product through its partner.

     The Company acquired a 47,000 sq. ft., free-standing manufacturing facility
in Canton,

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Massachusetts, designed and equipped for the commercial production of biologic
products in 1996. The Company anticipates that its initial use of the facility
will be for the production of vaccines for the Joint Vaccine Acquisition
Program. The facility will also accommodate production development activities
for OraVax's proprietary products depending on the outcome of product
development.

SCIENTIFIC BACKGROUND

     The human immune system is comprised of two distinct compartments, systemic
and mucosal, each including immunity mediated directly by the cells of the
immune system, "cell mediated immunity" and immunity mediated by antibody
proteins, "humoral immunity". Immunologically reactive cells react directly with
the target antigens on viruses or bacteria to inactivate them and also have
direct cytotoxic effects on virally infected cells. The systemic humoral immune
system, which protects the blood and deep tissues of the body, relies on
antibodies composed principally of IgG and IgM immunoglobulins. The mucosal
immune system, which protects mucosal surfaces, such as the digestive,
respiratory and genitourinary tracts and the surface of the eye, relies on
antibodies composed principally of the IgA class of immunoglobulins.
Historically, vaccine or antibody development has been focused on the systemic
immune system, with the objective of increasing IgG antibodies in the blood by
injecting vaccines or specific preformed immunoglobulins. However, this approach
alone often does not provide protection for mucosal surfaces as they do not
effectively induce or provide IgA immunoglobulin. The mucosal surfaces, which
comprise a total surface area of over 3,600 square feet, represent either the
site of disease or the portal of entry into the body for most infectious agents.
Furthermore, IgA antibodies produced by the mucosal immune system constitute
over 75% of all antibodies produced by the human immune system. Accordingly, the
Company believes that its understanding of both systemic and mucosal immunity
provides an attractive opportunity for developing products that treat or prevent
infectious disease. Such products include specific antibodies that are applied
directly to mucosal surfaces and vaccines that are designed to stimulate the
body to produce immunity that is effective in both the mucosal and / or systemic
compartments. Such vaccines are composed of one or more antigens of the pathogen
and are specifically formulated to induce the form of immunity most effective
against each disease agent.

     Benefits of Mucosal Immunity. Conventional vaccines and antibodies are
designed to provide systemic, as opposed to mucosal immunity and are
administered by injection. Such products include routine childhood vaccines
(e.g., Diphtheria/Tetanus/Pertussis, Hepatitis B and Measles/Mumps/Rubella),
adult vaccines (e.g., influenza and Hepatitis B) and immune globulins (e.g.,
rabies and cytomegalovirus). These products provide immunity to infection only
after the infecting organism has entered the bloodstream or deep tissues of the
body. In contrast, mucosal vaccines and antibody products are not injected but
rather are applied to mucosal surfaces (e.g., orally or intranasally). Mucosal
vaccines are designed to prevent infection at the point of entry into the body,
prior to deep tissue penetration. Mucosal vaccine and antibody products may
prevent or treat infections that are not susceptible to a systemic immunity
approach and can complement the effectiveness of systemic immunity.

     The Company believes that oral and other non-injected products based upon
mucosal immunity will offer a number of important clinical and commercial
advantages relative to injected antibody or vaccine products, including:

     Greater Clinical Efficacy. Mucosal immunity to specific antigens has been
demonstrated to be capable of preventing or eliminating mucosal infections in
cases where systemic immune responses have not been effective. The Company
believes that its approach to the generation of immunity will result in products
that more effectively prevent or treat many infectious diseases. In particular,
the Company expects that it will be able to develop vaccines to provide mucosal
immunity against diseases for which there are no current vaccines or for which
the protection afforded by systemic immunity has not been adequate.

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     Higher Level of Safety. Injected vaccines and antibody products can cause
fever, inflammation, acute allergic reactions and, although rare, severe
reactions resulting in disability or death. The Company believes oral vaccines
and non-injected antibody products will generally result in a lower incidence of
adverse reactions. However, the Company has pursued injected product strategies
for some product targets when injection has been determined to be the most
effective or cost efficient method of administration of a particular product.

     Lower Cost of Administration. It is anticipated that the Company's products
will generally be administered orally or through nose drops, nasal sprays, eye
drops, suppositories or other methods involving direct contact with mucosal
surfaces. In contrast to products that require intravenous or intramuscular
injection, these methods of administration will not require trained personnel or
utilization of hospital or outpatient facilities, effectively lowering the cost
of administration. However, for certain vaccines and antibodies the dose of
product required may be significantly lower when given by injection, resulting
in a lower cost of treatment; in such cases, the Company may elect to develop
injected products.

     Improved Patient Compliance. The Company believes that the greater ease of
administration of its products will result in increased patient compliance. In
the case of the oral or nosedrop products, the need for doctor or hospital
visits to receive the product may be avoided. Products such as the Company's
live viral vaccines, the single dose live-attenuated vaccine against Japanese
encephalitis is intended to replace current vaccines which require eight doses
to be given by the time a child is fifteen years old.

PRODUCTS UNDER DEVELOPMENT

     VACCINES AGAINST H. PYLORI

     Market Opportunity. OraVax is developing vaccines designed to prevent and
treat peptic ulcers and chronic gastritis caused by H. pylori. According to an
NIH Consensus Statement dated February 1994, H. pylori has been associated with
virtually all duodenal ulcer cases and more than 80% of gastric ulcer cases. In
1994, H. pylori was classified as a Category 1 carcinogen, causing the majority
of stomach cancer, by the World Health Organization. Although frequently
asymptomatic, all persons infected by H. pylori have chronic stomach
inflammation (gastritis). It is estimated that at least five million people
suffer from active peptic ulcers each year and approximately 350,000 to 500,000
new cases are diagnosed annually in the United States. Approximately 600,000
patients are hospitalized each year in the United States with peptic ulcers.
Serious complications occur in approximately one-third of these cases, including
intestinal obstruction, upper gastrointestinal hemorrhage and perforation.
Further, each year over 6,000 deaths in the United States are directly caused by
ulcers, and peptic ulcers are a contributing factor in an additional 11,000
deaths. Approximately 10% of the population will develop peptic ulcer disease
during its lifetime. The Company estimates that the direct medical costs of
treating peptic ulcers in the United States exceed $5 billion per year. The
Company estimates that approximately 30% of the United States population is
infected with H. pylori, while infection rates in most parts of the world exceed
those in the United States. In Japan and parts of Europe (including Greece,
Germany and all of Eastern Europe), the prevalence of infection is nearly twice
that of the United States. In Korea the infection rate approximates 90% while in
developing countries nearly 100% of the population is infected at an early age.
The increased prevalence of infection in these areas is associated with a high
risk of developing peptic ulcers and gastric cancer. In Japan, for example, the
risk of dying of gastric cancer is estimated to be as high as 8% as compared
with 0.8% in the United States. In 1996 the World Health Organization estimated
that H. pylori was responsible for approximately 550,000 new cases per year of
stomach cancer.

     Until recently, treatment of peptic ulcers focused on the use of
antagonists of acid secretion, such as the H-2 antagonists, Tagamet (cimetidine)
and Zantac (ranitidine), and the proton pump inhibitors, Prilosec (omeprazole)
and Lanzor (lansoprazole). High rates of recurrence and the need for chronic
therapy are associated with anti-secretory disease management. Several regimens
that include antibiotics and inhibitors of acid secretion are now licensed in
the U.S. for the treatment of peptic ulcer disease and

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prevention of ulcer recurrence. These regimens have shown 70-90% rates of cure
in clinical trials. However, antibiotic treatments have been complicated by the
need to treat for prolonged periods with multiple drugs, by side effects and
problems with patient compliance, by relapses if treatment is interrupted, and,
most importantly, by the development of antibiotic-resistant strains of the
bacteria. Moreover, in some areas of the world, antibiotic treatment has been
ineffective, due in part to a high rate of reinfection.

     OraVax Approach. The Company is developing vaccines to treat H. pylori
infection, to prevent reinfection in previously-infected persons and to
stimulate immunity in uninfected persons. The Company believes that vaccines
directed against H. pylori, if successfully developed, would eventually be
considered for routine administration as treatment for peptic ulcer disease and
chronic gastritis and as a preventive for the full spectrum of H. pylori-caused
diseases

     The Company is evaluating antigens derived from H. pylori bacteria, as well
as several formulation technologies for use in vaccines designed to combat
existing infections (treatment of chronic gastritis or recurrent peptic ulcer)
and/or to prevent primary infection or reinfection. Preclinical and clinical
studies have confirmed the activity of OraVax's leading, proprietary vaccine
candidate antigen, the urease protein. When given by the mucosal route or by
injection, urease has both prophylactic and therapeutic activity in pre-clinical
studies. In 1997, the Company and its partner, PMC licensed the genome of H.
pylori from Human Genome Sciences, Inc. and initiated the investigation of gene
products of the bacteria as additional antigens for incorporation into a vaccine
formulation. To date, over 350 genes have been cloned and the gene products
tested. Experimental vaccines incorporating eight of these antigens have shown
prophylactic or therapeutic activity in preclinical studies. The Company has
filed patent applications or secured access to the patents or patent
applications of others on over 740 antigens, including urease and each of the
other eight active vaccine antigens. A wide variety of formulation technologies
are also being evaluated by the Company and its collaborators. In animal
studies, the LT mucosal adjuvant has shown the highest level of activity to
date, but very promising results have been obtained following injection of
antigen with conventional and novel adjuvants all of which are acceptable for
human use.

     The Company's approach may result in separate vaccine products for (1)
treatment of existing infection and disease, (2) prevention of reinfection in
patients cleared of their infections by antibiotics, and (3) routine
prophylactic immunization early in life to prevent initial infection.

     The Company is in Phase II clinical trials with its leading candidate
vaccine called UreAB. The vaccine is based on urease, a major component of the
H. pylori bacteria with characteristics that make it an excellent vaccine
antigen. Urease is present in all strains of H. pylori and is exposed on the
surface of the bacteria as a target for antibody. OraVax has cloned the urease
gene and developed methods for efficiently producing purified non-toxic urease
as an oral vaccine candidate. The Company's preclinical studies in several
species, including nonhuman primates, have demonstrated that the urease antigen,
in combination with one of several adjuvants, stimulates a strong immune
response and has prophylactic and therapeutic activities.

     In December 1995 the Company conducted a Phase I therapeutic clinical
safety study in chronically infected adults at the Centre Hospital Universitaire
Vaudois ("CHUV") in Lausanne, Switzerland, which was completed, and demonstrated
the safety of the UreAB oral vaccine without any adjuvant.

     In October 1996 the Company announced results of a randomized,
double-blind, placebo- controlled Phase II safety and immunogenicity study of
recombinant urease, formulated with a mucosal adjuvant. The study, conducted at
the CHUV and the Center for Vaccine Development in Baltimore,

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involved 24 healthy adults with chronic gastritis due to H. pylori infection.
Subjects were assigned to one of five treatment groups, and received either
placebo, urease at graded doses of 20, 60 or 180 mg plus LT (heat-labile toxin
of Escherichia coli) as a mucosal adjuvant, or adjuvant alone. The study
medications were orally administered weekly for four consecutive weeks.
Participants underwent gastroscopy and four gastric biopsies were taken both
prior to and one month following immunization to monitor the status of their
infection by quantitative bacterial culture, by breath tests and by histological
examination of the biopsies.

     Administration of urease with LT was generally well-tolerated, with immune
responses - as measured by the ELISPOT assay for IgA antibody secreting cells
observed in 6 of 14 (43%) subjects in the urease treatment groups. In contrast,
0 of 10 (0 percent) placebo or LT recipients had a response. Results
demonstrated that the UreAB vaccine elicits a mucosal immune response and that
LT acts as a mucosal adjuvant.

     The level of infection in each patient was assessed by quantitative culture
of multiple gastric biopsies taken before and after treatment. The significance
of the mean change from baseline to post- immunization bacterial density was
assessed using statistical methods within each treatment group. In addition,
subjects in the treatment groups which contained an active dose of urease were
combined into one group and subjects in the treatment groups containing the
placebo dose of urease were combined into another group. Treatment group
comparisons were carried out on these two combination groups. All three
treatment groups containing an active dose of urease showed a decrease in H.
pylori bacterial density from baseline to post-immunization, indicating a
favorable response to treatment. Subjects receiving active urease experienced a
larger decrease in gastric bacterial densities from baseline to
post-immunization than did those subjects receiving placebo. The decrease for
subjects receiving active urease was significantly different from zero
(p=0.032), whereas the decrease for subjects receiving a placebo dose of urease
was not significantly different from zero (p=0.425). While the study was in a
small population, it provided the first statistically significant evidence that
a vaccine could have therapeutic activity in humans naturally infected with H.
pylori. These results are consistent with earlier results in animal models, and
demonstrate the feasibility of vaccine development.

     Based on the results indicating therapeutic activity of UreAB, efforts are
being directed toward optimizing the vaccine formulation. These efforts include
combining additional novel, proprietary antigens with UreAB, optimization of
dosing, schedule of immunization, adjuvants and delivery systems. Consequently,
in October, 1997 the Company initiated a second Phase II safety and
immunogenicity clinical study at the Beth Israel-Deaconess Medical Center,
Boston, the objective of which was to optimize the formulation of UreAB. In this
study, conducted in 42 healthy subjects without H. pylori, UreAB is given by two
different routes (oral liquid or enterically coated capsules) and with graduated
doses of the LT adjuvant. Multiple immunological measurements are being made to
define the optimal route of immunization and dose of LT. The study is in
progress.

     The Company is also undertaking three other clinical studies, with the
objective of identifying populations in which vaccine efficacy can be measured.
In January, 1997 the Company initiated a study in Mexico City in which up to 200
H. pylori-infected children and adults are being followed after antibiotic cure
to determine the incidence of reinfection. A similar study in Lima, Peru was
initiated in January, 1998. The results of these studies, which are expected to
take 18-24 months, will provide a basis for Phase II and III trials of the
ability of immunization to prevent reinfection. In a third study, initiated in
October 1997 at the Veterans Administration Medical Center and Baylor
University, Houston, Texas, healthy uninfected volunteers will be challenged
with Helicobacter pylori. This study will provide a human challenge model in
which the prophylactic activity of UreAB can be determined. Results are expected
within approximately 14 months.

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The Company expects to initiate at least one further trial in the 4th Quarter of
1998, the objective of which is to compare the activity of UreAB administered by
the mucosal vs. the parenteral route. To undertake this study, the Company has
prepared a new formulation of UreAB suitable for injection and expects to file
an amendment to its IND for this new formulation in the third quarter.

     OraVax has entered into several agreements with corporate and academic
collaborators relating to the development of H. pylori vaccines. See "Patents
and Proprietary Rights; Technology Agreements -- H. pylori Product Development
Program."

     Collaboration for H. pylori Product with Merieux. In March 1995, the
Company entered into a collaboration with Merieux, for the development,
manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines
against H. pylori infections in humans. Under the Joint Venture, OraVax and
Merieux agreed to co-develop vaccines which use the urease protein or any of its
sub-units as an antigen (the "Target Products"). OraVax and Merieux share
equally in profits from the sales of the Target Products and in all future
research, development, clinical and commercialization costs. OraVax and Merieux
estimate that research, development and clinical costs will exceed $50.0
million. Merieux is providing technical expertise and will also provide
marketing expertise to the Joint Venture. Merieux made an initial payment of
$3.2 million directly to OraVax which included $0.6 million to recognize the
value of research and development conducted by OraVax in the first quarter of
1995 prior to the formation of the Joint Venture, and a milestone payment of
$2.6 million to recognize the value of technology previously developed by OraVax
and made available to the Joint Venture. In addition, Merieux purchased $2.5
million of the Company's Series Preferred Stock. Subsequently, Merieux purchased
an additional $1.0 million of common stock in the Company's initial public
offering. In addition, Merieux agreed to pay the Company directly up to $12.0
million during the development period, subject to the achievement of certain
clinical and regulatory milestones, of which $0.6 million was paid to OraVax in
December 1995. However, there can be no assurance that the milestones which
trigger such future payments will be achieved. Beginning in the second quarter
of 1995, research, development and commercialization activities of the Joint
Venture were conducted through two equally controlled partnerships which have
contracted with the Company to perform the research, development and clinical
trial activities. OraVax earned $7.6 million, $6.6 million and $4.8 million
under these contracts during 1997, 1996 and 1995, respectively. In addition,
during 1996, the Joint Venture entered into research and development contracts
with Merieux and third parties. The research and development budgets of the two
partnerships comprising the Joint Venture are established by joint committees in
which each of the parties has an equal participation and role. The venturers
will pay approximately equal shares of the agreed budgets. OraVax will receive
revenue from the partnerships for the research and development work which is
requested to be performed by OraVax and funded by the Partnerships. There can be
no assurance, however, that OraVax will be selected to perform such work.

     OraVax and Merieux each licensed to the Joint Venture upon its formation
the right to use all of their respective existing proprietary technologies
relating to vaccines for the treatment or prevention of H. pylori, except for
so-called naked DNA technology (for an injectable vaccine) which is the subject
of a separate collaboration by Merieux with a third party. Additional technology
in the H. pylori field acquired by either party since the formation of the Joint
Venture is required to be offered to the Joint Venture. The Joint Venture itself
has also obtained licenses to relevant technology from third parties, including
a license in November, 1996 of the complete genome sequence of H. pylori from
MedImmune and Human Genome Sciences.

     It is the current intention of OraVax and Merieux that OraVax will
manufacture the Target Products in sufficient quantities for clinical trials and
for sales by the Joint Venture in the United States. It is also the current
intention of OraVax and Merieux that Merieux will manufacture the Target
Products for sale by the Joint Venture in non-U.S. markets.

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     The marketing activities of the Joint Venture will be managed by the Joint
Venture's Marketing Committee with equal control by each party. The corporate
names of both OraVax and Merieux will be prominently displayed on the label of
the Target Products to the extent consistent with regulatory agency
requirements. Marketing and sales of Target Products are expected to be carried
out principally by Merieux with the exception that OraVax is expected to market
and sell directly to the United States military and the National Centers for
Disease Control ("CDC").

     The Company or Merieux may withdraw from the Joint Venture only in the
event that there is a failure to efficiently and effectively carry out the
research and development program or a failure both of urease, and of any other
antigen or combination of antigens or formulations to work and irreconcilable
differences on how to proceed, in either case subject to arbitration. In the
event of termination, in all cases except breach, both parties can commercialize
the Target Products upon payment of cross-royalties.

     HNK20 INTRANASAL IGA ANTIBODY AGAINST RSV

     Market Opportunity. The Company is developing HNK20, a monoclonal IgA
antibody product designed to prevent viral pneumonia in children caused by
respiratory syncytial virus (RSV). In the United States, approximately 250,000
children annually have moderate to severe underlying medical problems that put
them at risk of contracting viral pneumonia from RSV infection. These are
children who are born prematurely or who have bronchopulmonary dysplasia,
congenital heart disease, leukemia, cystic fibrosis or various immunodeficiency
disorders. Approximately 36% of these children require hospitalization due to
severe lower respiratory infections from RSV and up to 1% of these hospitalized
cases prove to be fatal. The Company estimates that the direct medical costs
associated with treatment of the disease exceed $500 million annually in the
United States.

     The Company believes there is a need for a cost-effective approach to the
prevention of RSV pneumonia that can be used in both home and hospital settings.
Current treatment for RSV pneumonia involves hospitalization, often in an
intensive care unit, and administration of ribavirin, an anti-viral drug. The
disadvantages of such treatment include difficulty of administration, low
efficacy and high cost. One company recently received marketing approval for an
intravenous (systemic) IgG product derived from adult plasma donors. This
approach involves the high cost of the product and its intravenous
administration in a hospital or outpatient setting with doses varying with the
infant's weight and the risks inherent in the systemic administration of large
volumes of a human blood derived product to an infant. The same company has
developed a monoclonal IgG antibody for administration by injection and
submitted an application for marketing approval to the U.S. FDA in late 1997.
While the monoclonal IgG is anticipated to be safer than the blood derived IgG,
cost of the product is expected to be similar and the product would still
require administration by a health care professional. The Company believes that
its intranasally-administered HNK20 will have the advantages of being
non-invasive, designed for home administration by a family member, and of
limiting the upper respiratory infection at the outset, before it develops into
viral pneumonia.

     OraVax Approach. The Company is developing its HNK20, a monoclonal IgA
antibody, designed for administration by nose drop. Based on the results of
primate studies, the OraVax product candidate appears to be safe and provide
protection with small doses of antibody administered daily by nose drop. Studies
in several species, including nonhuman primates, indicate that HNK20 is
effective when administered at the convenient dosing interval of once daily. The
Company expects that its product, if successfully developed, would be used to
protect those children at risk from RSV infection, particularly during the
winter season when RSV infection is most prevalent.

     The Company received approval from the United States Food and Drug
Administration ("FDA") to initiate clinical trials of HNK20 under an
Investigational New Drug Application ("IND") filed in March 1994. Safety of
HNK20 was initially demonstrated in Phase I/II clinical studies in adults. Virus
challenge

                                                                        Page 10
<PAGE>   11

studies in adults suggested decreased virus shedding in HNK20 treated versus
placebo treated subjects. A Phase I safety trial in children was completed in
July 1995. A Phase II safety and pharmacology trial in premature infants and
infants with bronchopulmonary dysplasia at high risk of contracting RSV viral
pneumonia was completed in April 1996. The double-blind, placebo-controlled
study included 57 infants, under the age of nine months at study entry, who
received either 2.5 milligrams per day of HNK20 or placebo, each through once
daily nosedrop administration. Results of the study indicated that HNK20 was
well tolerated in the target population and was administered with a high level
of compliance. A review of adverse events revealed no safety concerns related to
treatment with HNK20. Given the small sample size, no significant differences
were observed between the HNK20 group and the placebo group related to the
incidence of RSV infections, pneumonia or hospitalization.

     In May 1996, the Company initiated a Phase III study designed to determine
the prophylactic effectiveness of intranasal administration of HNK20 in
premature infants and infants with bronchopulmonary dysplasia at high risk of
contracting RSV viral pneumonia. The double-blind, placebo-controlled study
included a total of 614 infants, and was conducted at 26 centers in Australia,
New Zealand, Argentina and South Africa, during the Southern Hemisphere's winter
months of May to October. The results indicated that, in the entire subject
population which included infants up to 19 months of age, those treated with
HNK20 experienced a 24% reduction in lower respiratory tract infection and an
11.4% reduction in the frequency of hospitalization relative to infants
receiving placebo. However in the younger infants, 185 infants who were under
four months of age at the beginning of the study, a greater difference was
observed. In these infants there was a 50% reduction in the frequency of lower
respiratory tract infections and a 42% reduction in the frequency of
hospitalization.

     The daily dose of HNK20 (2.5 mg) delivered in a concentration of 10 mg/ml
is believed to be suboptimal. Based on the weight of the infants on entry into
the study, the mean dose of HNK20 (0.5 mg/kg) was the minimum dose showing
prophylaxis in the nonhuman primate model of RSV. As children progressed through
the study and gained weight, the dose in mg/kg decreased. Levels of HNK20 in
nasal secretions were highest in the subgroup of infants under four months old
at study initiation, in whom efficacy was highest, suggesting a relationship
between passive antibody level and efficacy that could be optimized by
increasing dose. An analysis of HNK20 levels indicated that higher levels were
associated with a decreased frequency of hospitalization. Taken together, these
observations indicate that efficacy of HNK20 would be enhanced by increasing
dose.

     The Company believes that additional Phase III study could be conducted in
the Northern Hemisphere to demonstrate efficacy of HNK20 at an elevated dose
level, in infants under four months of age at study entry. The trial is designed
as a randomized, double-blind, placebo controlled study, to include a minimum of
520 infants, under four months of age at study entry. HNK20 recipients would
receive a dose of 7.5 mg per day, approximately three times higher than that
used in the Southern Hemisphere study. The Company will need to secure
additional partnerships or other sources of funding in order to support the
planned high-dose Northern Hemisphere study.

     CDVAX AND CDIG AGAINST ANTIBIOTIC-ASSOCIATED
     COLITIS

     Market Opportunity. The Company is developing CdVax, a vaccine designed to
prevent antibiotic-associated colitis caused by Clostridium difficile (C.
difficile). Antibiotic treatment results in a decrease in the number of
non-disease causing bacteria in the intestine, a condition allowing the rapid
growth of the antibiotic-resistant C. difficile. The C. difficile bacteria
produce two toxins (A and B toxins) that cause intestinal inflammation and fluid
secretion. C. difficile is a leading cause of antibiotic-associated colitis
among elderly hospitalized patients and nursing home residents who are
undergoing antibiotic treatment regimes. An estimated 21% of hospitalized
patients, or 6.6 million persons, develop C. difficile infections, and 7% (2.2
million persons) develop C. difficile disease (colitis and antibiotic-associated
diarrhea) annually in the United States. Up to 33% of nursing home residents
(approximately 500,000

                                                                        Page 11
<PAGE>   12

persons) develop diarrheal illness in the United States each year, and C.
difficile is an important cause of such illness. C. difficile infection is also
associated with the use of certain anticancer drugs. Diarrhea is an important
contributor to and cause of death in the elderly, and C. difficile is a
significant factor in such cases. Complications of diarrhea, especially
dehydration, electrolyte imbalance, and urinary tract and skin infections, are
frequent.

     Current treatment of C. difficile disease involves fluid and electrolyte
replacement and the use of additional antibiotics. Treatment is sometimes
problematic because of the need to interrupt the antibiotic regime targeting the
patient's primary infection in order to effect resolution of the C. difficile
infection. This interruption may result in recurrence of the primary infection.
The Company is not aware of any available method for prevention of the disease
other than avoidance of broad-spectrum antibiotics in high-risk elderly patients
and isolation, quarantine and other infection control procedures used to limit
exposure to C. difficile. These measures are often difficult or impossible to
apply.

     OraVax Approach. The Company has developed CdVax, containing chemically
inactivated A and B toxins which could be administered prior to exposure to the
C. difficile bacteria. Preclinical trials in animal models with CdVax have
demonstrated effectiveness in prevention of C. difficile induced disease.
Although certain high-risk groups, such as nursing home patients and patients
undergoing elective surgery may benefit from prophylactic immunization, the
Company's principal goal is to use the vaccine is to stimulate high-level
antitoxin antibodies in plasma donors. These plasma donations will be used to
prepare an immune globulin product (CdIG) for use in the short-term prophylaxis
and therapy of C. difficile infections.

The Company believes that a significant market exists for a novel therapy of C.
difficile colitis based on the passive administration of hyperimmune globulin.
The principal advantages of this approach to treatment over existing therapies
include rapid time to recovery from illness, shortened hospital stay and
resulting cost savings, and the absence of relapse, which complicates the use of
antibiotic treatments in 20% of C. difficile cases. Preclinical studies have
demonstrated the effectiveness of passive antibody treatment, and clinical case
reports using large doses of standard commercial globulin preparations (which
contain low titers of antibodies against C. difficile toxins) have shown
clinical benefit, providing proof of principle. The Company's hyperimmune
product will be significantly more potent than standard globulin formulations
and can be conveniently administered in small volumes.

     In October 1997, the Company was awarded a Phase II Small Business
Innovation Research (SBIR) grant totaling $690,000 from the National Institutes
of Health (NIH) in support of CdVax and CdIG development. The Company has filed
an Orphan Drug application for the colitis indication and anticipates commencing
Phase I studies of CdVax in mid - 1998.

          CHIMERIVAX(TM) PLATFORM TECHNOLOGY

     The Company has developed a novel, proprietary platform technology for the
construction of vaccines against a number of viral infections caused by members
of the family Flaviviridae ("Flaviviruses"). The underlying technology was
developed at St. Louis University and an exclusive worldwide license was granted
to OraVax on September 8, 1997. Flavivirus infections of medical significance
include hepatitis C, dengue, Japanese encephalitis, tick-borne encephalitis, St.
Louis encephalitis, and yellow fever. The technology is based on the use of the
yellow fever 17D vaccine, the safest and most effective live virus vaccine ever
developed, to construct genetically-engineered, live, attenuated vaccines
against other Flaviviruses. To produce the new vaccines, the gene encoding the
envelope (E) glycoprotein of the other virus (for example Japanese encephalitis,
dengue or hepatitis C) is inserted into the yellow fever 17D genome "backbone".
The resulting chimeric virus has the protein coat of the other Flavivirus virus,
which contains the protective antigens, and the replicative machinery of YF 17D
vaccine. The new vaccine stimulates neutralizing antibodies and cellular
immunity against the target

                                                                        Page 12
<PAGE>   13

Flavivirus virus and can be manufactured at extremely low cost. Based on
experience with the parent YF 17D vaccine and preclinical results with the
Company's chimeric vaccines to date, a single dose of the vaccine is expected to
provide lifelong immunity with negligible side-effects. The Company has
developed vaccine candidates against two disease targets, Japanese encephalitis
and dengue, and has initiated research and development on hepatitis C.

               JE VACCINE AGAINST INFECTION BY
               THE JAPANESE ENCEPHALITIS VIRUS

     The Company is in the advanced stages of development of an improved vaccine
for prevention of Japanese encephalitis ("JE") viral infections. JE is a
potentially fatal neurotropic viral infection, endemic and epidemic throughout
Asia, including important markets in Japan, Korea, Taiwan, China, India and
Thailand. JE is the leading cause of viral central nervous system infection of
children worldwide, and has surpassed poliomyelitis in importance as vaccine
coverage rates for polio have increased. Current JE vaccines used to immunize
all children in Japan, Korea and Taiwan are expensive, produced in mouse brain
and require multiple booster doses. In Korea, children routinely receive eight
doses by fifteen years of age. In Japan, JE is the second leading vaccine sold,
after DPT. The mouse brain vaccine is also licensed in the United States,
Australia and many European countries for the immunization of travelers and
military, but significant safety concerns have emerged since its introduction in
the 1990's. The World Health Organization has identified a high priority for the
development of safer and less expensive vaccines against JE, which would ensure
its use in endemic regions, where the birth cohort at risk is approximately 70
million/year and where only a small fraction of children are immunized
currently. In addition, a safer vaccine that requires only a single dose for
immunization would better meet the needs of travelers and military, which
represent a major market opportunity in the US and Europe.

OraVax has demonstrated safety and preclinical efficacy of its JE vaccine based
on the ChimeriVax (TM) technology in animal models, including nonhuman primates.
The vaccine is produced in cell culture substrate acceptable for human use.
Production efficiency is very high, and extremely favorable margins on sales are
expected. The Company is currently in pilot production under GMP, and expects to
file an IND and initiate clinical trials in the first quarter of 1999.

          DENGUE FEVER

     Dengue is the most important mosquito-borne viral infection worldwide. The
disease is characterized by two distinct clinical syndromes, dengue fever, a
debilitating acute disease with fever, rash, muscle and joint pains and dengue
hemorrhagic fever (DHF) with prostration, bleeding and shock. DHF is a leading
cause of hospitalization of children in Asia and is fatal in up to 5% of cases.
There are over 2.5 billion persons at risk of dengue, 100 million of whom are
infected with dengue viruses annually. A high proportion of infected people
develop dengue fever, with approximately 450,000 cases progressing to DHF.
Dengue occurs throughout all tropical regions of the world, and is
intermittently introduced into the United States, Australia and Europe, with
ensuing outbreaks. Hundreds of cases occur among U.S. and European travelers
annually. There is no specific treatment and no vaccine is available for
prevention of the infection. An effective vaccine against dengue would be widely
used not only in endemic areas but for protection of all travelers to the
tropics.

     There are four distinct viruses that cause dengue fever (dengue types 1-4).
OraVax has developed a candidate ChimeriVax(TM) vaccine against dengue type 2
which is in preclinical development, with very promising results. The Company's
objective is to develop a tetravalent vaccine, containing all four dengue
serotypes.

          HEPATITIS C

                                                                        Page 13
<PAGE>   14


     Hepatitis C virus causes an estimated 20% of all cases of viral hepatitis,
and is the agent responsible for 80-90% of all cases of "nonA-nonB viral
hepatitis". The virus is transmitted by blood, blood products, reused needles,
and by congenital transmission. There is considerable evidence for heterosexual
transmission as well. Four million persons in the United States are chronically
infected with hepatitis C, with 30,000 new cases occurring annually.
Approximately 80% of those infected develop chronic, persistent infections of
the liver, and 20% of these develop cirrhosis, with a high risk of liver cancer.
Worldwide, 3% of the entire human population is infected, with 170 million
chronic carriers at risk of cirrhosis and cancer. There is a very high mandate
for an effective vaccine.

     OraVax believes that its ChimeriVax technology is applicable to the
construction of an effective vaccine that would stimulate both humoral and
cellular immunity against hepatitis C. As for dengue, a multivalent vaccine is
required, with simultaneous immunization against two or three different
hepatitis C types representing the majority of types causing human illness.

          TICK-BORNE ENCEPHALITIS

     Tick-borne encephalitis (TBE) is a major medical problem, causing severe
illness and deaths in eastern Europe and the former USSR. The epidemiology and
motivation for vaccination is similar to that for Lyme disease. Existing
vaccines are conventional killed virus vaccines produced in cell culture, and
are the leading vaccines sold in Austria, Germany, with significant unexploited
potential markets elsewhere in Europe and Russia. These vaccines are expensive,
require multiple doses for primary immmunization and booster doses. There are
reported neurological accidents associated with these vaccines.

     OraVax's ChimeriVax(TM) technology is applicable to the development of a
TBE vaccine that would have significant advantages (single dose, life long
immunity, safety and low cost) over existing vaccines. Like the vaccine against
JE, a TBE vaccine requires a single product against one serotype, and thus is
technically feasible within a short development cycle. The Company plans to seek
a corporate partner before initiating research and development on a TBE vaccine.

OTHER ORAVAX TECHNOLOGIES

     In addition to the Company's three principal product development programs,
the Company has rights to certain other technologies which may have the
potential to be developed into products. These technologies also build on the
Company's platform of knowledge of the mucosal immune system and immunology.
OraVax will continue to evaluate potential development opportunities for these
technologies and may consider seeking a corporate partner to commercialize them
on a case-by-case basis.

     IgA Antibody Technology. The Company's monoclonal lgA antibody technology
includes methods for stimulating IgA antibody production, producing recombinant
secretory component and linking IgA antibody to secretory component. The
Company's current efforts in these areas are focused on the development of the
HNK20 monoclonal IgA antibodies against RSV, but are expected to have general
application to the development of monoclonal IgA antibodies against other
infections. The Company's patent application, filed worldwide, describing the
HNK20 monoclonal IgA antibody issued in the United States in 1995. In addition,
the Company has filed a United States patent application claiming the DNA
encoding the RSV-recognition site. OraVax also has an exclusive worldwide
license from Harvard University to a patent application covering complexes of
antibody and secretory component and methods for producing such complexes,
including methods for the production of recombinant secretory component and for
linking IgA antibodies to secretory component. The Company is not aware of
competing patent rights involving complexes of antibody and secretory component.

                                                                        Page 14
<PAGE>   15



     Viricle Technology. The bluetongue virus ("BTV") afflicts sheep and cattle
in livestock raising regions, including the western United States, Australia and
South Africa, causing still births. Genetically engineered virus-like particles
known as Viricles(R) were developed as a vaccine against BTV in sheep and
against African Horse Sickness, an economically important disease in Spain and
other countries which raise thoroughbred horses. In veterinary field trials
conducted prior to 1994 by Oxford Virology and the National Environmental
Research Council in England, orally administered Viricles have shown promise as
a veterinary vaccine against BTV without the need for a mucosal adjuvant. OraVax
believes this delivery system may prove useful in the development of human oral
vaccines. Consequently, the Company has incorporated a portion of the C.
difficile gene into these virus-like particles and has shown that the resulting
Viricle vaccine stimulates antibody against both BTV and C. difficile. OraVax
acquired the rights of Oxford Virology and jointly owns and has an exclusive
license from the National Environment Research Council in Oxford, England to two
inventions involving BTV, one relating to Viricles and one relating to a method
for producing an immunogenic effect against BTV through the use of such
particles. Patents have issued with broad claims to the technology.
Additionally, in 1997 an OraVax patent was issued by the US patent office for
additional viricle technology titled "Oral Immunization with Multiple
Particulate Antigen Delivey System", US patent #5,690,938. Two additional
patents covering the technology, included in the license to OraVax, have been
awarded by the US patent office covering the technology, patents: #5,667,782
"Multiple Particulate Antigen Delivery System" and #5,686,270 "Production of
Antigens by Self-Assembly of Polypeptide Components". The Company has
additionally received notice of allowance of a fourth patent, "Use of Bluetounge
Virus as Vaccine Components".

     Shigella Live Vector Oral Vaccine Technology. Infection by Shigella
bacteria ("Shigella") is the leading cause of bacillary dysentery. Bacillary
dysentery is a worldwide problem, with the highest incidence among children in
developing countries. The principal markets for a Shigella vaccine are expected
to be travelers, deployed military populations and selected high-risk
institutionalized groups in the United States. Current treatment of bacillary
dysentery involves fluid replacement and the use of antibiotics and
anti-motility drugs after the occurrence of the infection. While certain
antimicrobial drugs may provide protection against Shigella, the widespread use
of such drugs has not been recommended because of their side effects and the
possibility of inducing the development of drug resistant strains of bacteria.

     The Company has a worldwide exclusive license to the virG gene modification
from the Institut Pasteur. The virG mutation limits virulence of the bacteria.
The Company is aware of certain additional gene modifications, which may be
necessary or useful in formal design of a human vaccine. These additional
modifications are covered by patents or patent applications to which the Company
does not currently have rights. The Company is evaluating the possibility of
using Shigella live vector technology as an antigen delivery method for its H.
pylori vaccine.

     Copolymer Microsphere Technology. The Company has a non-exclusive license
to a patent application covering the use of copolymer microsphere technology in
the development of oral vaccines directed against five specific disease targets,
including H. pylori and C. difficile. However, this technology is not currently
used in formulating any OraVax product candidates. The Company has a
non-exclusive license to an issued United States patent relating to the use of
copolymer microspheres in injected vaccines. The Company is aware of an
additional issued United States patent relating to selective release of active
ingredients through the use of copolymer microspheres.

     Hydroxyapatite. The Company has an exclusive license from Harvard
University to a patent covering the use of hydroxyapatite crystals as a
particulate carrier for antigens used as oral vaccines. The patent is titled
"Hydroxyapatite-Antigen Conjugates and Methods for Generating a Poly-Ig Immune
Response", was issued in August of 1995, US patent #5,443,832.

                                                                        Page 15
<PAGE>   16


     License of CagA. In September 1996, the Company entered into a licensing
agreement with bioMerieux Vitek, Inc. granting bioMerieux exclusive rights to
develop automated human diagnostic products incorporating a proprietary OraVax
antigen. The antigen, called CagA, is a component of H. pylori. Strains of H.
pylori producing CagA are thought to be among the most virulent. Under terms of
the agreement, bioMerieux receives an exclusive, royalty-bearing sublicense to
manufacture, use, sell, lease, and otherwise distribute any licensed products
for use in the field of in vitro diagnostic tests using instruments that perform
automatic, multiparametric immunoanalysis. This sublicense is worldwide, except
in Japan, where coexclusive rights were granted. Additionally, in March of 1998,
OraVax entered into a separate licensing agreement with Biomerica, Inc. for the
diagnostic use of CagA in in-office diagnostic tests. Under the terms of the
agreement, Biomerica receives an exclusive, royalty-bearing, worldwide,
sublicense to manufacture, use, sell, lease, and otherwise distribute any
licensed products for use as a single diagnostic test, or a component of a
diagnostic test that incorporates the CagA antigen and is intended for single
use. OraVax retains all rights to the use of CagA for vaccines to treat or
prevent diseases caused by H. pylori infection. CagA was originally identified
by Martin J. Blaser, M.D., Timothy Cover, M.D. and Murali Tummuru, Ph.D. of
Vanderbilt University School of Medicine. In 1993, OraVax acquired worldwide
exclusive rights to CagA patented by Vanderbilt University.

MANUFACTURING

     At present, the Company's ability to manufacture its products is limited to
clinical trial quantities. The Company does not have the capability to
manufacture commercial quantities of products. The Company's long-term strategy
is to develop its Canton manufacturing facilities for producing both pilot-scale
and commercial quantities of products. To ensure compliance with GMP
regulations, OraVax will need to add sufficient technical staff to oversee all
product operations, including quality control, quality assurance, technical
support and manufacturing management.

     UreAB Oral Vaccine. The UreAB vaccine product used in the Phase I clinical
trials is manufactured in the biological production facility of the Walter Reed
Army Institute of Research, Forest Glen Section, Silver Spring, Maryland under a
Cooperative Research and Development Agreement ("CRADA") with the United States
Army. OraVax anticipates the continued use of this facility to support Phase II
and at least the initial portion of Phase III trials. The Company's partner,
Merieux, has initiated GMP manufacturing at its facilities in Marcy l'Etoile
(Lyon) France, and will be able to provide vaccine for Phase III trials. OraVax
expects to manufacture product for commercial distribution in the United States.
Alternatively, the Company may elect to contract out this commercial product
manufacture.

     HNK20 lntranasal Antibody. Manufacturing of HNK20 for Phase I and Phase II
clinical trials has been performed by OraVax at its primary facility in
Cambridge, Massachusetts and by third parties under contract to OraVax. The
product used in the Phase III clinical trials conducted in the Southern
Hemisphere which commenced at the end of the second quarter of 1996 was
manufactured by a contract manufacturer. The Company had previously anticipated
using product from inventory produced by this contract manufacturer to conduct a
second Phase III trial in North America during the winter of 1997-1998. However,
during an audit conducted by the Company in October 1997 of an additional
contract manufacturer, the Company discovered that improper handling of the
product by the latter manufacturer during a step which is not part of the
current process, precluded the clinical use of this supply of HNK20. The
manufacture of the additional supply of the product necessary for the trial is
underway, however the conduct of the trial will require additional funding and
the Company is continuing negotiations with potential corporate partners for
such funding.

     CdAB Vaccine. Product for early clinical trials has been manufactured by
third parties under contract to OraVax and under a CRADA with the Walter Reed
Army Institute of Research.The Company,

                                                                        Page 16
<PAGE>   17


however, may elect to manufacture product for further clinical trials in its own
facilities in Cambridge or Canton, Massachusetts.

MARKETING STRATEGY

     The Company's products fall into one or more of three market segments:
travelers and military from the developed country markets, the developed country
general pharmaceutical markets and what is broadly characterized as the rest of
the world (ROW). OraVax has developed a preferred approach to each of these
market segments.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
              MARKET SEGMENT                           PRODUCT
----------------------------------------------------------------------------------------
<S>                                         <C>
Developed country general pharmaceutical    Helicobacter pylori vaccines
                                            Clostridium difficile hyperimmune globulin
                                            HNK20 nosedrop
                                            hepatitis C vaccine
                                             (tick borne encephalitis - regional Central
                                            European)
----------------------------------------------------------------------------------------
Travelers and military                      Yellow Fever vaccine
                                            Dengue vaccine
                                            Japanese encephalitis virus vaccine
                                            tick borne encephalitis vaccine
                                            hepatitis C vaccine
----------------------------------------------------------------------------------------
ROW                                         Helicobacter pylori
                                            Yellow Fever vaccine
                                            Dengue vaccine
                                            Japanese encephalitis virus vaccine
                                            hepatitis C vaccine
----------------------------------------------------------------------------------------
</TABLE>

     For sales in the distributed general pharmaceutical markets of the
developed countries, OraVax plans to establish marketing arrangements with
pharmaceutical companies with large distribution systems for non-bulk
distribution of its products and does not expect to establish a direct sales
capability for non-bulk distribution in this segment for several years. To
market in the future any of its products directly for non-bulk distribution, the
Company will need to develop a marketing and sales force with technical
expertise and distribution capability. There can be no assurance that the
Company will be able to establish relationships with third parties for any of
its products or successful in-house sales and distribution capabilities. To the
extent that the Company enters into marketing or distribution arrangements, any
revenues received by the Company will depend upon the efforts of third parties
and there can be no assurance that such efforts will be successful. The Company
currently intends to retain the right to market some of its products directly to
bulk purchasers of vaccines and antibodies, including the United States military
and the U.S. Center for Disease Control. See "Factors That May Affect Future
Results -- Limited Sales and Marketing Experience."

     The Company plans to market products directly to the travelers and military
markets, particularly in the U.S. and through partners in other countries. The
Company has acquired the U.S. sales and marketing rights to an existing product,
already being sold to the travelers and military markets in Europe and selected
Asian countries as an early entry into this market segment. In November 1997,
the Company acquired exclusive U.S. sales, marketing and distribution rights to
the Arilvax(R) Yellow Fever vaccine from Evans Medical Limited, a subsidiary of
Medeva, PLC. The Company believes it can market the product effectively, with a
small sales force, since the market is currently restricted to the U.S. military
and to physicians and travel medicine clinics approved by the State Health
Departments. Several of the Company's other products are targeted for the same
market.

                                                                        Page 17
<PAGE>   18


     The Company's current strategy for commercialization of vaccines with a
large market in countries where the diseases are endemic (eg. China, South
America, Africa and others) is to form partnerships with local companies or
government institutes. In these cases the Company may choose to license the
production technology to local companies for regional manufacture, to supply
bulk product for local fill and finish or to supply finished product.

     The vaccines acquired under the Department of Defense contract will be sold
principally to the U.S. military through sales contracts to the JVAP program, to
other countries' military organizations or international bodies such as NATO as
approved and to the limited civilian markets directly by OraVax or through its
partner companies in the JVAP program.

PATENTS AND PROPRIETARY RIGHTS; TECHNOLOGY AGREEMENTS

     The following sets forth the Company's proprietary position with respect to
its principal product development programs.

     RSV PRODUCT DEVELOPMENT PROGRAM

     The Company's patent application, filed worldwide, describing the HNK20
monoclonal IgA antibody issued in the United States in 1996. The Company has
filed a United States patent application claiming the DNA encoding the
RSV-recognition site. OraVax is not aware of any other patents or patent
applications describing this antibody.

     H. PYLORI PRODUCT DEVELOPMENT PROGRAM

     In addition to its own inventions, the Company has worldwide rights to
inventions made by six groups of researchers in the field of H. pylori:

     During 1997 the Company and its joint venture partner, Pasteur Merieux,
also acquired worldwide exclusive license to the Vibrovec live-vector vaccine
delivery system from Virus Research Institute in Cambridge, Massachusetts for
antigens being evaluated by the partners. The joint venture partners also
completed option agreements with Aquila covering the QS21 adjuvant. Separately,
OraVax secured an exclusive option agreement with IOMAI for their transdermal
vaccine delivery system.

     Human Genome Sciences/MedImmune. In November 1996, the Company and Pasteur
Merieux entered into a research and licensing agreement with Human Genome
Sciences, Inc., ("HGS") and MedImmune, licensing the complete genome sequence of
H. pylori for the development of vaccines. Under this agreement, OraVax and
Pasteur Merieux have control and responsibility for filing patents on new
molecular discoveries for use in the development of vaccines against H. pylori
infection. Financial terms of the agreement call for OraVax and Pasteur Merieux
to make license payments to HGS/MedImmune beginning with execution of the
agreement and upon issuance of the first U.S. patent. In addition to royalties
on any future sales, future milestone payments will be paid to HGS/MedImmune to
reflect attainment of certain product development and revenue goals. During 1997
OraVax and its partner Pasteur Merieux filed several additional patent
applications covering new molecules identified using the genome sequence
information.

     Case Western Reserve University. In October 1993, the Company entered into
an assignment agreement with its collaborators at Case Western Reserve
University ("CWRU") and a research agreement with these collaborators and CWRU.
Pursuant to the agreement, OraVax has been assigned preexisting patent rights
claiming oral immunization using H. pylori antigens; One patent was issued in
the United States in 1996. The research agreement provides for sponsorship of
the continuing development work of the collaborators in the field of H. pylori,
including the development of monoclonal antibodies against

                                                                        Page 18
<PAGE>   19


urease and other antigens, the development of adjuvants to be used in
conjunction with an oral vaccine directed against H. pylori and the development
of animal models for the testing of oral vaccines directed against H. pylori.
Under the terms of the research agreement, the Company will be granted a
worldwide exclusive license to inventions made in the course of sponsored
research.

     Centre Hospitalier Universitaire Vaudois ("CHUV"); Max-Planck Institute. In
April 1992, the Company entered into a research and development agreement with
the Foundation Pour La Recherche Des Maladies GastroIntestinales ("Gastrofonds")
in Lausanne, Switzerland pursuant to which OraVax is sponsoring research in the
field of H. pylori at the CHUV in Lausanne, Switzerland, and at the Max-Planck
Institute in Tubingen, Germany. Pursuant to this agreement, Gastrofonds,
representing collaborating inventors at the CHUV and the Max-Planck Institute,
have assigned to OraVax title to two patent applications covering urease as a
vaccine for prevention and treatment of H. pylori infection. Also pursuant to
this agreement, Gastrofonds has granted the Company a worldwide exclusive
license to all patent rights and know-how developed during the course of the
sponsored research in the field of vaccine and secretory IgA products for
prevention or treatment of infections caused by H. pylori.

     Institut Pasteur. The Company also has a co-exclusive license, with
Merieux, to an issued patent and two patent applications owned by the Institut
Pasteur covering the H. pylori urease antigen, heat shock protein A (hspa) and
other antigens.

     Saint Bartholomew's Hospital Medical College. In October 1992, OraVax
entered into an agreement with The Medical College of Saint Bartholomew's
Hospital in London, England ("St. Bart's") pursuant to which the Company
sponsored, from October 1992 through August 1995, research relating to the
development of vaccine candidates for use in an oral vaccine directed against H.
pylori. Under the agreement, OraVax was granted worldwide nonexclusive license
to preexisting patent rights and know-how in the field of H. pylori developed by
St. Bart's, and worldwide exclusive license to all patent rights and know-how
developed during the course of the sponsored research.

     Vanderbilt University. In September 1993, the Company entered into a
license agreement with Vanderbilt University ("Vanderbilt") pursuant to which
Vanderbilt has granted to OraVax an exclusive worldwide license to patent rights
to a specific region of the gene for an H. pylori antigen, the Cag A antigen, as
a vaccine and diagnostic means and methods for detecting predisposition to
peptic ulceration, and to related know-how.

     OraVax anticipates that its H. pylori vaccine products will be used in
conjunction with mucosal adjuvants or mucosal antigen delivery systems. The
UreAB vaccine formulation tested in a Phase II clinical trial uses the native
heat-labile enterotoxin ("LT") produced by E. coli as a mucosal adjuvant. The
Company is aware of a patent application owned by a competitor claiming use of
LT combined with H. pylori antigens, including urease, against H. pylori
infection; whether this application will issue in the United States or in other
countries is uncertain. The Company currently has a license to the United States
Navy's patent application covering the use of native LT as a mucosal adjuvant.
The Company is aware of a patent owned by the Kitasato Institute that also
claims the use of native LT. The Company is also conducting research on the
polyphosphazene mucosal adjuvant and the Vibrio cholerae live-vector delivery
system under an option from Virus Research Institute in Cambridge,
Massachusetts. Other formulation technologies being evaluated include mutants of
LT that may have advantages in greater safety or potency, the Shigella
live-vector system developed by the Company and technologies developed or
controlled by Merieux. It is possible that the Joint Venture may need to obtain
a license to the patent rights owned by a third party covering a mucosal
adjuvant or mucosal antigen delivery system, and there can be no assurance that
the Company will be able to obtain any such license on favorable terms. See
"Risk Factors -- Patents and Proprietary Rights." See "Factors That May Affect
Future Results -- Patents and Proprietary Rights."

                                                                        Page 19
<PAGE>   20


     C. DIFFICILE PRODUCT DEVELOPMENT PROGRAM

     In March 1993, OraVax entered into a collaborative development and license
agreement with Techlab, Inc. ("Techlab") pursuant to which OraVax is sponsoring
research and the development of vaccines for the prevention of diseases caused
by C. difficile. With respect to technology developed during the course of the
collaboration, the Company will have title to all patent rights and know-how
invented by OraVax employees or developed jointly by Company and Techlab
employees, and Techlab will have title to all patent rights and know-how
developed solely by its employees. Techlab has granted to OraVax a worldwide
exclusive license to technology owned solely by Techlab. The Company has filed a
patent application covering its C. difficile vaccine product candidate and
related technology. The Company owns this patent application and any patents
issued thereon.

     GENERAL

     The Company's success will depend, in part, upon its ability to develop
patentable products and technologies and obtain patent protection for its
products and technologies both in the United States and other countries. The
Company is not aware of any issued third party patents which would interfere
with development of its RSV, H. pylori or C. difficile product candidates. There
can be no assurance that additional 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 or
with a competitive advantage. There can be no assurance that patents will not be
challenged or designed around by others. The Company could incur substantial
costs in proceedings before the United States Patent Office, including
interference proceedings. These proceedings could also result in adverse
decisions as to the patentability of the Company's licensed or assigned
inventions. Further, there can be no assurance that the Company will not
infringe upon prior or future patents owned by others, that the Company will not
need to acquire licenses under patents belonging to others for technology
potentially useful, or necessary to the Company, or that such licenses will be
available to the Company, if at all, on terms acceptable to the Company.
Moreover, there can be no assurance that any patent issued to or licensed by the
Company will not be infringed by others. Lastly, there can be no assurance that
third parties will not bring suit against the Company for patent infringement or
for declaratory judgment to have the patents owned or licensed by the Company
declared invalid. OraVax also relies on trade secrets and other unpatented
proprietary technology. No assurance can be given that the Company can
meaningfully protect its rights in such unpatented technology or that others
will not independently develop substantially equivalent products and processes
or otherwise gain access to the Company's technology. See "Factors That May
Affect Future Results -- Patents and Proprietary Rights."

     OraVax is engaged in research and development collaborations and licensing
arrangements with a number of academic, government and commercial research
groups. The Company has entered into these agreements to secure rights to
certain technologies, processes and compounds that it believes may be important
to the development of its products. See "Products Under Development" and
"Factors That May Affect Future Results -- Risks Associated with Collaborative
Arrangements."

     In general, the research and development agreements provide for OraVax
sponsorship of research and development in exchange for exclusive,
royalty-bearing licenses or options to the technology developed during the
course of the sponsored research. Certain of these agreements also include
nonexclusive licenses to preexisting technology rights. In general, the license
agreements grant to the Company exclusive licenses in exchange for varying
combinations of license fees, milestone payments, royalties and minimum
royalties. In addition, the license agreements typically place commercialization
obligations on the Company which, if not satisfied, may result in the licensor
having the right to render the license nonexclusive or to terminate the
agreement. In certain instances, the Company has obtained assignments of
technology, although the Company's ownership, IN some cases, is subject to
forfeiture for

                                                                        Page 20
<PAGE>   21


failure to commercialize. Typically, the agreements are terminable by either
party for breach. Further, the research agreements are generally terminable in
the discretion of either party and the license agreements are generally
terminable by the Company in its discretion.

COMPETITION

     The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being 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 the Company. In addition, some of the
Company'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, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. There can be no assurance that the
Company'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
United States or elsewhere. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiency and marketing capabilities, areas in which it has limited 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 OraVax in
recruiting highly qualified scientific personnel. See "Factors That May Affect
Future Results -- Competition and Technological Change."

     The Company is aware of certain programs under development by competitors
that are targeted for the prevention or treatment of certain diseases that the
Company has identified as product development areas, including RSV and H.
pylori. Certain of the Company's competitors are developing antibody products
for the prevention of disease caused by RSV, and one such competitor has
recently received U.S. regulatory approval for marketing its intravenous IgG
(systemic) antibody product. The same company has developed a monoclonal IgG
antibody for administration by injection and submitted an application for
marketing approval to the U.S. FDA in late 1997. In addition, certain
competitors of the Company are engaged in H. pylori research. However, the
Company is not aware of any company that has initiated clinical trials of an H.
pylori vaccine product candidate. The existence of products developed by these
competitors, or other products or treatments of which the Company is not aware,
or products or treatments that may be developed in the future, may adversely
affect the marketability of products developed by the Company.

GOVERNMENT REGULATION

     Regulation by governmental authorities in the United States and other
countries will be a significant factor in the manufacturing and marketing of any
products that may be developed by the Company. The nature and extent to which
such regulation may apply to the Company will vary depending on the nature of
any such products. All of the Company's products will require regulatory
approval by governmental agencies prior to commercialization. Human
therapeutics, in particular, are subject to rigorous preclinical and clinical
testing and other approval procedures by the FDA and similar health authorities
in foreign countries. Various federal statutes and regulations also govern or
influence

                                                                        Page 21
<PAGE>   22


the manufacturing, safety, labeling, storage, record keeping and marketing of
such products.

     The Immunization Practices Advisory Committee ("ACIP") of the CDC has a
role in setting the market for most, if not all, of the products OraVax intends
to make. The ACIP meets quarterly to review developing data on licensed
vaccines, and those approaching license, as well as epidemiologic data on the
need for these products. The recommendations of ACIP on the appropriate use of
vaccines and related products are published in the Morbidity and Mortality
Weekly Report and reprinted in several journals. The CDC develops epidemiologic
data in support of the need for new vaccines and monitors vaccine usage and
changes in disease incidence. In addition CDC staff frequently act as key
advisors to the FDA in their review process.

     The Company believes that both its vaccines and antibody products will be
classified by the FDA as "biologic products" as opposed to "drug products." New
biologic products must satisfy several requirements in order to receive
regulatory approval, including: preclinical laboratory and animal tests;
submission by the Company or an individual physician to the FDA of an
application for an IND, or submission to an Institutional Review Board of a
research institution for approval of intrastate trials, one of which must become
effective before human clinical trials may start, the performance of
well-controlled clinical trials; and the submission of a Product License
Application ("PLA") containing the results of clinical trials and manufacturing
information prior to commercial sale or shipment of the product. During the
approval process, the FDA must confirm that appropriate standards were
maintained during product testing and that the product meets regulatory
standards for safety and efficacy. In addition to obtaining FDA approval for
each PLA, an Establishment License Application ("ELA") must be filed and
approved by the FDA for the manufacturing facilities for a biologic product
before commercial marketing of the biologic product is permitted. As a
consequence of regulatory reforms initiated in 1995, a formal ELA may not be
needed for some of the Company's product candidates. However, manufacturing
practices will continue to be subject to FDA regulations and review. The
regulatory process may take many years and requires the expenditure of
substantial resources. Before testing of any agents with potential therapeutic
value in healthy human test subjects or patients may begin, government
requirements for preclinical data must be satisfied. These data, obtained from
studies in animals, as well as from laboratory studies, are generally submitted
in an IND application or its equivalent in countries outside the United States
where clinical studies are to be conducted. These preclinical data must provide
an adequate basis for evaluating both the safety and the scientific rationale
for the initial Phase 1 studies in human volunteers.

     Phase I clinical studies are generally performed in healthy human subjects
or, occasionally, selected patients with the targeted disease or disorder. The
goal of the Phase I study is to establish initial data about safety and
tolerance of the drug in humans. Also, the first data regarding the absorption,
distribution, metabolism and excretion of the drug in humans, or the immune
response to a vaccine, may be obtained. In Phase II human clinical studies,
evidence is sought about the desired therapeutic efficacy of a drug or antibody,
or the immune response to a vaccine, in limited studies with small numbers of
carefully selected subjects. Efforts are made to evaluate the effects of various
dosages and to establish an optimal dosage level and dosage schedule. Additional
safety data are also gathered from these studies. The Phase III clinical
development program consists of expanded, large scale, multicenter studies of
patients with the target disease or disorder, or in the case of a preventive
antibody or vaccine, who are susceptible to the disease. The goal of these
studies is to obtain definitive statistical evidence of the efficacy and safety
of the proposed product and dosage regimen.

     At the same time that the human clinical program is being performed,
additional non-clinical (animal) studies may also be conducted. In addition,
expensive, long duration toxicity, teratogenicity (birth defects) and
carcinogenicity studies may be required to demonstrate the safety of drug
administration for the extended period of time required for effective therapy.
Also, a variety of laboratory, animal and initial human studies are performed to
establish manufacturing methods for the

                                                                        Page 22
<PAGE>   23


drug, as well as stable, effective dosage forms.

     All data obtained from this comprehensive development program are submitted
as a PLA to the FDA and the corresponding agencies in other countries for review
and approval. FDA approval of the PLA and the associated manufacturing
documentation is required before marketing may begin in the United States.
Although the FDA's policy is to review priority applications within 180 days of
their filing, in practice longer times may be required. The FDA frequently
requests that additional information be submitted requiring significant
additional review time. Essentially, all proposed products of the Company will
be subject to demanding and time-consuming PLA or similar approval procedures in
the countries where the Company intends to market its products. These
regulations define not only the form and content of the development of safety
and efficacy data regarding the proposed product, but also impose specific
requirements regarding manufacture of the product, quality assurance, packaging,
storage, documentation and record keeping, labeling and advertising, and
marketing procedures. Effective commercialization also requires inclusion of the
Company's products in national, state, provincial, or institutional formularies
or cost reimbursement systems.

     In addition, the activities of the Company, and its potential partners and
licensees are subject to laws and regulations regarding, among other things,
occupational safety, the use and handling of radioisotopes, environmental
protection, laboratory and manufacturing working conditions, handling and
disposition of potentially hazardous materials, and use of laboratory animals.

     Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities may be necessary in foreign countries prior to
the commencement of marketing of the product in such countries. The approval
procedure varies among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there is now a
centralized European Community approval mechanism in place, each European
country may nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive. Thus, there can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. The Company expects to
rely on corporate partners and licensees, along with Company expertise, to
obtain governmental approval in foreign countries of drug formulations utilizing
its compounds. See "Factors That May Affect Future Results -- Government
Regulation; No Assurance of Regulatory Approval."

HEALTHCARE REIMBURSEMENT

     In both domestic and foreign markets, sales of the Company's products, if
any, will depend, in part, on the availability of reimbursement from third-party
payers, such as government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the price and cost-effectiveness of medical products. There can be
no assurance that the Company's products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company
to maintain price levels sufficient to realize an appropriate return on its
investment in product development. See "Factors That May Affect Future Results
-- Uncertainty of Third-Party Reimbursement."

PRODUCT LIABILITY

     The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's products or clinical trials may expose the Company to
product liability claims and possible adverse publicity. These risks also exist
with respect to the Company'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 a Company with products at this stage of clinical development.
The Company does not have product liability insurance for the commercial sale of
its

                                                                        Page 23
<PAGE>   24


products but intends to obtain such coverage if and when its products are
commercialized. However, such coverage is becoming increasingly expensive and
there can be no assurance that the Company 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.

     If and when the Company manufactures vaccines which are recommended for
routine administration to children, it is possible that the Company will be
required to participate in the National Vaccine Injury Compensation Program.
This program compensates children having adverse reactions to certain routine
childhood immunizations with funds collected through an excise tax from the
manufacturers of these vaccines.

EMPLOYEES

     As of March 13, 1998, OraVax employed a work force of 75 persons including
61 persons employed full-time, of which 6 are leased employees, and 8 persons
employed part-time. Of this total work force, 57 persons are engaged in research
and development activities and 18 are devoted to research and facilities support
and administrative activities. 18 persons hold Ph.D. or M.D. degrees. A
significant number of the Company's management and professional employees have
had prior experience with pharmaceutical, biotechnology or medical products
companies. OraVax believes that it has been successful in attracting skilled and
experienced scientific personnel; however, competition for such personnel is
intense. See "Factors That May Affect Future Results -- Dependence on Attraction
and Retention of Key Employees." OraVax believes that its relationships with its
employees are good.

ACADEMIC CONSULTANTS

     OraVax has relationships with a number of academic consultants. These
persons are not employees of the Company. Accordingly, the Company has limited
control over their activities and can expect only limited amounts of their time
to be dedicated to the Company's activities. These persons may or may not enjoy
relationships with other commercial entities, some of which could compete with
the Company. Although the precise nature of each relationship varies, the
consultants generally sign agreements which provide for confidentiality of the
Company's proprietary information and results of studies but not for the
assignment of inventions. There can be no assurance that OraVax will in
connection with every relationship be able to maintain the confidentiality of
the Company's technology, dissemination of which could have a materially adverse
effect on the Company's business. Further, there can be no assurance that the
Company will be able to license inventions and technology discovered by such
consultants. See "Factors That May Affect Future Results -- Patents and
Proprietary Rights."

                                                                        Page 24
<PAGE>   25

ITEM 2. PROPERTIES

        The Company's administrative offices and research facilities consist of
an aggregate of approximately 53,000 square feet of leased space at 38 Sidney
Street, Cambridge, Massachusetts. The Company moved its principal offices to the
38 Sidney Street location from a nearby building in Cambridge in December 1995,
significantly expanding its available laboratory and office space and improving
its facilities. In January 1996, the Company leased a fully-equipped
manufacturing facility of approximately 47,000 square feet in Canton,
Massachusetts and purchased substantial related equipment from the former
tenant. This facility was specifically designed and equipped by the former
tenant for the manufacture of biological products. The Company anticipates that
its initial use of the facility will be for the production of vaccines for the
Joint Vaccine Acquisition Program, of the U.S. Department of Defense. The
facility will also accomodate production development activities for OraVax's
proprietary products depending on the outcome of product development. Existing
building and capital equipment leases, which include renewal and purchase
options, were transferred to the Company. In addition, the Company purchased
leasehold improvements and other related assets from the former tenant, payable
in installments through 1999. The Company believes these facilities are adequate
for its needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not a party to any litigation or legal proceedings that
it believes could have a material adverse effect on the Company or its business.

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

        No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.



                                                                         Page 25

<PAGE>   26

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share. As of March 13, 1998, there were issued and
outstanding 10,405,641 shares of Common Stock held by approximately 196
stockholders of record and 6,250 shares of 6% Convertible Preferred Stock
("Convertible Preferred Stock") held by approximately 32 stockholders of record.

COMMON STOCK

        The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol ORVX since June 7, 1995. Prior to June 7, 1995, the
Company's Common Stock was not publicly traded. The following table sets forth
for the periods indicated the high and low sales prices per share of the Common
Stock as reported by the Nasdaq National Market.


    1997                                               HIGH        LOW
    ----                                               ----        ---
First Quarter                                         $ 7.00      $ 2.375
Second Quarter                                          3.625       2.25
Third Quarter                                           2.75        2.125
Fourth Quarter                                          4.25        1.75

    1996
    ----
First Quarter                                         $15.00      $11.00
Second Quarter                                         14.50        7.25
Third Quarter                                           9.25        6.50
Fourth Quarter                                         10.75        5.25

    1995
    ----
First Quarter                                         N/A           N/A
Second Quarter (June 9, 1995 - June 30, 1995)         10.125        7.25
Third Quarter                                         16.75         8.25
Fourth Quarter                                        14.875        9.50

        On March 13, 1998, the closing price of the Company's Common Stock on
the Nasdaq National Market was $1.875. The Company has never paid dividends on
its Common Stock. The Company currently intends to reinvest its earnings, if
any, for use in the business and does not expect to pay cash dividends in the
foreseeable future.

6% CONVERTIBLE PREFERRED STOCK

        In December 1997, the Company issued and sold in a private placement to
certain accredited investors for $1,000 per share an aggregate of 6,300 shares
of Convertible Preferred Stock, resulting in gross proceeds to the Company of
$6.3 million in the aggregate.

        Each share of Convertible Preferred Stock is entitled to receive
cumulative dividends at the rate of $60.00 per share per annum, payable in
shares of Convertible Preferred Stock valued at $1,000

                                                                         Page 26

<PAGE>   27

per share, when and as declared by the Company's Board of Directors. Such
dividends accrue from day to day whether or not earned or declared. Each share
of Convertible Preferred Stock is also entitled to a liquidation preference of
$1,000 per share, plus any accrued but unpaid dividends, in preference to any
other class or series of capital stock of the Company. Except to determine
whether such stock is entitled to its liquidation preference under certain
circumstances, and as provided by applicable law, holders of shares of
Convertible Preferred Stock have no voting rights.

        All of the Convertible Preferred shares are fully convertible, at the
option of the holder. On December 23, 2002, all outstanding shares of
Convertible Preferred Stock will automatically be converted into Common Stock.

        The number of shares of Common Stock issuable upon conversion of shares
of Convertible Preferred Stock will equal the liquidation preference of the
shares being converted divided by the then-effective conversion price applicable
to the Convertible Preferred Stock (the "Conversion Price"). The Conversion
Price is the lowest trading price of the Common Stock during the 22 consecutive
trading days immediately preceding the date of conversion reduced by the
Applicable Percentage described below. The "Applicable Percentage", which is
dependent upon the time elapsed after the date of issuance to the date of
measurement, will be 5.000% starting on the first day of the fourth month after
the date of issuance and will increase in the subsequent 14 months to 6.125%,
7.250%, 8.375%, 9.500%, 10.625%, 11.750%, 12.875%, 14.000%, 15.125%, 16.250%,
17.375%, 18.500%, 19.750% and 21.000%, respectively. At any date after the first
day of the eighteenth month after the date of issuance, the Conversion Price
will be the lesser of (i) 79% of the average of the daily low trading prices of
the Common Stock for the eighteenth month, (ii) 79% of the average of the daily
low trading prices of the Common Stock for the twenty-fourth month, and (iii)
79% of the average of the daily low trade prices of the Common Stock for the
thirtieth month. The Conversion Price is at all times also subject to customary
anti-dilution adjustment for events such as stock splits, stock dividends,
reorganizations and certain mergers affecting the Common Stock. No holder of
Convertible Preferred Stock will be entitled to convert any share of Convertible
Preferred Stock into shares of Common Stock if, following such conversion, the
holder and its affiliates (within the meaning of the Exchange Act) will be the
beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of 10% or
more of the outstanding shares of Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

        The information required by this Item is attached as APPENDIX A.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The information required by this Item is attached as APPENDIX B.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this Item is attached as APPENDIX C.


                                                                         Page 27

<PAGE>   28

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        There have been no disagreements on accounting and financial disclosure
matters.



                                                                         Page 28

<PAGE>   29

                                    PART III


ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

         The executive officers and directors of the Company are as follows:


<TABLE>
<CAPTION>
Name                                            Age    Title
----                                            ---    -----
<S>                                             <C>    <C>

Lance K. Gordon, Ph.D.........................  50     President, Chief Executive Officer and Director
Thomas P. Monath, M.D.........................  57     Vice President, Research and Medical Affairs
Robert J. Gerety, M.D., Ph.D..................  58     Vice President of Development and Regulatory
                                                       Affairs
Douglas MacMaster (1)(2)......................  67     Chairman of the Board of Directors
C. Boyd Clarke (1)............................  49     Director
Andre L. Lamotte, Sc.D.(2)....................  48     Director
Allen Misher, Ph.D. (2).......................  66     Director
</TABLE>

----------
(1)Member of the Audit Committee of the Board of Directors.
(2)Member of the Compensation Committee of the Board of Directors.

         LANCE K. GORDON, PH.D. has served as the President and Chief Executive
Officer and a member of the Board of Directors of the Company since June 1990.
From January 1989 to June 1990, Dr. Gordon served as Senior Vice President of
North American Vaccine, Inc., a biopharmaceutical company. From April 1988 to
January 1989, he served as Chief Executive Officer of American Vaccine
Corporation and Selcore Laboratories, Inc., both of which are biopharmaceutical
companies. From 1987 to 1988, Dr. Gordon was Associate Director, Infectious &
Inflammatory Diseases, Clinical Pharmacology -- Drug Medical Affairs, of E.R.
Squibb & Sons, Inc., a pharmaceutical company. From 1981 to 1987, he was
Director, Immunobiology Research at Connaught Laboratories, Ltd., a
pharmaceutical company. During his seven years with Connaught Laboratories,
Ltd., Dr. Gordon was responsible for both bacterial and viral research and
development programs. He was the inventor and Project Director of the Connaught
Haemophilus influenzae type b conjugate vaccine, ProHibit. Dr. Gordon also
serves on the advisory boards of the not-for-profit Albert Sabin Foundation and
BioSciences Contract Production, a private biopharmaceutical services company.
Dr. Gordon received a B.A. from the University of California at Humboldt and a
Ph.D. in Biomedical Science from the University of Connecticut. Dr. Gordon
completed his postdoctoral fellowship at the Howard Hughes Medical Institute.

         THOMAS P. MONATH, M.D. has served as Vice President, Research and
Medical Affairs of the Company since December 1993. From April 1992 to December
1993, he served as Vice President, Research and Development of the Company and
from October 1991 to March 1992, he served as a consultant to the Company. From
November 1988 to October 1991, Dr. Monath was Chief, Virology Division of the
United States Army Medical Research Institute of Infectious Diseases, Fort
Detrick, Maryland. As Chief of the Virology Division, Dr. Monath directed the
development of conventional and genetically engineered viral vaccines and the
discovery, evaluation, preclinical testing and clinical development of antiviral
drugs. Dr. Monath currently serves as a member of the Steering Committee

                                                                         Page 29

<PAGE>   30

on Dengue and Japanese Encephalitis of the Global Program for Vaccines and
Immunization of the World Health Organization. In 1997 Dr. Monath was named to
the National Vaccines Advisory Committee. Dr. Monath received a B.A. from
Harvard College and an M.D. from Harvard Medical School.

         ROBERT J. GERETY, M.D., PH.D. has served as Vice President of
Development and Regulatory Affairs of the Company since April 1997. From July
1994 until he resigned in December 1996, Dr. Gerety was President and Chief
Executive Officer of ImmuLogic Pharmaceutical Corporation ("ImmuLogic"), a
biopharmaceutical company that develops products with an emphasis on the
treatment of allergies, autoimmune diseases and drugs of abuse. From October
1993 to July 1994, he served as ImmuLogic's Executive Vice President of
Pharmaceutical Development. Prior to October, 1993, Dr. Gerety was Vice
President of Development Operations at Biogen Inc., a biopharmaceutical company
engaged in developing, manufacturing and marketing drugs for human healthcare.
From June 1985 through September 1989, Dr. Gerety was an Executive Director of
Merck & Co. and head of virus and cell biology at Merck & Co. Dr. Gerety
received a B.A. from Rutgers University, an M.D. from the George Washington
School of Medicine and M.A. and Ph.D. degrees from Stanford University Medical
School.

         DOUGLAS MACMASTER has served as a director of the Company since March
1993 and was elected Chairman of the Board of Directors in April 1994. From July
1988 until his retirement in January 1992, Mr. MacMaster served as a Senior Vice
President of Merck & Co., Inc. ("Merck"), a pharmaceutical company, with
responsibility for worldwide chemical and pharmaceutical manufacturing,
worldwide construction, the Agvet division and the Speciality Chemicals Group.
From October 1985 to July 1988, Mr. MacMaster was President of the Merck Sharp &
Dohme Division, with responsibility for the United States human healthcare
business. Mr. MacMaster was an employee of Merck for 30 years. He is currently
on the Board of Directors of American Precision Industries, Inc., Martek
Biosciences Corp., Neose Pharmaceuticals, Inc., Phyto Pharmaceuticals Inc. and
U.S. Bioscience, Inc. Mr. MacMaster received his A.B. degree from St. Francis
Xavier University (Canada) and his J.D. degree from Boston College Law School.

         C. BOYD CLARKE, was elected a director of the Company in March 1997.
Since September 1996, Mr. Clarke has served as President of U.S. Bioscience,
Inc., a pharmaceutical company specializing in the development and
commercialization of products for patients with cancer and AIDS. From January
1995 to May 1996, Mr. Clarke served as Vice President, Strategy, Alliance
Management and Development for Merck Vaccines, where he managed a global
alliance with Pasteur Merieux for the development of vaccines. Mr. Clarke served
in other capacities at various units of Merck & Co., Inc. since 1977. Mr. Clarke
received a B.S. in biochemistry and a M.A. in European History from the
University of Calgary and was a doctoral candidate in European History at
University of Wisconsin.

         ANDRE L. LAMOTTE, SC.D. has served as a director of the Company since
April 1990. Since April 1989, he has served as the Managing General Partner of
Medical Science Ventures, the General Partner of Medical Science Partners L.P.,
and as Managing General Partner of Medical Science Ventures II, the General
Partner of Medical Science Partners II, L.P. and Medical Science II Co-
Investment L.P. Dr. Lamotte received a B.S. in General Engineering from Ecole
Centrale Paris, an M.S. in Chemical Engineering and an Sc.D. in Chemical
Engineering from the Massachusetts Institute of Technology, and a M.B.A. from
the Harvard Graduate School of Business Administration.

         ALLEN MISHER, PH.D. has served as a director of the Company since
January, 1996. He was elected by the Board of Directors to fill a vacancy
created by the resignation of Robert E. Curry as a Director. Dr. Misher is a
consultant. From 1984 to 1994, he served as President of Philadelphia College of
Pharmacy and Science. From 1982 to 1984, he was a Senior Vice President of
National Medical Care, Inc. From 1964 to 1982 he was employed by SmithKline &
French and SmithKline Corp. in a variety of positions in pharmacology and
research, including President of SmithKline Medical Diagnostics Group from 1978
to 1982 and Group Vice President of SmithKline Corp. from

                                                                         Page 30

<PAGE>   31

1978 to 1982. He is currently on the Board of Directors of U.S. Bioscience and
Cortech, Inc. Dr. Misher received his B.Sc. from Philadelphia College of
Pharmacy and Science and his Ph.D. in Physiology from the University of
Pennsylvania.

         The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term. The Board is comprised of two
Class I Directors (Mr. MacMaster and Dr. Lamotte), two Class II Directors (Mr.
Clarke and Dr. Misher) and one Class III Director (Dr. Gordon). At each annual
meeting of stockholders, a class of directors will be elected for a three-year
term to succeed the directors of the same class whose terms are then expiring.
The terms of the Class I Directors, Class II Directors and Class III Directors
will expire upon the election and qualification of successor directors at the
annual meeting of stockholders held during the calendar years 1999, 2000 and
1998, respectively.

         The Board of Directors has a Compensation Committee comprised of Drs.
Lamotte and Misher and Mr. MacMaster, which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to the
Company, and an Audit Committee comprised of Messrs. Clarke and MacMaster, which
reviews the results and scope of the audit and other services provided by the
Company's independent public accountants.



                                                                         Page 31

<PAGE>   32

ITEM 11. EXECUTIVE COMPENSATION

         EXECUTIVE COMPENSATION. The following table sets forth certain
information with respect to the compensation paid by the Company during the
fiscal years ended December 31, 1995, 1996 and 1997 to the Company's Chief
Executive Officer and each of the Company's four other most highly compensated
executive officers whose cash compensation exceeded $100,000 in 1997 (the Chief
Executive Officer and such other executive officers are hereinafter referred to
as the "Named Executive Officers"):

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
<CAPTION>
                                                                                               LONG TERM
                                                                                              COMPENSATION

                                                          ANNUAL COMPENSATION(1)                AWARDS
                                                                                              SECURITIES
                                                                          OTHER ANNUAL        UNDERLYING          ALL OTHER
                                       YEAR    SALARY        BONUS(2)    COMPENSATION(3)      OPTIONS(#)     COMPENSATION($)(4)
                                      -----   ---------   ----------    ---------------       -----------    ------------------
<S>                                    <C>     <C>           <C>            <C>                 <C>           <C>
Lance K. Gordon                        1997    $250,000      $62,500        $ 8,522             100,000               ---
President and Chief                    1996    $250,000      $56,250        $ 6,067              40,000               ---
Executive Officer                      1995    $220,500      $40,794        $ 7,009                 ---           $45,653

Thomas P. Monath                       1997    $190,000      $52,500        $ 3,417              50,000               ---
Vice President, Research               1996    $190,000      $42,750        $ 2,250                 ---               ---
and Medical Affairs                    1995    $157,500      $29,138        $ 5,034                 ---               ---

Robert J. Gerety                       1997    $188,815      $37,500        $43,855             125,000               ---
Vice President of                      1996        ---          ---             ---                 ---               ---
Development and Regulatory             1995        ---          ---             ---                 ---               ---
Affairs

Keith S. Ehrlich(5)                    1997    $145,000      $36,250        $10,017              75,000               ---
Vice President, Finance and            1996    $145,000      $26,100        $   799              10,000               ---
Administration                         1995    $131,250      $24,938        $ 1,039                 ---               ---
</TABLE>

----------
(1)  Includes amounts payable in a subsequent fiscal year for services rendered
     by the Named Executive Officer in the fiscal year.
(2)  Other compensation in the form of perquisites and other personal benefits
     has been omitted because it constitutes less than the lesser of $50,000 or
     ten percent of the total annual salary and bonus for the Named Executive
     Officer.
(3)  Includes term-life insurance premiums and financial planning expenses paid
     by the Company to the Named Executive Officer.
(4)  Represents relocation allowances paid by the Company.
(5)  Mr. Ehrlich resigned as an officer of the Company effective as of
     January 29, 1998.




                                                                         Page 32

<PAGE>   33

         OPTION GRANT TABLE. The following table sets forth certain information
regarding options granted by the Company to the Named Executive Officers during
the fiscal year ended December 31, 1997:

                        OPTION GRANTS IN LAST FISCAL YEAR

                               Individual Grants


<TABLE>
<CAPTION>
                                                                                                         Potential
                                                                                                      Realizable Value
                                                                                                         at Assumed
                                 Number of        Percent of                                             Stock Price
                                 Shares of       Total Options                                         Annual Rates of
                               Common Stock       Granted to                                            Appreciation
                                 Underlying        Employees                                         For Option Term(1)
                                  Options          in Fiscal        Exercise      Expiration
Name                            Granted(#)           Year          Price($/sh)       Date             5%($)      10%($)
----                           ------------      -------------     -----------    ----------        --------------------
<S>                               <C>              <C>              <C>           <C>               <C>         <C>

Lance K. Gordon............       100,000          20.1%            $2.50         3/24/07           $157,224    $398,436
Thomas P. Monath...........        50,000(2)       10.0%            $2.50         3/24/07            $78,610    $199,220
Robert J. Gerety...........       125,000(3)       25.1%            $3.00         4/03/07           $235,838    $597,653
Keith S. Ehrlich(4)........        75,000          15.0%            $2.50         3/24/07           $117,915    $298,830
</TABLE>

----------
(1) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term. These gains
    are based on assumed rates of stock price appreciation of 5% and 10%
    compounded annually from the date the respective options were granted to
    their expiration date. This table does not take into account any
    appreciation in the price of the Common Stock to date. Actual gains, if
    any, on stock option exercises will depend on the future performance of the
    Common Stock and the date at which the options are exercised.
(2) Option vests in 16 equal quarterly installments commencing on
    March 31, 1997.
(3) Option vests in four equal annual installments commencing on April 3, 1998.
(4) Mr. Ehrlich resigned as an officer of the Company effective
    January 29, 1998.

     YEAR-END OPTION TABLE. The following table sets forth certain information
regarding stock options exercised during the year ended December 31, 1997 and
stock options held as of December 31, 1997, by the Named Executive Officers:



                                                                         Page 33

<PAGE>   34

                      AGGREGATED OPTION EXERCISES IN LAST
                        FISCAL YEAR AND FISCAL YEAR-END
                                 OPTION VALUES


<TABLE>
<CAPTION>
                                      Number of                         Number of Shares
                                      Shares of                      Underlying Unexercised     Value of Unexercised In-
                                    Common Stock        Value              Options at             the-Money Options at
                                     Acquired on       Realized        Fiscal Year-End (#)        Fiscal Year-End($)(2)
Name                                Exercise (#)        ($)(1)      Exercisable/unexercisable  Exercisable/unexercisable
----                               --------------      --------     -------------------------  -------------------------
<S>                                <C>                 <C>          <C>                         <C>
Lance K. Gordon..................        ---             ---             176,223/93,003               $132,546/$0
Thomas P. Monath.................        ---             ---             148,557/48,502                $92,497/$0
Robert J. Gerety.................        ---             ---                ---/125,000                    ---/$0
Keith S. Ehrlich(3)..............        ---             ---              64,554/60,500                     $0/$0
</TABLE>

----------
(1) Represents the difference between the exercise price and the fair market
    value on the date of exercise.
(2) Based on the fair value of the Common Stock on December 31, 1997 ($1.75),
    less the option exercise price.
(3) Mr. Ehrlich resigned as an officer of the Company effective as of
    January 29, 1998.

         DIRECTOR COMPENSATION. Except as described below, the Company's
directors do not receive any cash compensation for service on the Board of
Directors or any committee thereof, but are reimbursed for actual expenses
incurred in connection with attending meetings of the Board and any committee
thereof. The Company pays reasonable travel and out-of-pocket expenses incurred
by non-employee Directors in connection with attendance at meetings to transact
the business of the Company or attendance at meetings of the Board of Directors
or any committee thereof. In April 1994, the Company entered into an agreement
with Mr. MacMaster, Chairman of the Board of Directors, pursuant to which Mr.
MacMaster receives an annual retainer of $25,000 paid quarterly in advance, a
fee of $2,000 per day for attending meetings of the Board of Directors or other
meetings attended at the request of the Company's President or the Board of
Directors, including monthly advisory meetings, plus travel expenses. Mr.
MacMaster received an option effective February 6, 1995, to purchase 12,750
shares of Common Stock at an exercise price of $3.529 per share. The option
vests in five equal annual installments commencing one year after the date of
grant. In February 1996, the Company entered into an agreement with Dr. Misher
pursuant to which Dr. Misher receives an annual retainer of $5,000 and a fee of
$1,500 per meeting of the Board of Directors attended. In addition, on February
5, 1996, Dr. Misher received an option to purchase 10,000 shares of Common Stock
at an exercise price of $13.25 per share. The option vests in three equal annual
installments commencing one year after the date of grant. In March 1997, the
Company entered into an agreement with Mr. Clarke pursuant to which Mr. Clarke
receives an annual retainer of $5,000 and a fee of $1,500 per meeting of the
Board of Directors attended. In addition, on March 7, 1997, Mr. Clarke received
an option to purchase 10,000 shares of Common Stock at an exercise price of
$5.50 per share. The option vests in three equal annual installments commencing
one year after the date of grant.

EMPLOYMENT AGREEMENTS

         Under the terms of an employment agreement dated July 19, 1990, Dr.
Gordon serves as President, Chief Executive Officer and a director of the
Company and is entitled to receive an annual base salary, as determined by the
Board of Directors, plus a bonus based upon the achievement of certain defined
management objectives. The employment agreement automatically renews for



                                                                         Page 34

<PAGE>   35

successive 12-month periods. Dr. Gordon's employment is terminable (i) by the
Company or Dr. Gordon at any time upon not less than six months' prior written
notice or (ii) by the Company, for "cause" (as defined in the employment
agreement), immediately upon written notice. In the event the Company elects not
to extend the employment agreement or terminates Dr. Gordon without "cause," the
Company must pay Dr. Gordon a one time severance payment equal to fifty percent
(50%) of his annual base salary in effect at the time. Dr. Gordon has agreed,
for a period of one year following termination of his employment, not to engage
in any business activity that directly or indirectly competes with the Company
or to provide any services to the Company's competition or its clients. Dr.
Gordon also has agreed not to disclose any of the Company's proprietary
information to third parties without the written approval of the Company either
during or after his employment. In connection with the execution of his
employment agreement, the Company agreed to sell, and Dr. Gordon agreed to buy,
70,834 shares of the Company's Common Stock at a purchase price of $0.235 per
share. See "Certain Transactions."

         Under the terms of an employment agreement dated October 18, 1991, Dr.
Monath serves as Vice President, Research and Development and is entitled to
receive an annual base salary as determined by the Board of Directors and to
participate in the bonus program for the Company's executive officers. Pursuant
to the employment agreement, the Company granted Dr. Monath an option to
purchase 39,006 shares of the Company's Common Stock at $0.706 per share,
vesting over a four-year period, and reimbursed Dr. Monath for expenses
associated with his relocation to the Boston, Massachusetts area.

         Under the terms of an employment agreement dated April 3, 1997, Dr.
Gerety serves as Vice President of Development and Regulatory Affairs and is
entitled to receive an annual base salary as determined by the Board of
Directors and to participate in the bonus program for the Company's executive
officers. Pursuant to the employment agreement, the Company granted Dr. Gerety
an option to purchase 125,000 shares of the Company's Common Stock at $3.00 per
share, vesting over a four-year period.

         Each of the employment agreements with Drs. Monath and Gerety is for an
initial period of three years and is thereafter automatically renewable for
successive twelve-month periods unless terminated by either party by giving
six-months' prior written notice to the other. The employment of Drs. Monath and
Gerety is terminable by the Company, by giving prior written notice, at any
time, with or without "cause" (as defined in their employment agreements). In
the event the Company terminates Dr. Monath's or Dr. Gerety's employment without
"cause," the terminated party is entitled to receive his then current salary for
a period of six months following such termination. In addition, Drs. Monath and
Gerety have agreed, for a period of three years, not to engage in any business
activity that directly or indirectly competes with the Company or to provide any
services to the Company's competition. Drs. Monath and Gerety have also entered
into Confidential Information and Invention Assignment Agreements with the
Company pursuant to which each of them has agreed (i) not to disclose any of the
Company's proprietary information to third parties without the prior written
approval of the Company either during or after his employment and (ii) to assign
to the Company his full right and title in and to any inventions made during the
course of his employment with the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The current members of the Compensation Committee are Drs. Lamotte and
Misher and Mr. MacMaster. No member of the Compensation Committee was at any
time during 1997, or formerly, an officer or employee of the Company or any
subsidiary of the Company, nor has any member of the Compensation Committee had
any relationship with the Company requiring disclosure under Item 404 of
Regulation S-K under the Securities Exchange Act of 1934.



                                                                         Page 35

<PAGE>   36

         During 1997, no executive officer of the Company has served as a
director or member of the Compensation Committee (or other committee serving an
equivalent function) of any other entity, one of whose executive officers served
as a director of or member of the Compensation Committee of the Company.

REPORT OF THE COMPENSATION COMMITTEE

         The executive compensation program of the Company is administered by
the Compensation Committee, composed of Drs. Lamotte and Misher and Mr.
MacMaster, all of whom are non-employee directors.

         The Company's executive compensation program is designed to retain and
reward executives who are capable of leading the Company in the achievement of
its business objectives. All decisions by the Compensation Committee relating to
the compensation of the Company's officers are reviewed by the full Board.

         COMPENSATION PHILOSOPHY

         The objectives of the executive compensation program are (i) to align
compensation with business objectives and individual performance and (ii) to
attract, retain and reward executive officers who contribute to the long-term
success of the Company. The Company's executive compensation philosophy is based
on the principles of competitive and fair compensation and sustained
performance.

                  Competitive and Fair Compensation. The Company is committed to
providing an executive compensation program that helps attract and retain highly
qualified executives. To ensure that compensation is competitive, the Company
compares its compensation practices with those of other companies in the
industry and sets its compensation guidelines based on this review. The Company
believes compensation for its executive officers is within the range of
compensation paid to executives with comparable qualifications, experience and
responsibilities in companies with similar businesses and of comparable size and
success. The Company also strives to achieve equitable relationships both among
the compensation of individual officers and between the compensation of officers
and other employees throughout the organization.

                  Sustained Performance. Executive officers are rewarded based
upon corporate performance and individual performance. Corporate performance is
evaluated by reviewing the extent to which strategic and business plan goals are
met, including such factors as achievement of operating budgets, establishment
of strategic licensing and development alliances with third parties, timely
development of new processes and products, and performance relative to
competitors. Individual performance is evaluated by reviewing attainment of a
specified individual objectives and the degree to which teamwork and company
values are fostered.

         In evaluating each executive officer's performance, the Company
generally conforms to the following process:

         -   Company and individual goals and objectives generally will be set
             at the beginning of the performance cycle.

         -   At the end of the performance cycle, the accomplishment of the
             executive's goals and objectives and his contributions to the
             Company will be evaluated.


                                                                         Page 36

<PAGE>   37

         -   The executive's performance will then be compared with peers within
             the Company and the results will be communicated to the executive.

         -   The comparative results, combined with comparative compensation
             practices of other companies in the industry, will be then used to
             determine salary and stock compensation levels.

         Annual compensation for the Company's executives generally consists of
three elements -- salary, cash bonuses and stock options.

         The salary for executives is generally set by reviewing compensation
for competitive positions in the market and the historical compensation levels
of the executives. Increases in annual salaries and payment of bonus awards will
be based on actual corporate and individual performance against targeted
performance and various objective performance criteria. Targeted performance
criteria vary for each executive are based on his area of responsibility, and
may include continued innovation and development of the Company's technology and
products, timely development of new products or processes, implementation of
financing strategies and establishment of strategic licensing and developmental
alliances with third parties. Subjective performance criteria include an
executive's ability to motivate others, develop the skills necessary to grow as
the Company matures, recognize and pursue new business opportunities and
initiate programs to enhance the Company's growth and success. The Committee
does not use a specific formula based on these targeted performance and
subjective criteria, but makes an evaluation of each executive officer's
contributions in light of all such criteria.

         Compensation at the executive officer level also includes the long-term
incentives offered by stock options. The stock option program is designed to
promote the identity of long-term interests between the Company's employees and
its shareholders and assist in the retention of executives. The size of option
grants is generally intended to reflect the executive's position with the
Company and his contributions to the Company, including his success in achieving
the individual performance criteria described above. The option program
generally uses a five-year vesting period to encourage key employees to continue
in the employ of the Company.

         Executive officers of the Company are also eligible to participate in
the Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan"). The
Purchase Plan is available to virtually all employees of the Company and
generally permits participants to purchase shares at a discount of approximately
15% of the fair market value at the beginning or end of the applicable purchase
period.

         Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), enacted in 1993,
generally disallows a tax deduction to public companies for compensation over $1
million paid to the corporation's chief executive officer and four other most
highly compensated executive officers. Qualifying performance compensation will
not be subject to the deduction limit if certain requirements are met. The
Company intends to structure the performance-based portion of the compensation
of its executive officers in a manner that complies with the new statute to
mitigate any disallowance of deductions.

         Dr. Gordon's 1997 Compensation. Dr. Gordon, President and Chief
Executive Officer of the Company, is eligible to participate in the same
executive compensation plans available to other executives. Dr. Gordon's salary
for 1997 remained at $250,000. Dr. Gordon also received bonus compensation of
$62,500 in 1997. The Compensation Committee believes that Dr. Gordon's annual
compensation has been set at a level competitive with other companies in the
industry.

                             COMPENSATION COMMITTEE


                                                                         Page 37

<PAGE>   38

                                                     Andre L. Lamotte
                                                     Allen Misher
                                                     Douglas MacMaster

COMPARATIVE STOCK PERFORMANCE

         The comparative stock performance graph below compares the cumulative
stockholder return on the Common Stock of the Company for the period from June
8, 1995 (the effective date of the initial public offering of the Company's
Common Stock) through December 31, 1997 with the cumulative total return on (i)
the Total Return Index for the Nasdaq Stock Market (U.S. Companies) (the "Nasdaq
Composite Index"), and (ii) the Nasdaq Pharmaceutical Index (assuming the
investment of $100 in the Company's Common Stock, the Nasdaq Composite Index and
the Nasdaq Pharmaceutical Index on June 8, 1995 and reinvestment of all
dividends). Measurement points are on June 8, 1995 and the last trading day of
the years ended December 31, 1996 and 1997. Prior to June 8, 1995, the Company's
Common Stock was not registered under the Securities Exchange Act of 1934.


     __________________________________________________________________________

$250      [ ]CRSP Nasdaq Stock Market
          [ ]CRSP Pharmaceutical Stocks________________________________________
          [ ]OraVax, Inc.
     __________________________________________________________________________

$200
     __________________________________________________________________________

$150
     __________________________________________________________________________

$100
     __________________________________________________________________________

$50
     __________________________________________________________________________

$0
     __________________________________________________________________________

       6/8/95             12/31/95             12/31/96             12/31/97
     __________________________________________________________________________

                                   6/8/95     12/29/95    12/31/96    12/31/97
     __________________________________________________________________________

      CRSP Nasdaq Stock Market     $100.00    $120.32     $148.00      $181.59
      CRSP Pharmaceutical Stocks   $100.00    $159.71     $159.88      $165.22
      OraVax, Inc.                 $100.00    $117.50      $52.50      $17.50
     __________________________________________________________________________


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information, as of March 13,
1998, with respect to the beneficial ownership of the Company's Common Stock by
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each executive officer named in the Summary Compensation Table under the heading
"Executive Compensation" above and (iv) all directors and executive officers of
the Company as a group.

         The number of shares of Common Stock beneficially owned by each
director or executive officer is determined under the rules of the Securities
and Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power

                                                                         Page 38

<PAGE>   39

or investment power and also any shares which the individual has the right to
acquire within 60 days after March 13, 1998 through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with
respect to the shares set forth in the following table. the inclusion herein of
any shares deemed beneficially owned does not constitute an admission of
beneficial ownership of those shares.

         As of March 13, 1998, no director or executive officer of the Company
beneficially owned any shares of Convertible Preferred Stock.

<TABLE>
<CAPTION>
                                                                      Number of
                                                                      Shares of
                                                                       Common        Percentage of    Percentage of
                                                                        Stock            Common        Total Voting
                                                                    Beneficially         Stock        Capital Stock
                        Beneficial Owner                                Owned          Outstanding      Outstanding
----------------------------------------------------------------    ------------     -------------    -------------
<S>                                                                   <C>                 <C>              <C>
5% STOCKHOLDERS
Wellington Management Company, LLP (1)..........................      1,010,700           9.8%             9.8%
Vanguard Specialized Portfolios -- Health
  Care Portfolio (2)............................................        602,600           5.8%             5.8%
Medical Science Partners, L.P.(3)...............................        600,857           5.8%             5.8%

DIRECTORS
C. Boyd Clarke (4)..............................................          6,666              *                *
Lance K. Gordon (5).............................................        229,445           2.2%             2.2%
Andre L. Lamotte (6)............................................        603,695           5.8%             5.8%
Douglas MacMaster (7)...........................................         18,700              *                *
Allen Misher (8)................................................          6,666              *                *

OTHER EXECUTIVE OFFICERS
Keith S. Ehrlich (9)............................................        128,925           1.2%             1.2%
Robert J. Gerety (10)...........................................         48,750              *                *
Thomas P. Monath (11)...........................................        154,507           1.5%             1.5%
All directors and executive officers as a group (12)............      1,189,855          11.0%            11.0%
</TABLE>

----------

*   Less than 1%.
(1) The information reported is based on a Schedule 13G/A filed with the
    Securities and Exchange Commission on February 10, 1998. The address of this
    entity is 75 State Street, Boston, MA 02109.
(2) The information reported is based on a Schedule 13G/A filed with the
    Securities and Exchange Commission on February 9, 1998. The address of this
    entity is 100 Vanguard Boulevard, VM #V34, Malvern, PA 19355.
(3) Includes 26,320 shares held by Medical Science II Co-Investment L.P. ("MSP
    II-Co") and 149,544 shares held by Medical Science Partners II, L.P. ("MSP
    II"). Medical Science Partners, L.P. ("MSP") is an affiliate of MSP II-Co
    and MSP II and may be deemed to be the beneficial owner of shares held by
    such entities. The address of MSP is 20 Williams Street, Suite 250,
    Wellesley, MA 02181.
(4) Represents shares which Dr. Clarke may acquire upon the exercise of options
    within 60 days after March 13, 1998.



                                                                         Page 39

<PAGE>   40

(5)  Includes 166,216 shares of Common Stock which Dr. Gordon has the right to
     acquire within 60 days after March 13, 1998 upon exercise of outstanding
     stock options.
(6)  Includes 424,993 shares held by MSP, 26,320 shares held by MSP II-Co and
     149,544 shares held by MSP II. Dr. Lamotte is the Managing General Partner
     of Medical Science Ventures, the General Partner of MSP and is the Managing
     General Partner of Medical Science Ventures II, the General Partner of MSP
     II and MSP II-Co, and may be deemed to be the beneficial owner of the
     shares held by Partner of MSP II and MSP II-Co, and may be deemed to be the
     beneficial owner of the shares held by MSP, MSP II and MSP II-Co although
     Dr. Lamotte disclaims beneficial ownership of such shares. The address of
     Dr. Lamotte is c/o MSP, 20 Williams Street, Suite 250, Wellesley, MA 02181.
(7)  Represents shares which Mr. MacMaster may acquire upon the exercise of
     options within 60 days after March 13, 1998.
(8)  Represents shares which Dr. Misher may acquire upon the exercise of options
     within 60 days after March 13, 1998.
(9)  Includes 124,899 shares which Mr. Ehrlich may acquire upon the exercise of
     options within 60 days after March 13, 1998. Mr. Ehrlich resigned as an
     officer of the Company effective January 22, 1998.
(10) Includes 31,250 shares which Dr. Gerety may acquire upon the exercise of
     options within 60 days after March 13, 1998.
(11) Includes 148,557 shares which Dr. Monath may acquire upon the exercise of
     options within 60 days after March 13, 1998.
(12) Includes 502,954 shares which all directors and executive officers as a
     group may acquire upon the exercise of options within 60 days after
     March 13, 1998.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         For a description of certain transactions between the Company and Mr.
MacMaster, a director of the Company, see "Management -- Director Compensation."
For a description of certain employment and other arrangements between the
Company and its executive officers, see "Management -- Executive Compensation"
and "Management -- Employment Agreements."

         For a description of certain registration rights held by Dr. Gordon and
certain stockholders of the Company, see "Description of Capital Stock."

         The Company believes that the securities issued in the transactions
described above were sold at their then fair market value and that the terms of
the transactions described above were no less favorable than the Company could
have obtained from unaffiliated third parties.

         The Company has a policy that all material transactions between the
Company and its officers, directors and other affiliates must (i) be approved by
a majority of the members of the Company's Board of Directors and by a majority
of the disinterested members of the Company's Board of Directors and (ii) be on
terms no less favorable to the Company than could be obtained form unaffiliated
third parties. In addition, this policy requires that any loans by the Company
to its officers, directors or other affiliates be for bona fide business
purposes only.


                                                                         Page 40

<PAGE>   41

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)    The following documents are included as part of this Annual
Report on Form 10-K.

                1.   The following financial statements (and related notes) of
                     the Company are included as APPENDIX C of this Report:

                       Report of Independent Accountants
                       Consolidated Balance Sheets - December 31, 1996 and 1997.
                       Consolidated Statements of Operations - Fiscal years
                       ended December 31, 1995, 1996 and 1997.
                       Consolidated Statements of Stockholders' Equity
                       (Deficit) - Fiscal years ended December 31, 1995, 1996
                       and 1997.
                       Consolidated Statements of Cash Flows - Fiscal years
                       ended December 31, 1995, 1996 and 1997.
                       Notes to Consolidated Financial Statements.

                2.   Combined Financial Statements of OraVax Merieux Co. and
                     Merieux OraVax Co.

                       Report of Independent Accountants           S-1
                       Combined Financial Statements               S-2
                       Notes to Combined Financial Statements      S-6


                     All other schedules are omitted as the information required
                     is inapplicable or the information is presented in the
                     financial statements or the related notes.

                3.   The Exhibits listed in the Exhibit Index immediately
                     preceding the Exhibits are filed as a part of this Annual
                     Report on Form 10-K.

         (b)    On January 21, 1998, the Company filed a Current Report on
Form 8-K dated as of December 23, 1997 relating to the issuance and sale by the
Company of 6,300 shares of Convertible Preferred Stock.

         The following trademarks of the Company are mentioned in this Annual
Report on Form 10-K: OraVax, Viricle.


                                                                         Page 41

<PAGE>   42

                                   SIGNATURES

         Pursuant to the requirements of the Section 13 or 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 on the
19th day of March, 1998.

                                            ORAVAX, INC.


                                            By: /s/ Lance K. Gordon
                                                ---------------------------
                                                Lance K.  Gordon, President
                                                and Chief Executive Officer

         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 date indicated.


<TABLE>
<CAPTION>
          Signature                   Title                      Date
          ---------                   -----                      ----
<S>                       <C>                                   <C>
/s/ Lance K. Gordon       President, Chief Executive Officer)
-----------------------   and Director (principal executive )
Lance K. Gordon           officer and principal financial   )
                          officer)                          )

/s/ Lisa M. Bruneau       Controller (controller and        )
-----------------------   principal accounting officer)     )
Lisa M. Bruneau

/s/ Douglas MacMaster     Director                          )     March 19, 1998
-----------------------
Douglas MacMaster

/s/ C. Boyd Clarke        Director                          )
-----------------------
C. Boyd Clarke

/s/ Andre L. Lamotte      Director                          )
-----------------------
Andre L. Lamotte

/s/ Allen Misher          Director                          )
-----------------------
Allen Misher
</TABLE>



                                                                         Page 42

<PAGE>   43

                                  EXHIBIT INDEX

         The following exhibits are filed as part of this Annual Report on Form
10-K.

<TABLE>
<CAPTION>
Exhibit No.                        Description
-----------                        -----------
<S>            <C>

 3.1(2)        Form of Second Amended and Restated Certificate of Incorporation
               of the Company.

 3.2(2)        Amended and Restated By-Laws of the Company.

 4.1(2)        Specimen Certificate for shares of Common Stock, $.001 par value,
               of the Company.

 4.2(6)        Rights Agreement dated as of April 2, 1997 between the Company
               and The First National Bank of Boston.

 4.3(7)        Certificate of Designations of the Convertible Preferred Stock.

10.1(1)(2)     1990 Stock Option Plan, as amended.

10.2(1)(2)     1995 Stock Option Plan.

10.3(1)(2)     Employment Agreement between the Company and Lance K. Gordon
               dated as of July 19, 1990.

10.4(1)(2)     Employment Agreement between the Company and Thomas P. Monath
               dated October 18, 1991.

10.5(1)(2)     Stock Purchase Agreement between the Company and Lance K. Gordon
               dated as of September 28, 1990.

10.6(2)        Consulting Agreement between the Company and Dr. Jean-Pierre
               Kraehenbuhl dated as of January 1, 1990.

10.7(2)        Consulting Agreement between the Company and Dr. Marian Neutra
               dated as of January 1, 1990.

10.8(1)(4)     Letter Agreement dated February 5, 1996 between the Company and
               Allen Misher.

10.9(1)(5)     Letter Agreement dated February 10, 1997 between the Company and
               C. Boyd Clarke.

10.10(2)       Master Lease Agreement between Comdisco and the Company dated
               March 31, 1993.

10.11(2)       Equipment Schedule to Master Lease Agreement between Comdisco and
               the Company dated June 21, 1994.

10.12(2)+      Invention and License Administration Agreement between the
               President and Fellows of Harvard College and the Swiss Institute
               for Experimental Cancer Research dated October 22, 1990.
</TABLE>


                                                                         Page 43

<PAGE>   44

<TABLE>
<S>            <C>
10.13(2)+      Research and Development Agreement among the Company, Foundation
               Pour La Recherche Des Maladies Gastro-Intestinales, Dr. Andre
               Blum and Kieta Holding, S.A. dated April 2, 1992, as amended in
               February 1993 and January 1994.

10.14(2)+      Invention and License Administration Agreement among Foundation
               Pour La Recherche Des Maladies Gastro-Intestinales, the Swiss
               Institute for Experimental Cancer Research and Dr. Jean-Pierre
               Kraehenbuhl dated April 2, 1992.

10.15(2)+      Invention and License Administration Agreement among Foundation
               Pour La Recherche Des Maladies Gastro-Intestinales, Max-Planck
               Institute for Biology and Dr. Rainer Haas dated April 1992 and
               related Participation Agreement.

10.16(2)       Participation Agreements by and between the Company and each of
               Dr. Rainer Haas, Sven Gustafson, Dr. Jean-Pierre Kraehenbuhl, Dr.
               Madeleine Heitz, Dr. Pierre Michetti and Dr. Andre Blum.

10.17(2)+      Agreement between the Company, the Natural Environmental Research
               Council and Dr. D.H.L. Bishop dated May 15, 1992.

10.18(2)+      Collaborative Development and License Agreement between the
               Company and Techlab, Inc. dated March 31, 1993.

10.19(2)+      Industrial Research Agreement between the Company, Case Western
               Reserve University, Dr. Steven J. Czinn and Dr. John G. Nedrud
               dated October 14, 1993.

10.20(2)+      Assignment Agreement among the Company, Dr. Steven J. Czinn and
               Dr. John G. Nedrud dated October 14, 1993.

10.21(2)+      Cooperative Research and Development Agreement between the
               Company and Walter Reed Army Institute of Research dated December
               19, 1994.

10.22(2)+      Master Agreement between the Company and Pasteur Merieux Serums &
               Vaccins S.A. dated March 31, 1995.

10.23(2)+      Research and Development Agreement between the Company and
               Merieux OraVax S.N.C. and OraVax, Merieux Co. dated March 31,
               1995.

10.24(3)       Lease dated October 27, 1995 between the Company and Forest City
               38 Sidney Street, Inc.

10.25(4)       Assignment of Lease dated as of January 1, 1996 between
               Immunogen, Inc. and the Company.

10.26(4)       Landlord's Waiver, Consent and Agreement dated as of January 1,
               1996 by and among AEW No. 1 Corporation, Aberlyn Capital
               Management Limited Partnership and the Company.

10.27(4)       Consent to Assignment and Leasehold Mortgage dated as of January
               1, 1996 by and among AEW No. 1 Corporation, Immunogen, Inc. and
               the Company.
</TABLE>


                                                                         Page 44

<PAGE>   45

<TABLE>
<S>            <C>
10.28(4)+      License Agreement dated as of February 6, 1996 between Institut
               Pasteur and the Company.

10.29(7)       Form of Preferred Stock Investment Agreement dated as of December
               23, 1997.

10.30++        Agreement dated as of September 29, 1997 between the Company and
               Evans Medical Limited.

10.31(1)       Employment Agreement dated April 3, 1997 between the Company and
               Robert J. Gerety.

21(4)          Subsidiaries of the Company.

23.1           Consent of Coopers & Lybrand L.L.P.

27             Financial Data Schedule.
</TABLE>

----------

(1) Management contract or compensatory plan or arrangement filed as an exhibit
    to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.

(2) Incorporated herein by reference to the Company's Registration Statement on
    Form S-1, as amended (File No. 33-90936).

(3) Incorporated herein by reference to the Company's Quarterly Report on Form
    10-Q for the fiscal quarter ended September 30, 1995.

(4) Incorporated herein by reference to the Company's Annual Report on Form 10-K
    for the year ended December 31, 1995.

(5) Incorporated herein by reference to the Company's Annual Report on Form 10-K
    for the year ended December 31, 1996.

(6) Incorporated herein by reference to the Company's Registration Statement on
    Form 8-A dated April 11, 1997 (File No. 0-26034).

(7) Incorporated herein by reference to the Company's Current Report on Form 8-K
    dated December 23, 1997.

+   Confidential treatment granted as to certain portions.

++  Confidential treatment requested as to certain portions, which portions are
    omitted and filed separately with the Securities and Exchange Commission.



                                                                         Page 45

<PAGE>   46
                                                                      APPENDIX A


                             SELECTED FINANCIAL DATA

     The selected financial data set forth below with respect to the Company's
statements of operations for each of the five years in the period ended December
31, 1997 are derived from financial statements that have been audited by Coopers
& Lybrand L.L.P., independent accountants. The statement of operations data for
the years ended December 31, 1993 and 1994, and the Balance Sheet data for the
years ended December 31, 1993, 1994 and 1995 is derived from audited financial
statements not included in this Annual Report on Form 10-K. The data set forth
below should be read in conjunction with " Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's financial
statements and related notes included elsewhere in this Annual Report on Form
10-K.

                             SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>

                                               1993             1994              1995               1996              1997

<S>                                     <C>               <C>               <C>               <C>               <C>
Statement of Operations Data:
Revenues:
   Collaborative research and
     development ....................   $         --      $         --      $      8,684      $      6,595      $      7,587
   Government grants and other ......            349               257               311               870               583
   Interest .........................             78                51             1,080             1,280               683
                                        ------------      ------------      ------------      ------------      ------------
                                                 427               308            10,075             8,745             8,853
Expenses:
   Research and development .........          5,981             8,406            12,450            21,009            14,589
   General and administrative .......          1,848             2,580             3,299             3,750             3,422
   Interest .........................             92               190                87               523               418
                                        ------------      ------------      ------------      ------------      ------------
                                               7,921            11,176            15,836            25,282            18,429
Equity in joint venture..............                                             (2,436)           (5,085)           (6,236)
                                                                            ------------      ------------      ------------
Net loss (1) ........................         (7,494)          (10,868)           (8,197)          (21,622)          (15,812)
Net loss to common stockholders (1)..         (7,494)          (10,968)           (8,305)          (21,622)          (15,812)


Basic and diluted loss per share ....                                       $      (1.90)     $      (2.46)     $      (1.58)

Weighted average number of basic
  and diluted shares outstanding ....                                          4,377,131         8,794,775        10,031,222
</TABLE>


<TABLE>
<CAPTION>
                                                                      December 31,
                                           -----------------------------------------------------------------------------------------
                                               1993         1994          1995         1996         1997
<S>                                        <C>           <C>           <C>          <C>          <C>
Balance Sheet Data:
Cash and investments ...................   $  1,042      $  3,706      $ 27,631     $ 22,125     $ 11,722
Total assets ...........................      3,050         5,195        29,833       28,744       17,344
Working capital ........................       (218)        1,400        23,109       14,694        7,837
Long term obligations ..................        679           462           492        2,659        1,298
Convertible preferred stock ............     14,988        27,331             -            -        5,601
Total stockholders' equity (deficit) ...    (14,152)      (25,038)       24,513       18,424        9,785
</TABLE>


(1)  The net loss for the years ended December 31, 1994 and 1995 exclude
     accretion to redemption value of preferred stock of $100,000 and $108,000,
     respectively, which is included in the net loss to common shareholders.
<PAGE>   47




                                                                  APPENDIX B

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     Since its inception in 1990, the Company has been engaged in the discovery
and development of vaccines and injected antibody products to prevent
or treat human infectious diseases.

     To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 1999. The
first product revenues are anticipated from sales of the yellow fever vaccine,
under the Company's partnership with Evans Medical Limited. The Company's losses
incurred since inception resulted principally from expenditures under its
research and development programs and the Company expects to incur significant
operating losses over the next several years due primarily to expanded research
and development efforts, preclinical testing and clinical trials of its product
candidates, the acquisition of additional technologies, the establishment of
manufacturing capability and the performance of commercialization activities.
Results of operations may vary significantly from quarter to quarter depending
on, among other factors, the progress of the Company's research and development
efforts, the receipt, if any, of milestone payments, the timing of certain
expenses and the establishment of collaborative research agreements.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996

     The Company's total revenues increased to $8,853,000 in 1997 from
$8,745,000 in 1996. In 1997, the Company's revenues consisted of $7,587,000
earned under its collaboration (the "Joint Venture") with Pasteur Merieux
Connaught ("PMC") which was entered into during 1995, $583,000 from government
grants and other research revenues, and $683,000 in interest earned on invested
funds. In 1996, the Company's revenues consisted of $6,595,000 earned under the
Joint Venture with PMC, $870,000 from government grants and other research
revenues, and $1,280,000 in interest earned on invested funds.  The increased
revenue was attributable to increased budgeted activities, for research and
development, of the Joint Venture with PMC offset by a decrease in interest
income as a result of declining cash investments and a decrease in grant revenue
as a result of expired grants from the National Institute of Health.

     The Company's total costs and expenses decreased to $18,429,000 in 1997
from $25,282,000 in 1996. Research and development expenses decreased 31% to
$14,589,000 in 1997 from $21,009,000 in 1996, principally reflecting the 1996
conduct of both a Phase II clinical trial under its H.pylori program and a Phase
III clinical trial under its RSV program, and the 1996 production of necessary
supplies of clinical materials for its Phase III clinical trial. In addition,
the Company reduced its workforce by approximately 25% in early April 1997.
General and administrative expenses decreased 9% to $3,422,000 in 1997 from
$3,750,000 in 1996 as decreased expenses associated with the workforce reduction
in the second quarter of 1997 offset increases which the Company had incurred in
the first quarter of 1997 as compared to the same period in 1996. Interest
expense decreased to $418,000 in 1997 from $523,000 in 1996, principally due to
the expiration of some equipment leases.

     The Company accounts for its investment in the Joint Venture Partnerships,
through which the Joint Venture began conducting its research beginning in the
second quarter of 1995, under the equity method of accounting. Accordingly, the
Company recorded its $5,085,000 and $6,236,000 share of the Joint Venture
Partnerships' losses during the years ended December 31, 1996 and 1997,
respectively. The increased loss was principally attributable to increased
budgeted activities, for research and development, of the Joint Venture in 1997
as compared with 1996.

     The Company incurred a net loss of $15,812,000 in 1997 compared to a net
loss of $21,622,000 in 1996.

<PAGE>   48

     YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995

     The Company's total revenues decreased to $8,745,000 in 1996 from
$10,075,000 during 1995. In 1996, the Company's revenues consisted of $6,595,000
earned under its collaboration (the "Joint Venture") with Pasteur Merieux
Connaught. ("PMC") which was entered into during 1995, $870,000 from government
grants and other research revenues and $1,280,000 in interest earned on invested
funds. In 1995, the Company's revenues consisted of $8,684,000 earned under the
Joint Venture, of which $3,816,000 represented up front payments earned in
connection with the initiation of the Joint Venture, $311,000 from government
grants and $1,080,000 in interest earned on invested funds.

     The Company's total costs and expenses increased to $25,282,000 in 1996
from $15,836,000 in 1995. Research and development expenses increased 69% to
$21,009,000 in 1996 from $12,450,000 in 1995, principally reflecting the conduct
of an approximately 600 patient Phase III clinical trial of the Company's HNK20
product candidate together with production costs associated with clinical grade
materials used in the trial, and other growth in the Company's other primary
product development programs, including conduct of a Phase 2 clinical trial
under its H. pylori program. The 14% increase in general and administrative
expenses during the same period to $3,750,000 in 1996 from $3,299,000 in 1995,
reflects some increases in other administrative costs necessary to support the
growth in research and development. General and administrative expenses did not
grow in proportion to the increase in research and development costs principally
because the Company's clinical trials and manufacture of clinical grade
materials were substantially conducted by outside contractors requiring minimal
incremental administrative overhead. Interest expense increased to $523,000 in
1996 from $87,000 in 1995 principally as a result of the assumption of existing
and new debt in connection with the Company's acquisition of its manufacturing
facility in Canton, Massachusetts in early 1996.

     The Company accounts for its investment in the Joint Venture Partnerships,
through which the Joint Venture began conducting its research beginning in the
second quarter of 1995, under the equity method of accounting. Accordingly, the
Company recorded its $5,085,000 and $2,436,000 share of the Joint Venture
Partnerships' losses during the years ended December 31, 1996 and 1995,
respectively. The increase was principally attributable to increased budgeted
research activities of the Joint Venture in 1996 as compared with 1995.

     The Company incurred a net loss of $21,622,000 in 1996 compared to a net
loss of $8,197,000 in 1995.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standard Board issued Statement of
Accounting Standards No.130, "Reporting Comprehensive Income". This statement
requires that changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements. The
Statement will become effective for fiscal years beginning after December 15,
1997. The Company will adopt the new standard beginning in the first quarter of
the fiscal year ending December 31, 1998. The Company does not expect the
adoption of FAS 130 to materially effect the financial statement presentation.

     In June 1997, the Financial Accounting Standard Board also issued Statement
of Financial Accounting Standards No.131, "Disclosures about Segments of an
Enterprise and Related Information". This Statement specifies new guidelines for
determining a company's operating segments and related requirements for
disclosure. The Company is in the process of evaluating the impact of the new
standard on the presentation of the financial statements and the disclosures
therein. The Statement will become effective for fiscal years

                                      -2-

<PAGE>   49

beginning after December 15, 1997. The Company will adopt the new standard for
the fiscal year ending December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

     In January and March 1995, the Company sold an aggregate of 216,237 shares
of Series Preferred Stock for net cash proceeds of $9.2 million. These shares
were converted to common stock upon the closing of the Company's initial public
offering in June 1995.

     In March 1995, the Company entered into a Joint Venture with Pasteur
Merieux Connaught ("PMC") for the development, manufacturing, marketing and sale
of immuno-therapeutic and preventive vaccines against H. pylori infections in
humans. Under the Joint Venture, OraVax and PMC agreed to develop vaccines which
use the urease protein or any of its sub-units as an antigen (the "Target
Products"). OraVax and PMC will share equally in profits from the sales of the
Target Products and in all future research, development, clinical and
commercialization costs. OraVax and PMC estimate that research, development and
clinical costs will exceed $50.0 million. PMC is providing technical expertise
and will also provide marketing expertise to the Joint Venture. PMC made an
initial payment of $3.2 million directly to OraVax which included $0.6 million
to recognize the value of research and development conducted by OraVax in the
first quarter of 1995 prior to the formation of the Joint Venture, and a
milestone payment of $2.6 million to recognize the value of technology
previously developed by OraVax and made available to the Joint Venture. In
addition, PMC purchased $2.5 million of the Company's Series Preferred Stock.
Subsequently, PMC purchased an additional $1.0 million of common stock in the
Company's initial public offering. In addition, PMC agreed to pay the Company
directly up to $12.0 million during the development period, subject to the
achievement of certain clinical and regulatory milestones, of which $0.6 million
was paid to OraVax in December 1995. However, there can be no assurance that the
milestones which trigger such future payments will be achieved. Beginning in the
second quarter of 1995, research, development and commercialization activities
of the Joint Venture were conducted through two equally controlled partnerships
which have contracted with OraVax to perform research and development and
clinical trial activities. OraVax earned $6.6 million and $7.6 million under
these contracts in 1996 and 1997, respectively. In addition, during 1996 and
1997, the Joint Venture entered into research and development contracts with PMC
and third parties. The research and development budgets of the two partnerships
comprising the Joint Venture are established by joint committees in which each
of the venturers has an equal participation and role. The venturers will pay
approximately equal shares of the agreed budgets. OraVax will receive revenue
from the partnerships for the research and development work which is requested
to be performed by OraVax and funded by the Partnerships. There can be no
assurance, however, that OraVax will be selected to perform such work. The Joint
Venture provides for certain rights of termination, but, absent any breach,
either party may unilaterally terminate the Joint Venture. The venture's have
agreed to fund through the Joint Venture, on an annual basis, the research and
development, clinical and pharmaceutical development costs, and the Executive
Committee of the Joint Venture has currently approved funding of such costs
through December 1998.

     In June 1995, the Company sold 2,300,000 shares of its common stock for
$10.00 per share in an initial public offering, providing net proceeds of
approximately $20.7 million.

     In 1995, the Company entered into a five year operating lease, with renewal
options, to consolidate its current research and administrative operations and
provide for its longer-term expansion plans in an approximately 53,000 square
foot facility in Cambridge, Massachusetts. Occupancy of the new facility began
in December 1995. There were no material impairments of long-lived assets as a
result of the move.

     In January 1996, the Company leased an approximately 47,000 square foot
GMP-compliant manufacturing facility in Canton, Massachusetts and acquired
related equipment and leasehold improvements from the former tenant.  This
facility was specifically designed and equipped by the former tenant for the
manufacture of biological products. The Company anticipates that its initial use
of the facility will be for the production of vaccines for the Joint Vaccine
Acquisition Program, of the U.S. Department of Defense. This facility will also
accommodate production development activities for OraVax's proprietary products
depending on the outcome of product development. Existing building and capital
equipment leases, which include renewal and purchase options, were transferred
to the Company. In addition, the Company purchased leasehold improvements and
other related assets from the former tenant, payable in installments through
1999.

                                      -3-
<PAGE>   50
     The costs to lease and equip these facilities will be funded in whole, or
in part, either through the Department of Defense Program, existing cash and
investments, proceeds from offerings of securities, or other methods of
financing including mortgage or lease financing, if available to the Company on
acceptable terms. In addition, the Company expects to continue its current
practice of leasing most of its capital equipment, provided such lease financing
continues to be available to the Company on acceptable terms. The timing and
amount of costs of developing the manufacturing facility, and the capital
requirements thereon, will be dependent upon the timing of when it is put into
use for the scale-up of manufacturing, and further negotiations with the Joint
Vaccine Acquisition Program Principals.

     In June 1996, the Company sold 2,300,000 shares of its common stock for
$7.25 per share in a follow-on public offering, providing net proceeds of
approximately $15.2 million.

     In December 1997, the Company sold 6,300 shares of its 6% Convertible
Preferred Stock, for $1,000 per share, in a private placement financing,
providing gross proceeds of $6.3 million, of which $4.9 million was received in
1997 and $1.4 million in January 1998. Net proceeds were approximately $5.6
million.

     In December 1997, the Company sold 240,000 shares of its common stock, for
$1.91 per share, in a private placement financing, providing net proceeds of
$396,000.

     The Company's aggregate cash and investments were $11,722,000 at December
31, 1997, a decrease of $10,403,000 since December 31, 1996. Cash used by
operations during the period, principally to support research and development,
was $7,940,000. The Company expended $253,000 for property and equipment, repaid
$1,530,000 of its capital lease obligations, and repaid $330,000 of its
installment debt, net of accrued interest, during the period. In addition, the
Company invested $5,082,000 in the Joint Venture during the year ended December
31, 1997.

     In September, 1997 the Company was selected by Evans Medical Limited
(Evans), a Medeva PLC group company, as the exclusive marketer and distributor
of Evans' live-attenuated yellow fever vaccine, Arilvax(R), in the United
States. The Company also agreed to work with Evans to introduce the vaccine into
other international markets.

     Under the terms of the agreement, the Company will conduct clinical studies
necessary for U.S. registration of the vaccine and will market and distribute
the product to both civilian and military groups in the U.S. Arilvax(R) is
currently marketed by Evans in Europe and selected Asian markets. Evans will
fund all costs associated with the agreed-upon clinical trials and with securing
regulatory approval in the U.S. Based on the established performance of
Arilvax(R) in other markets and discussions with the FDA, Evans anticipates
submitting a U.S. product license application (PLA) in 1998. The Company does
not anticipate incurring any material net expenditures under this agreement
until 1999 at which time, assuming a U.S. PLA is filed, it would expect to incur
premarketing and predistribution costs.

     Since inception, the Company's cash expenditures have exceeded its
revenues. Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's Joint Venture with Merieux, government grants and interest income. The
Company's future capital requirements will depend on many factors, including,
but not limited to, the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the funding of the Company's share of the
expenses of the Joint Venture or similar arrangements, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the acquisition of additional facilities and
capital equipment.

     The Company plans to finance these cash needs in the near term principally
through its existing cash reserves, together with interest earned thereon,
revenues, payments and reimbursements under the Company's Joint Venture with PMC
and facilities and equipment financing. The Company believes, based upon its
current operating plan, that, in addition to its available cash balances and
known revenues, it will need additional financing in order to fund the Company's
operations in the second half of 1998. The Company will require additional funds
to conduct, if planned, a Phase III trial of its HNK20 product candidate and for
HNK20 manufacturing start up. Moreover, changes in the Company's research and
development plans or

                                      -4-
<PAGE>   51
other events affecting the Company's operations may result in accelerated or
unexpected expenditures. In addition, the Company will need substantial
additional capital to fund its operations for the manufacturing and marketing of
any of its successful product candidates. Possible sources of capital include
strategic corporate partnerships and private equity financing, both of which the
Company is actively pursuing. If additional funds are raised by issuing equity
securities, further dilution to existing stockholders may result and future
investors may be granted rights superior to those of existing stockholders.
There can be no assurance, however, that additional financing will be available
from any of these sources, or if available, will be available on terms
satisfactory to the Company. The Company's inability to obtain needed funding on
satisfactory terms may require the Company to delay, curtail or eliminate one or
more of its planned product development programs, scale back its planned
manufacturing operations or enter into collaborative arrangements that may
require the Company to issue additional equity or relinquish rights to certain
technologies or product candidates that the Company would not otherwise issue or
relinquish.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the following, that could cause
actual results to differ materially from those indicated by the forward-looking
statements made herein and presented elsewhere by management from time to time.

     EARLY STAGE OF PRODUCT DEVELOPMENT. The products under development by the
Company will require significant additional research and development efforts,
including extensive clinical testing and regulatory approval, prior to
commercial use. The Company's potential products are subject to the risks of
failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that the Company's
therapeutic approach will not be successful, that any or all of the Company's
potential products will be found to be unsafe, ineffective, toxic or otherwise
fail to meet applicable regulatory standards or receive necessary regulatory
clearances, that the potential products, if safe and effective, will be
difficult to develop into commercially viable products, to manufacture on a
large scale or be uneconomical to market, that proprietary rights of competitors
or other parties will preclude the Company from marketing such products; or that
competitors or other parties will market superior or equivalent products.

     FUTURE CAPITAL NEEDS. In addition, the Company will require substantial
additional funds in order to continue its research and development programs,
preclinical and clinical testing of its product candidates and to conduct full
scale manufacturing and marketing of any pharmaceutical products that may be
developed. The Company's capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the purchase of additional facilities and
capital equipment. The Company believes, based upon its current operating plan,
that, in addition to its available cash balances and known revenues, it will
need additional financing, in the second half of 1998, in order to fund the
Company's planned operations. Possible sources of capital include strategic
corporate partnerships and private equity financing, both of which the Company
is actively pursuing. There can be no assurance, however, that changes in the
Company's research and development plans, acquisitions or other events affecting
the Company's operations will not result in accelerated or unexpected
expenditures. Thereafter, the Company will need to raise substantial additional
capital to fund its operations. There can be no assurance, however, that
additional financing will be available, or if available, will be available on
acceptable or affordable terms.

     MANUFACTURING LIMITATIONS. At present, the Company's ability to manufacture
its products is limited to clinical trial quantities. At present, the Company
does not have the capability to manufacture commercial quantities of products.
The Company's strategy is to develop manufacturing facilities, initially through
the manufacturing agreements for products funded by the U.S. Department of
Defense's Joint Vaccine Acquisition Program and to expand their use in the
future, for producing both pilot-scale and commercial quantities of its
proprietary products. To ensure compliance with current Good Manufacturing
Practices ("cGMP") imposed by the FDA, OraVax will need to establish sufficient
technical staff to oversee all product operations, including quality control,
quality assurance, technical support and manufacturing management. The Company
may enter into arrangements with contract manufacturing companies to expand its
own production capacity in order to meet requirements for its product
candidates. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing

                                      -5-
<PAGE>   52


relationships with manufacturers to produce, package and distribute its finished
pharmaceutical or other medical products (if any), clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Moreover, contract manufacturers must operate in compliance with cGMP. The
Company's potential dependence upon third parties for the manufacture of its
products may adversely affect the Company's profit margins and its ability to
develop and deliver such products on a timely and competitive basis.

     RISKS ASSOCIATED WITH COLLABORATIVE ARRANGEMENTS. The Company's product
development strategy may require the Company to enter into various additional
arrangements with corporate, government and academic collaborators, licensors,
licensees and others. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. There can be no assurance that the Company will be able to
establish additional collaborative arrangements or license agreements that the
Company deems necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful.

     PATENT AND PROPRIETARY RIGHTS. The Company seeks to protect its trade
secrets and proprietary know-how, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will not be violated by the other parties, that
OraVax will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Certain of the technology that may be used in the products of
OraVax is not covered by any patent or patent application. There can be no
assurance that any pending patent applications relating to the Company's product
candidates will result in patents being issued. Moreover, there can be no
assurance that any such patents will afford protection against competitors with
similar technology. There may be pending or issued third-party patents relating
to the product candidates of OraVax. OraVax may need to acquire licenses to, or
to contest validity of, any such third party patents. It is likely that
significant funds would be required to defend any claim that OraVax infringes a
third-party patent, and any such claim could adversely affect sales of the
challenged product of OraVax until the claim is resolved. There can be no
assurance that any license required under any such patent would be made
available.

     GOVERNMENT REGULATION. The rigorous preclinical and clinical testing
requirements and regulatory approval process of the FDA and of foreign
regulatory authorities can take a number of years and require the expenditure of
substantial resources. The Company has limited experience in conducting and
managing preclinical and clinical testing necessary to obtain government
approvals. There can be no assurance that the Company will be able to obtain the
necessary approvals for clinical testing or for the manufacturing and marketing
of any products that it develops. Additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
product candidates. Delays in obtaining regulatory approvals would adversely
affect the marketing of any products developed by the Company and the Company's
ability to receive product revenues or royalties. If regulatory approval of a
potential product is granted, such approval may include significant limitations
on the indications for which such product may be marketed. Even if initial
regulatory approvals for the Company's product candidates are obtained, the
Company, its products and its manufacturing facilities are subject to continual
review and periodic inspection. The regulatory standards for manufacturing are
applied stringently by the FDA. Discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties.

     UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. Government and other third-party
payers are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third party payers for uses of the Company's
products, the market acceptance of these products would be adversely affected.

     YEAR 2000 ISSUES. The approaching millennium ("Year 2000") could result in
challenges related to the Company's computer software, accounting records and
relationships with suppliers, collaborative partners and licensees. Management
of the Company is studying Year 2000 issues and is seeking to avoid such
problems. Based on the Company's review of its business and operating systems,
the Company does not expect to incur material costs with respect to assessing
and remediating Year 2000 problems; however, there can be no assurance that
such problems will not be encountered or that the costs incurred to resolve
such problems will not be material.



                                      -6-
<PAGE>   53

     Because of these and other factors, past financial performance should not
be an indicator of future performance. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in the biotechnology
and pharmaceutical industries and recommendations by analysts or other events.


                                      -7-
<PAGE>   54
                                                                      APPENDIX C

                                  ORAVAX, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS                                                       PAGE
<S>                                                                          <C>
Report of Independent Accountants........................................    2
Consolidated Balance Sheets as of December 31, 1996 and 1997.............    3
Consolidated Statements of Operations for the years ended
   December 31, 1995, 1996 and 1997......................................    4
Consolidated Statements of Stockholders' Equity (Deficit)
   for the years ended December 31, 1995, 1996 and 1997..................    5
Consolidated Statements of Cash Flows for the years ended
   December 31, 1995, 1996 and 1997......................................    6
Notes to Consolidated Financial Statements...............................    7
</TABLE>


<PAGE>   55





                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of OraVax, Inc.:

     We have audited the accompanying consolidated balance sheets of OraVax,
Inc. as of December 31, 1996 and 1997 and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OraVax, Inc. as
of December 31, 1996 and 1997, and the consolidated results of its operations
and cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and will require additional funds to continue operations into the second half
of 1998, both of which raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


                                         /s/ Coopers & Lybrand L.L.P.


Boston, Massachusetts
March 27, 1998




<PAGE>   56

                                  ORAVAX, INC.

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                            AS OF DECEMBER 31,
                                                                        ------------------------
                                                                            1996           1997

<S>                                                                     <C>             <C>
ASSETS
Cash and cash equivalents .......................................       $ 14,916        $ 10,274
Short-term investments ..........................................          7,209           1,448
Deferred financing costs ........................................             --             847
Prepaid and other current assets ................................            230           1,529
                                                                        --------        --------
Total current assets ............................................         22,355          14,098
Property and equipment, net .....................................          5,454           3,524
Investment in and advances to (from) joint venture ..............            619            (535)
Other assets ....................................................            316             257
                                                                        --------        --------
Total assets ....................................................       $ 28,744        $ 17,344
                                                                        ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................       $  1,135        $    935
Accrued expenses ................................................          3,653           3,659
Obligation under capital leases .................................          1,597           1,316
Installment debt ................................................            330             260
Deferred joint venture revenue ..................................            946              91
                                                                        --------        --------
Total current liabilities .......................................          7,661           6,261
Obligation under capital leases, excluding current portion ......          1,665             416
Installment debt, excluding current portion .....................            994             882
                                                                        --------        --------
Total liabilities ...............................................         10,320           7,559
Commitments and contingencies  (Note H)
Stockholders' equity :
  Preferred stock, $.001 par value; 2,000,000 shares
     authorized in 1996 and 1997; none issued or outstanding ....             --              --
  Convertible preferred stock, $.001 par value; 9,000 shares
       authorized in 1997; issued and outstanding
       6,300 in 1997 (liquidation preference $6,300) ............             --           5,601
  Common stock, $.001 par value; 25,000,000 shares
     authorized in 1996 and 1997; issued and outstanding
     9,975,821 and 10,371,543 in 1996 and 1997 ..................             10              10
  Additional paid-in capital ....................................         73,519          74,962
  Deferred compensation .........................................           (223)            (94)
  Accumulated deficit ...........................................        (54,882)        (70,694)
                                                                        --------        --------
Total stockholders' equity ......................................         18,424           9,785
                                                                        --------        --------
Total liabilities and stockholders' equity ......................       $ 28,744        $ 17,344
                                                                        ========        ========
</TABLE>

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


<PAGE>   57




                                  ORAVAX, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED
                                                                                    DECEMBER 31,
                                                                                    ------------
                                                                     1995                1996               1997
<S>                                                             <C>                 <C>                 <C>
Revenue:
  Collaborative research and development
  -- related party ......................................       $      4,868        $      6,595        $      7,587
  -- other ..............................................              3,816                  --                  --
  Government grants and other ...........................                311                 870                 583
  Interest ..............................................              1,080               1,280                 683
                                                                ------------        ------------        ------------
                                                                      10,075               8,745               8,853
                                                                ------------        ------------        ------------
Expenses:
  Research and development ..............................             12,450              21,009              14,589
  General and administrative ............................              3,299               3,750               3,422
  Interest ..............................................                 87                 523                 418
                                                                ------------        ------------        ------------
                                                                      15,836              25,282              18,429
                                                                ------------        ------------        ------------
Loss from operations ....................................             (5,761)            (16,537)             (9,576)
Equity in operating loss of joint venture ...............             (2,436)             (5,085)             (6,236)
                                                                ------------        ------------        ------------
Net loss ................................................             (8,197)            (21,622)            (15,812)
Accretion to redemption value of preferred stock ........                108                  --                  --
                                                                ------------        ------------        ------------
Net loss to common stockholders .........................       $     (8,305)       $    (21,622)       $    (15,812)
                                                                ============        ============        ============
Basic and diluted loss per share ........................       $      (1.90)       $      (2.46)       $      (1.58)
Weighted average number of basic and diluted shares
 outstanding ............................................          4,377,131           8,794,775          10,031,222
</TABLE>


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


<PAGE>   58


                                  ORAVAX, INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1997
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                                       TOTAL
                                      PREFERRED     COMMON         COMMON      PAID-IN     DEFERRED    ACCUMULATED  STOCKHOLDERS'
                                        STOCK       SHARES          STOCK      CAPITAL    COMPENSATION    DEFICIT      EQUITY
<S>                                    <C>          <C>           <C>           <C>         <C>         <C>          <C>
Balance, December 31, 1994 ............             230,661           --           245      (220)      (25,063)      (25,038)
Conversion of redeemable convertible
  preferred stock to common stock .....           5,019,383       $    5        36,666        --            --        36,671
Issuance of common stock ..............           2,310,197            3        20,745        --            --        20,748
Issuance of common stock-401k .........               5,758           --            68        --            --            68
Issuance of common stock options ......                  --           --           141      (141)           --            --
Exercise of common stock options ......              44,982           --            54        --            --            54
Exercise of common stock warrants .....               4,884           --            --        --            --            --
Vesting of compensatory common
   stock options .....................                   --           --           250        --            --           250
Accretion of redeemable convertible
   preferred stock to redemption value                   --           --          (108)       --            --          (108)
Amortization of deferred
   compensation ...................                      --           --            --        65            --            65
Net loss ..........................                      --           --            --        --        (8,197)       (8,197)
                                       -------    ---------       ------     ---------     -----       -------       -------
Balance, December 31, 1995 .........              7,615,865            8        58,061      (296)      (33,260)       24,513
Issuance of common stock ...........              2,313,822            2        15,340        --            --        15,342
Issuance of common stock-401k ......                 18,509           --            97        --            --            97
Exercise of common stock options ...                 27,625           --            21        --            --            21
Amortization of deferred
   compensation ....................                     --           --            --        73            --            73
Net loss ..........................                      --           --            --        --       (21,622)      (21,622)
                                       -------  -----------       ------     ---------     -----      --------      --------
Balance, December 31, 1996 .........              9,975,821           10        73,519      (223)      (54,882)       18,424
Issuance of common stock ...........                276,146           --           480                                   480
Issuance of common stock-401k ......                 50,723           --            89                                    89
Exercise of common stock options ...                 68,853           --            51                                    51
Issuance of convertible preferred
  stock (6,300 shares) .............     5,601           --           --            --
Deferred financing costs ...........                                               847                                   847
Amortization of deferred
   compensation ....................        --           --           --            66                                    66
Reversal of deferred compensation ..                                               (63)       63                           0
Non-cash stock compensation ........                                                39                                    39
Net loss ...........................                     --           --            --        --       (15,812)      (15,812)
                                       -------    ---------       ------       -------    ------      --------       -------
Balance, December 31, 1997 ........    $ 5,601   10,371,543       $   10     $  74,962    $  (94)    $ (70,694)     $  9,785
                                       =======   ==========       ======     =========     =====      ========      ========
</TABLE>




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


<PAGE>   59



                                  ORAVAX, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                              1995         1996          1997
<S>                                                       <C>           <C>           <C>
Cash flows from operating activities:
  Net loss from operations ..........................     $ (8,197)     $(21,622)     $(15,812)

  Adjustments to reconcile net loss from operations
    to net cash used in operating activities:
    Depreciation ....................................          708         2,028         2,183
    Equity in operations of joint venture ...........        2,436         5,085         6,236
    Amortization of debt discount ...................           --            --           148
    Non-cash compensation ...........................          383           170           194
    Changes in operating assets and liabilities:
      Prepaid expenses and other current assets .....         (172)           76           101
      Other assets ..................................          (37)         (200)           59
      Accounts payable ..............................          210            74          (200)
      Accrued expenses ..............................        1,225         1,301             6
      Deferred revenue ..............................          899            47          (855)
                                                          --------      --------      --------
Net cash used in operating activities ...............       (2,545)      (13,041)       (7,940)
                                                          --------      --------      --------
Cash flows from investing activities:
  Purchases of short-term investments ...............      (26,189)      (17,378)       (5,422)
  Sales and maturities of short-term investments ....       10,440        25,918        11,183
  Expenditures for property and equipment ...........         (762)       (1,361)         (253)
  Proceeds from sale-leaseback of property and
      equipment .....................................          614           775            --
  Investment in and advances to joint venture .......       (2,886)       (5,254)       (5,082)
                                                          --------      --------      --------
Net cash provided by (used in) investing activities .      (18,783)        2,700           426
                                                          --------      --------      --------
Cash flows from financing activities:
  Proceeds from common stock issuances, net .........       20,802        15,363           531
  Proceeds from preferred stock issuances, net ......        9,232            --         4,201
  Principal payments under capital lease
   obligations ......................................         (530)       (1,488)       (1,530)
  Principal payments of installment debt, net .......           --          (500)         (330)
                                                          --------      --------      --------
Net cash provided by financing activities ...........       29,504        13,375         2,872
                                                          --------      --------      --------
Net increase (decrease) in cash and cash
      equivalents ...................................        8,176         3,034        (4,642)
Cash and cash equivalents at beginning of period ....        3,706        11,882        14,916
                                                          --------      --------      --------
Cash and cash equivalents at end of period ..........     $ 11,882      $ 14,916      $ 10,274
                                                          ========      ========      ========
Interest paid during the year .......................     $     87      $    384      $    418
                                                          ========      ========      ========
Noncash financing activities - See Note I.
</TABLE>


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


<PAGE>   60



                                  ORAVAX, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS:

     OraVax's mission is the discovery, development and commercialization of
biologic products for the prevention and treatment of human infectious diseases.
Prior to the first quarter of 1995, the Company operated as a development stage
enterprise, devoting substantially all of its efforts to establishing the new
business and carrying on research and development activities. Beginning in 1995,
the Company was no longer classified as a development stage enterprise.

     Since inception, the Company's cash expenditures have exceeded its
revenues. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Operations have been funded principally through
public and private placements of equity securities, equipment lease financing,
revenues from the Company's Joint Venture with Merieux, government grants and
interest income. The Company's future capital requirements will depend on many
factors, including, but not limited to, the progress of its research and
development programs, the progress of preclinical and clinical testing, the time
and cost involved in obtaining regulatory approvals, the funding of the
Company's share of the expenses of the Joint Venture or similar arrangements,
the cost of filing, prosecuting and defending and enforcing any patent claims
and other intellectual property rights, competing technological and market
developments, changes in the company's existing research relationships, the
ability of the Company to establish collaborative arrangements, the development
of commercialization activities and arrangements, and the acquisition of
additional facilities and capital equipment.

     The Company plans to finance these cash needs in the near term principally
through its existing cash reserves, together with interest earned thereon,
revenues, payments and reimbursements under the Company's Joint Venture with PMC
and facilities and equipment financing. The Company believes, based on its
current operating plan, that, in addition to its available cash balances and
known revenues, it will need additional financing in order to fund the Company's
operations in the second half of 1998. The Company will require additional funds
to conduct, if planned a Phase III trial of its HNK20 product candidate and for
HNK20 manufacturing start up. Moreover, changes in the Company's research and
developments plans or other events affecting the Company's operations may result
in accelerated or unexpected expenditures. In addition, the Company will need
substantial additional capital to fund its operations for the manufacturing and
marketing of any of its successful product candidates. Possible sources of
capital include strategic corporate partnerships and private equity financing,
both of which the Company is actively pursuing. If additional funds are raised
by issuing equity securities, further dilution to existing stockholders may
result and future investors may be granted rights superior to those of existing
stockholders. There can be no assurance, however, that additional financing will
be available from any of these sources, or if available, will be available on
terms satisfactory to the Company. The Company's inability to obtain needed
funding on satisfactory terms may require the Company to delay, curtail or
eliminate one or more of its planned product development programs, scale back
its planned manufacturing operations or enter into collaborative arrangements
that may require the Company to issue additional equity or relinquish rights to
certain technologies or product candidates that the Company would not otherwise
issue or relinquish.

     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, manufacturing limitations, third party
reimbursements, collaborative arrangements, and compliance with government
regulations.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, OraVax JVM, Inc. and OraVax Securities Corp.,
which were incorporated in 1995. Intercompany transactions and balances have
been eliminated in consolidation.

Joint Venture

     The Company accounts for its investment in its Joint Venture Partnerships
under the equity method of accounting. (see Note K)

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash Equivalents

     The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments. The Company
restricts temporary cash investments to institutions with high credit standing.

                                                                              7
<PAGE>   61


Short-term Investments

     Short-term interest-bearing investments are those which, when purchased,
have maturities of less than one year but greater than three months. At December
31, 1997 Company had the following short-term investments available for sale
which it expects to utilize for working capital purposes, carried at amortized
cost plus accrued interest, which approximates fair market value (in thousands):

<TABLE>
<S>                                                                                          <C>
     US Government and Agency obligations, due February 1998 through April 1998, 4.8% -      $  394*
     5.2%
     Certificate of deposit, due January 1998, 5.8%                                           1,054
                                                                                             ------
                                                                                             $1,448
                                                                                             ======
* These treasury securities are restricted as to their use.
</TABLE>

Property and Equipment

     Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the lesser of the lease term or
the estimated useful lives of the related assets, generally three to seven
years.

     When assets are retired or otherwise disposed of, the assets and related
accumulated depreciation and amortization are eliminated from the accounts and
any resulting gains and losses are included in operations in the period of
disposal.

Revenue Recognition

     Revenue under the Company's collaborative research and development
agreement is recognized as related expenses are incurred. The Company recognizes
milestone payments as revenue when the milestones are achieved. (See Note K)

     The Company recognizes government grant revenue as the related expenses are
incurred.

Research and Development Costs

     Research and development costs are expensed as incurred.

Computation of Net Loss per Common Share

     For the year ended December 31, 1997, the Company adopted Statement of
Accounting Standards No.128 ("FAS 128"), which requires the presentation of
Basic and Dilutive earnings per share, which replaces primary and fully diluted
earnings per share. Earnings per share have been restated for all periods
presented to reflect the adoption of FAS 128. Basic net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive effect
of common stock equivalents. Common stock equivalent shares consist of
convertible preferred stock (Note I) and stock options (Note J). The dilutive
computations do not include common stock equivalents for the years ended
December 31, 1997, 1996 and 1995, as their inclusion would be antidilutive.

Income Taxes

                                                                              8
<PAGE>   62

     The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial reporting
and tax bases of liabilities and assets using enacted tax rates in effect in the
years in which the differences are expected to reverse. Potential future income
tax benefits resulting from net operating losses, unused research and
experimentation credits, and other timing differences will be recognized as
taxable income becomes available to absorb them.

Effect of Recent Accounting Pronouncements

     In June 1997, the Financial Accounting Standard Board issued Statement of
Accounting Standards No.130, "Reporting Comprehensive Income". This statement
requires that changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements. The
Statement will become effective for fiscal years beginning after December 15,
1997. The Company will adopt the new standard beginning in the first quarter of
the fiscal year ending December 31, 1998. The Company does not expect the
adoption of FAS 130 to materially effect the financial statement presentation.

     In June 1997, the Financial Accounting Standard Board also issued Statement
of Financial Accounting Standards No.131, "Disclosures about Segments of an
Enterprise and Related Information". This Statement specifies new guidelines for
determining a company's operating segments and related requirements for
disclosure. The Company is in the process of evaluating the impact of the new
standard on the presentation of the financial statements and the disclosures
therein. The Statement will become effective for fiscal years beginning after
December 15, 1997. The Company will adopt the new standard for the fiscal year
ending December 31, 1998.

C. PROPERTY AND EQUIPMENT:

     Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                    YEARS ENDED
                                                    DECEMBER 31,
                                                 -----------------
                                                   1996       1997
         <S>                                     <C>        <C>
         Furniture and equipment ...........     $  442     $  493
         Computer hardware and software ....        172        197
         Leasehold improvements ............      2,578      2,626
         Equipment under capital lease .....      4,803      4,353
                                                 ------     ------
                                                  7,995      7,669
         Less accumulated depreciation .....      2,541      4,145
                                                 ------     ------
         Property and equipment, net .......     $5,454     $3,524
                                                 ======     ======
</TABLE>

     The net book value of equipment under capital lease was $3,121,000 and
$1,579,000 at December 31, 1996 and 1997, respectively.

D. ACCRUED EXPENSES:

     Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                               YEARS ENDED
                                               DECEMBER 31,
                                           -----------------
                                             1996       1997
<S>                                        <C>        <C>
Research and development contracts ...     $2,374     $1,985
License fees .........................         58         63
Financing related deal costs .........         --        751
Other ................................      1,221        860
                                           ------     ------
Total accrued expenses ...............     $3,653     $3,659
                                           ======     ======
</TABLE>


                                                                             9
<PAGE>   63
E. INCOME TAXES:

     Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using statutory rates. A valuation allowance is recorded against
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.

     The components of deferred taxes were as follows:

<TABLE>
<CAPTION>
                                      Years Ended December 31,
                                        1996           1997
<S>                                    <C>           <C>
Capitalization of costs ..........     $  8,238      $ 11,943
Property, plant and equipment ....          563           898
Capital leases ...................          (20)           --
Accrued expenses .................          326           358
Net operating loss ...............       11,272        13,459
Tax credits ......................        1,797         2,586
                                       --------      --------
Gross deferred tax asset .........       22,176        29,244
Valuation allowance ..............      (22,176)      (29,244)
                                       --------      --------
Net deferred tax asset ...........     $     --      $     --
                                       ========      ========
</TABLE>

     As of December 31, 1997, the Company had available federal net operating
loss carryforwards of approximately $33,760,000 and $1,770,000 of federal tax
credits, which may be used to offset future taxable income. These carryforwards
expire beginning in 2005. Due to the uncertainty surrounding the realization of
the net operating loss carryforwards in future tax returns, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased approximately $7,069,000 from December 31, 1996 to December 31, 1997.

     The Company has experienced ownership changes as defined under Section 382
of the Internal Revenue Code. Ownership changes limit the future use of the net
operating loss and credit carryforwards created prior to the ownership change.
If the full amount of the limitation is not used in any year, the amount not
used increases the allowable limit in the subsequent year.

F. CAPITAL LEASES:

     During the year ended December 31, 1997, the Company did not enter into any
sale-leaseback or direct lease arrangements due to the low volume of capital
equipment expenditures. During 1996, an equipment lease assumed by the Company
in connection with its lease of a manufacturing facility in Canton,
Massachusetts, was capitalized in the amount of $2,773,000. Interest paid on
capital leases during the years ended December 31, 1995, 1996 and 1997was
$87,000, $372,000 and $270,000, respectively.

Minimum future payments under the Company's capital leases as of December 31,
1997 were as follows (in thousands):

<TABLE>
<CAPTION>
                YEAR ENDING
                DECEMBER 31,              AMOUNT
<C>                                       <C>
1998 ................................     $1,418
1999 ................................        320
2000 ................................        124
                                          ------
                                           1,862
Less amount representing interest ...        130
                                          ------
                                           1,732
Less current obligation .............      1,316
                                          ------
Long-term obligation ................     $  416
                                          ======
</TABLE>

                                                                            10
<PAGE>   64
G.   INSTALLMENT DEBT:

     In January 1996, the Company leased an approximately 47,000 square foot,
good manufacturing practices ("GMP"), manufacturing facility in Canton,
Massachusetts and acquired related equipment and leasehold improvements from the
former tenant. This facility was specifically designed and equipped by the
former tenant for the manufacture of biological products. The Company
anticipates that its initial use of the facility will be for the production of
vaccines for the Joint Vaccine Acquisition Program, of the U.S. Department of
Defense. The facility will also accommodate production development activities
for OraVax's proprietary products depending on the outcome of product
development. Existing building and capital equipment leases, which contain
renewal and purchase options were transferred to the Company. In addition, the
Company purchased leasehold improvements and other related assets from the
former tenant, capitalized in the amount of $1,824,000, with the related debt
payable in installments through 1999 collateralized by a leasehold mortgage and
collateral assignment of OraVax's interest in the building lease.

    Future minimum payments under the installment purchase are as follows (in
thousands):

<TABLE>
<CAPTION>
                       YEAR ENDING
                       DECEMBER 31,                AMOUNT
<S>      <C>                                       <C>
         1998 ................................     $  260
         1999 ................................      1,050
                                                   ------
                                                    1,310
         Less amount representing interest ...        168
                                                   ------
                                                    1,142
         Less current obligation .............        260
                                                   ------
         Long-term obligation ................     $  882
                                                   ======
</TABLE>

H. COMMITMENTS AND CONTINGENCIES:

Operating Leases

     The Company leases office and laboratory facilities in Cambridge,
Massachusetts under an operating lease which contains renewal options and
expires in March 2001. In addition, the Company has an operating lease for a
manufacturing facility in Canton, Massachusetts, containing renewal and purchase
options and expiring in June 2002. The noncancelable future payments as of
December 31, 1997 were as follows (in thousands):

                              YEAR ENDING
                              DECEMBER 31,    AMOUNT
                         1998..............   $1,427
                         1999..............    1,430
                         2000 .............    1,434
                         2001 .............      511
                         2002 .............      101

     Rent expense for leased facilities during the years ended December 31,
1995, 1996 and 1997 was $689,000, $1,862,000 and $2,051,000, respectively.

Agreements

     The Company is party to various agreements, principally contracted research
and clinical trials, for which noncancelable minimum future payments as of
December 31, 1997 were $895,000 payable in the year ended December 31, 1998.

                                                                            11
<PAGE>   65

     In addition, under certain of these and other agreements, the Company may
pay royalties on future sales of specified products.

I. PREFERRED STOCK:

     The Company issued an aggregate of 964,803 shares of Series Redeemable
Convertible Preferred Stock for net cash proceeds of $27,231,000 (the "Series
Preferred Stock") at various dates since its inception through December 31,
1994.

     In January and March 1995, the Company issued an aggregate of 216,237
shares of Series Preferred Stock for net cash proceeds of $9,232,000.

     During 1994 and 1995, $100,000 and $108,000, respectively, to accrete the
redeemable convertible preferred stock to its redemption value on a
straight-line basis, was recorded in noncash transactions.

     In June 1995, all outstanding shares of Series Preferred Stock were
converted to 5,019,383 shares of common stock in connection with the closing of
the Company's initial public offering.

     In December 1997, in a private placement financing, the Company issued
6,300 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock"),
for $1,000 per share, providing cash proceeds of $5.6 million, of which $4.2
million was received in 1997 and $1.4 million in 1998, net of $700,000 in deal
costs, to the Company. The holders of the Convertible Preferred Stock receive an
annual cumulative 6% dividend, which accrues in stock. All of the Convertible
Preferred shares are fully convertible into shares of the company's Common
Stock, at the option of the holder. The conversion price is the lowest trading
price of the Common Stock during the 22 consecutive trading days immediately
preceding the date of conversion reduced by a conversion discount that starts at
5% in December 1997 and increases to a maximum of 21% by June 1999. At December
31, 1997, the value of the discount is $846,788, which has been recorded as
deferred financing costs and will be amortized over the eighteen month discount
period. The discount will be marked to market on a quarterly basis based on
changes in the Company's stock price. The number of shares sold on any given
date are limited to the greater of 4,000 shares, 10% of the average daily
trading volume of the Common Stock for the 5 trading days immediately preceding
such sale, as reported by Nasdaq or such principal exchange, or 10% of the
trading volume of the Common Stock on the day of such sale, as reported by
Nasdaq or such principal exchange. The conversion price is at all times also
subject to customary anti-dilution adjustment for events such as stock splits,
stock dividends, reorganizations and certain mergers affecting the Company's
Common Stock. On December 23, 2002, all outstanding shares of the Convertible
Preferred Stock, including any accrued dividends thereon, will automatically be
converted into the Company's Common Stock at the conversion price on such date.
Each share of Convertible Preferred Stock is also entitled to a liquidation
preference of $1,000 per share, plus any accrued but unpaid dividends, in
preference to any other class or series of capital stock of the Company. Except
to determine whether such stock is entitled to its liquidation preference under
certain circumstances, and as provided by applicable law, holders of the
Convertible Preferred Stock have no voting rights. In February 1998, 7,294,737
shares were registered for conversion.

J. STOCKHOLDERS' EQUITY:

Common Stock

     In December 1997, in a private placement financing, the Company sold
240,000 shares of its common stock, par value $.00l per share, for $1.91 per
share, providing net proceeds of $396,000 to the Company.

     In June 1996, the Company sold 2,300,000 shares of its common stock, par
value $.001 per share, for $7.25 per share in a follow-on stock offering,
providing net proceeds of $15,215,000 to the Company.

     In June 1995, the Company sold 2,300,000 shares of its common stock, par
value $.001 per share, for $10.00 per share in an initial public offering,
providing net proceeds of $20,676,000 to the Company. In connection with the
initial public offering, all outstanding shares of Series Preferred Stock were
converted to common stock.

     In March 1995, the Company's stockholders approved an increase in the
authorized shares of common stock to 25,000,000 shares and authorized 2,000,000
shares of a new class of preferred stock, par value $.001 per share.

                                                                            12
<PAGE>   66

Stock Options

     Effective January 1, 1996, The Company adopted FAS No. 123, "Accounting for
Stock-Based Compensation." FAS 123 established financial accounting and
reporting standards for stock-based employee compensation plans. The statement
defines a new method of accounting for employee stock compensation plans using a
fair value based method, under which compensation costs is measured and
recognized in results of operations. Alternatively, FAS 123 allows an entity to
retain the accounting for employee stock compensation plans defined under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company retained the accounting defined in APB No. 25 under
which no compensation expense is recognized for fixed stock option grants to
employees provided that the grant price equals or is greater than fair market
value. As required, the Company will disclose the pro forma effects of
stock-based compensation using the fair value based method defined under FAS
123.

     Incentive stock options granted under the Company's 1990 and 1995 stock
option plans (the "Plans") may not be granted at a price less than the fair
market value of the common stock on the date of grant (or less than 110% of fair
market value in the case of employees or officers holding 10% or more of the
voting stock of the Company). Nonqualified stock options may be granted at an
exercise price established by the Board of Directors, which may be less than,
equal to or greater than the fair value of the common stock on the date of
grant. Options granted under the Plans generally vest over three- to five-year
periods, and expire not more than ten years from the date of grant, or not more
than five years from the date of grant in the case of incentive stock options
granted to an employee or officer holding 10% or more of the voting stock of the
Company.

     The Company's 1996 Employee Stock Purchase Plan (the "ESPP") permits
employees to purchase common stock of the Company at the lesser of 85% of its
fair value at the beginning or end of related six month payroll withholding
periods. During 1995, 1996 and 1997, 10,197, 13,822 and 36,146 shares,
respectively, were sold to employees under the ESPP. At December 31, 1997,
39,835 shares of common stock remained reserved for future issuances under the
ESPP.

     Had compensation cost for options issued under OraVax's stock option plan
and Employee Stock Purchase Plan been determined based on the fair value at the
grant dates consistent with the methods defined under FAS 123, OraVax's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                                                                    Year Ended
                                                                                                   December 31,
                                                                                         1995         1996          1997
<S>                                                                                   <C>         <C>           <C>
     Net loss as reported (in thousands)........................................      ($8,305)    ($21,622)     ($15,812)
     Pro forma ( in thousands)..................................................      ($8,378)    ($21,877)     ($16,233)
     Basic and diluted loss per share ..........................................       ($1.90)      ($1.91)       ($1.58)
     Pro forma..................................................................       ($1.91)      ($2.49)       ($1.62)
</TABLE>

The fair value of each stock option granted is estimated on the grant date using
the Black-Scholes pricing model with the following weighted-average assumptions.

<TABLE>
<CAPTION>
                                                                                                   Year Ended
                                                                                                  December 31,
                                                                                        1995         1996         1997
                                                                                      -------       -------     -------
<S>                                                                                   <C>           <C>         <C>
     Expected Option Term.......................................................      5 years       5 years     5 years
     Expected Option Volatility.................................................          65%          65%         70%
     Risk Free Interest Rate....................................................        6.82%        6.13%       6.54%
</TABLE>

                                                                            13
<PAGE>   67
<TABLE>
<S>                                                                                        <C>          <C>         <C>
     Expected Dividend Yield....................................................           0%           0%          0%
</TABLE>

The weighted average fair value of options granted under the plans during each
of the years ended December 31, 1995, 1996 and 1997 was $4.55, $7.32 and $1.66,
respectively.

The fair value of each option granted under the Employee Stock Purchase Plan is
estimated on the grant date using the Black-Scholes pricing model with the
following weighted-average assumptions.

<TABLE>
<CAPTION>
                                                                                               Year Ended
                                                                                               December 31,
                                                                                     1995        1996        1997
                                                                                   --------    --------    --------
<S>                                                                                <C>         <C>         <C>
     Expected Option Term.......................................................   1/2 year    1/2 year    1/2 year
     Expected Option Volatility.................................................       65%         65%        70%
     Risk Free Interest Rate....................................................     5.64%       5.32%      5.62%
     Expected Dividend Yield....................................................        0%          0%         0%
</TABLE>

The weighted-average fair value of options granted under the Employee Stock
Purchase Plan during each of the years ended December 31, 1995, 1996 and 1997
was $3.49, $3.11 and $.97, respectively.

Because some options vest over several years and additional awards are generally
made each year, the pro forma amounts may not be representative of the effects
on net income in future years.

     A summary of the status of OraVax's stock option plan for the years ended
December 31, 1995, 1996 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                         WEIGHTED-AVERAGE
                                             SHARES       EXERCISE PRICE
<S>                                       <C>                <C>
Outstanding at December 31, 1994 ...        761,419           1.74
  Granted ..........................         92,104           6.14
  Exercised ........................        (44,982)          1.20
  Canceled .........................         (5,734)          2.23
                                          ---------
Outstanding at December 31, 1995 ...        802,807           2.27
  Granted ..........................        127,610          12.18
  Exercised ........................        (27,625)           .78
  Canceled .........................        (11,983)          5.21
                                          ---------
Outstanding at December 31, 1996 ...        890,809           3.70
  Granted ..........................        498,683           2.63
  Exercised ........................        (68,853)           .74
  Canceled .........................       (145,367)          5.61
                                          ---------
Outstanding at December 31, 1997 ...      1,175,272           3.18
                                          =========
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                 Options Outstanding                         Options Exercisable
-----------------------------------------------    -----------------------------------------
Range of Exercise   #Outstanding   Wtd. Average    Wtd. Average   #Options      Wtd. Average
     Price           at 12/31/97    Remaining        Exercise    Exercisable      Exercise
                                   Contractual         Price                        Price
                                       Life
-----------------   ------------   ------------    ------------  -----------    ------------

<S>                  <C>               <C>            <C>          <C>              <C>
  0.471-  0.7065        41,802         4.36            0.69         46,333           0.68
  0.765-  1.1475       179,385         5.22            0.79        165,265           0.79
  2.25 -  3.375        792,968         8.25            2.60        270,516           2.56
  3.529-  5.2935        52,500         7.28            3.63         19,594           3.53
  6.625-  9.9375        22,745         7.78            7.81          9,000           7.85
 11.75 - 17.625         86,000         8.19           13.24         18,716          13.28
                     ---------                                     -------

$ 0.471-$17.625      1,175,400         7.59            3.18        529,424           2.35
                     ---------                                     -------
</TABLE>

     At December 31, 1997, options to purchase 818,178 shares of common stock
remained available for future grants under the plans. At December 31, 1997,
1,993,450 shares of common stock remained reserved to satisfy the issuance of
shares under outstanding and future grants under the plans.

     In connection with certain stock option grants in 1995, the Company
recorded $141,000 of deferred compensation expense which is being amortized and
charged to operations over the five-year vesting period of the related options.
In addition, $250,000 of compensation expense was recorded in 1995 in connection
with the vesting of certain milestone-based stock options. In 1997, $39,000 of
compensation expense was recored in connection with the vesting of certain
performance leased options and the extension of the term has certain options.



                                                                            14
<PAGE>   68
K. JOINT VENTURE:

     In March 1995, the Company entered into a collaboration (the "Joint
Venture") with Pasteur Merieux Connaught ("PMC") for the development,
manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines
against H. pylori infection in humans. Under the Joint Venture, OraVax and PMC
agreed to develop vaccines which use the urease protein or any of its sub-units
as an antigen (the "Target Products"). OraVax and PMC will share equally in
profits from the sales of the Target Products and in all future research,
development, clinical and commercialization costs. PMC is providing technical
expertise and will also provide marketing to the Joint Venture. PMC made an
initial payment of $3.2 million directly to OraVax which included $0.6 million
to recognize the value of research and development conducted by OraVax in the
first quarter of 1995 prior to forming the Joint Venture, and a milestone
payment of $2.6 million to recognize the value of technology previously
developed by OraVax and made available to the Joint Venture. In addition, PMC
purchased $2.5 million of the Company's Series Preferred Stock. Subsequently,
PMC purchased an additional $1.0 million of common stock in the Company's
initial public offering. In addition, PMC agreed to pay the Company directly up
to an additional $12.0 million during the development period, subject to the
achievement of certain clinical and regulatory milestones, of which $0.6 million
was paid to OraVax in December 1995. Beginning in the second quarter of 1995,
research, development and commercialization activities of the Joint Venture were
conducted through two equally controlled partnerships (the "Joint Venture
Partnerships") which have contracted with OraVax to perform the research,
development and clinical trial activities. OraVax earned $4,868,000, $6,595,000
and $7,587,000 under these contracts during 1995, 1996 and 1997, respectively.
In addition, during 1996 and 1997, the Joint Venture entered into research and
development contracts with PMC and third parties. The research and development
budgets of the two partnerships comprising the Joint Venture are established by
joint committees in which each of the venturers has an equal participation and
role. The venturers will pay approximately equal shares of the agreed upon
budgets. OraVax will receive revenue from the partnerships for research and
development work which is requested to be performed by OraVax and funded by the
Partnerships.

     OraVax and PMC each invested approximately $2.9 million, $4.5 million and
$5.8 million in 1995, 1996 and 1997, respectively, to fund the Joint Venture's
operations. OraVax accounts for its investments in the Joint Venture
Partnerships under the equity method of accounting and, accordingly, recorded
its $2,436,000, $5,085,000 and $6,236,000 share of the Joint Venture
Partnerships' net losses during 1995, 1996 and 1997, respectively. Following are
the Joint Venture Partnerships' summarized combined balance sheets as of
December 31, 1996 and 1997, and the summarized combined statement of operations
for the period March 31, 1995 (inception) through December 31, 1995, for the
years ended December 31, 1996 and 1997 and cumulative from inception (March 31,
1995) through December 31, 1997.

    OraVax and Merieux each licensed to the Joint Venture upon its formation
the right to use all of their respective existing proprietary technologies
relating to vaccines for the treatment of H. pylori, except for so-called naked
DNA technology (for an injectable vaccine) which is the subject of a separate
collaboration by Merieux with the third party. Additional technology in the H.
pylori field acquired by either party since the formation of the Joint Venture
is required to be offered to the Joint Venture. The Joint Venture itself has
also obtained licenses to relevant technology from third parties, including a
license in November, 1996 of the complete genome sequence of H. pylori from
MedImmune and Human Genome Sciences.


                           JOINT VENTURE PARTNERSHIPS
                        (development stage enterprises)
                             COMBINED BALANCE SHEET
                                 (IN THOUSANDS)

                                     ASSETS
<TABLE>
<CAPTION>

                                                          DECEMBER 31,
                                                             1996         1997
<S>                                                        <C>            <C>
                Cash................................       $  128        $  625
                Prepaid expenses....................        1,046           623
                                                           ------        ------
                                                           $1,174        $1,248
                                                           ======        ======
</TABLE>

                        LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
<S>                                                        <C>           <C>
                Accounts payable - OraVax                  $  750        $  382
                Accounts payable - PMC                        586           595
                Accounts payable - Other                                 1,240
                Partners' capital:
                  OraVax..................                    (81)         (485)
                  PMC.....................                    (81)         (484)
                                                           -------       ------
                                                           $ 1,174       $1,248
                                                           =======       ======
</TABLE>



                                       15
<PAGE>   69


                           JOINT VENTURE PARTNERSHIPS
                        (development stage enterprises)
                        COMBINED STATEMENT OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                         MARCH 31, 1995                                  CUMULATIVE
                                           (INCEPTION)                                   (INCEPTION
                                            THROUGH      YEAR  ENDED       YEAR  ENDED     THROUGH
                                          DECEMBER 31,    DECEMBER 31,     DECEMBER 31,  DECEMBER 31,
                                              1995           1996             1997          1997)
<S>                                          <C>           <C>             <C>            <C>
Interest income                              $     -       $     16        $     22       $     38
                                             -------       --------        --------       --------

Contract research expense -   OraVax......     4,868           6,595          7,587         19,050
Contract research expense - PMC...........                     2,258          2,375          4,633
Contract research expense - other.........                     1,139          2,508          3,647
Legal and administrative expenses                  -             85              15            100
                                             -------       --------        --------       --------

Total expenses                                 4,868         10,077          12,485         27,430
                                             -------       --------        --------       --------

Net loss..................................   $(4,868)      $(10,061)       $(12,463)      $(27,392)
                                             =======       ========        ========       ========
</TABLE>


L. RELATED PARTIES:

     The Company has a consulting agreement with the chairman of its Board of
Directors under which, and together with fees paid to him for his services as
chairman, he was paid $57,000, $51,000 and $39,000 during 1995, 1996 and 1997,
respectively. In 1996, the Company entered into a consulting agreement with a
member of its Board of Directors under which, and together with fees paid to him
for his services as a director, he was paid $8,000 and $16,000 during 1996 and
1997, respectively. In 1997, the Company entered into a consulting agreement
with another member of its Board of Directors under which, and together with
fees paid to him for his services as a director, he was paid $10,000 during
1997.

M. EMPLOYEE BENEFITS:

     The Company has a 401(k) retirement plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to statutory
limitations. For 1995, 1996 and 1997, the Company declared discretionary
matching aggregate contributions to the plan of $68,000, $97,000 and $89,000,
respectively, paid in 5,758, 18,509 and 50,723 shares of the Company's common
stock, respectively. At December 31, 1997, there were 75,010 shares of common
stock reserved for future issuances under the plan.


                                                                             16
<PAGE>   70


                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS

                     INDEX TO COMBINED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS                                                                                    PAGE

<S>                                                                                                      <C>
Report of Independent Accountants..............................................................          S-2
Combined Balance Sheets as of December 31, 1996 and 1997.......................................          S-3
Combined Statements of Operations for the period from inception (March 31, 1995)
   through December 31, 1995 and the years ended December 31, 1996 and 1997....................          S-4
Combined Statements of Partners' Capital (Deficit) for the period from inception
   (March 31, 1995) through December 31, 1995 and the years ended December 31, 1996 and 1997...          S-5
Combined Statements of Cash Flows for the period from inception (March 31, 1995)
   through December 31, 1995 and the years ended December 31, 1996 and 1997....................          S-6
Notes to Combined Financial Statements.........................................................          S-7
</TABLE>





<PAGE>   71

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of OraVax Merieux Co. and Merieux OraVax Co.:

     We have audited the accompanying combined balance sheets of OraVax Merieux
Co. and Merieux OraVax Co. (both development stage enterprises) as of December
31, 1996 and 1997 and the related statements of operations, partners' capital,
and cash flows for the period from inception (March 31, 1995) through December
31, 1995 and the years ended December 31, 1996 and 1997 and cumulative from
inception (March 31, 1995) through December 31, 1997. These financial statements
are the responsibility of the partnerships' management. Our responsibility is to
express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of OraVax Merieux Co.
and Merieux OraVax Co. (development stage enterprises) as of December 31, 1996
and 1997, and the combined results of their operations and their cash flows for
the period from inception (March 31, 1995) through December 31, 1995 and the
years ended December 31, 1996 and 1997 and cumulative from inception (March 31,
1995) through December 31, 1997, in conformity with generally accepted
accounting principles.


                                                /s/ Coopers & Lybrand L.L.P.
                                               --------------------------------
Boston, Massachusetts
March 27, 1998
<PAGE>   72



                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

                             COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                             -----------------------------
                                                                  1996           1997
<S>                                                           <C>            <C>
ASSETS
Cash ................................................         $   127,445      $  625,055
Prepaid expenses ....................................           1,046,301         623,164
                                                              -----------      ----------

Total assets ........................................         $ 1,173,746      $1,248,219
                                                              ===========      ==========

LIABILITIES AND PARTNERS' CAPITAL
Liabilities .........................................
     Accounts payable and accrued expenses ..........         $ 1,335,862      $2,217,576
Commitments and contingencies (note D)
Partners' capital (deficit) .........................            (162,116)       (969,357)
                                                              -----------      ----------

Total liabilities and partners' capital (deficit) ...         $ 1,173,746      $1,248,219
                                                              ===========      ==========
</TABLE>



The accompanying notes are an integral part of the combined financial
statements.


<PAGE>   73


                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

                        COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                                  CUMULATIVE
                                                 MARCH 31, 1995                                                   (INCEPTION
                                                    THROUGH                YEAR ENDED         YEAR ENDED            THROUGH
                                                DECEMBER 31, 1995      DECEMBER 31, 1996    DECEMBER 31, 1997  DECEMBER 31, 1997)
                                                -----------------      -----------------    -----------------  ------------------
<S>                                                <C>                   <C>                  <C>                   <C>
Revenue
    Interest Income                                          -           $     16,393         $     21,509         $     37,902
                                                                         ------------         ------------         ------------

Expenses:
   Contract research expense - OraVax, Inc....     $ 4,867,799           $  6,595,003         $  7,587,421         $ 19,050,223
    Contract research expense - PMsv..........               -              2,257,985            2,375,000            4,632,985
    Contract research expense - other.........               -              1,139,033            2,507,559            3,646,592
    Legal and administrative expenses.........               -                 85,777               15,020              100,797
                                                   -----------           ------------         ------------         ------------

Total expenses................................       4,867,799             10,077,798           12,485,000           27,430,597
                                                   -----------           ------------         ------------         ------------

Net loss......................................     $(4,867,799)          $(10,061,405)        $(12,463,491)        $(27,392,694)
                                                   ===========           ============         ============         ============
</TABLE>





 The accompanying notes are an integral part of the combined financial
 statements.


<PAGE>   74



                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

               COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
    FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>

                                                     PASTEUR         MERIEUX
                                      ORAVAX         MERIEUX         AMERICA
                                     JVM, INC.      CONNAUGHT      HOLDING, INC.       TOTAL
                                                                                   ------------
<S>                                <C>             <C>              <C>            <C>
Capital contributions...........   $ 2,885,851     $ 2,014,444      $   866,793    $  5,767,088
Net loss........................    (2,435,847)     (1,700,322)        (731,630)     (4,867,799)
                                   -----------     -----------      -----------    ------------

Balance, December 31, 1995......       450,004         314,122          135,163         899,289

Capital contributions...........     4,503,600       3,143,700        1,352,700       9,000,000
Net loss........................    (5,034,754)     (3,521,082)      (1,505,569)    (10,061,405)
                                   -----------     -----------      -----------    ------------

Balance, December 31, 1996......   $   (81,150)    $   (63,260)     $   (17,706)   $   (162,116)
                                   ===========     ===========      ===========    ============

Capital contributions ..........     5,832,751       4,062,359        1,761,140      11,656,250
Net loss .......................    (6,236,765)     (4,361,714)      (1,865,012)    (12,463,491)
                                   -----------      ----------       ----------     -----------
Balance, December 31, 1997 .....   $  (485,164)     $ (362,615)      $ (121,578)    $  (969,357)
                                   ===========      ==========       ==========     ===========
</TABLE>





 The accompanying notes are an integral part of the combined financial
 statements.


<PAGE>   75



                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                         (development stage enterprises)

                        COMBINED STATEMENTS OF CASH FLOWS
    FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                                                    CUMULATIVE
                                                 MARCH 31, 1995                                                     (INCEPTION
                                                    THROUGH              YEAR ENDED            YEAR ENDED            THROUGH
                                               DECEMBER 31, 1995      DECEMBER 31, 1996     DECEMBER 31, 1997   DECEMBER 31, 1997)
                                               -----------------      -----------------     -----------------   ------------------
<S>                                             <C>                     <C>                 <C>                     <C>
Cash flows from operating activities:
   Net loss .................................   $ (4,867,799)           $(10,061,405)         $(12,463,491)         $(27,392,695)
     Changes in operating assets and
       liabilities:
       Prepaid expenses .....................       (899,289)               (147,012)              423,137              (623,164)
       Accounts payable .....................             --               1,335,862               881,714             2,217,576
                                                ------------            ------------          ------------          ------------

Net cash used by operating activities .......     (5,767,088)             (8,872,555)          (11,158,640)          (25,798,283)

Cash flows from financing activities:
   Capital contributions ....................      5,767,088               9,000,000            11,656,250            26,423,338
                                                ------------            ------------           -----------          ------------

Net increase in cash and cash equivalents ...             --                 127,445               497,610               625,055
Cash and cash equivalents at beginning
  of period .................................             --                      --               127,445                    --
                                                ------------            ------------           -----------          ------------
Cash and cash equivalents at end of period ..   $         --            $    127,445           $   625,055          $    625,055
                                                ============            ============           ===========          ============
</TABLE>





 The accompanying notes are an integral part of the combined financial
 statements.


<PAGE>   76



                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

                     NOTES TO COMBINED FINANCIAL STATEMENTS



A.   NATURE OF BUSINESS:

     A collaboration between Pasteur Merieux Connaught ("PMC"), a societe
anonyme existing and organized under the laws of the Republic of France, and
OraVax, Inc. (OraVax), a corporation existing and organized under the laws of
the State of Delaware, was formed on March 31, 1995 (the "Collaboration").

     In accordance with the Master Agreement of the Collaboration (the
"Agreement"), two partnerships, Merieux OraVax Co. and OraVax Merieux Co., both
development stage enterprises (the "Partnerships") were formed. The Partnerships
conduct all activities relative to the research, development, registration,
commercialization, manufacturing, marketing, sales and distribution of
immunotherapeutic and preventative vaccines against Helicobacter pylori
infections in humans which use the urease protein or any of its sub-units as an
antigen. The partnerships began operations on April 1, 1995. The two
collaborators, OraVax and PMC have established their intent to own the
partnerships equally on an aggregated basis, to share expenses equally, and to
share profits and losses equally. The capital contributions of each partner are
determined by budgets established annually by committees on which each of the
partners has equal representation and an equal vote. It is the intent of the
partners to share such additional capital contributions equally.

     Merieux OraVax Co. is a French partnership whose partners are PMC and
OraVax JVM, Inc. ("OraVax JVM"), a wholly-owned subsidiary of OraVax. The term
of the partnership is ninety-nine years. The initial interest of each partner in
Merieux OraVax Co. is as follows:

                           PMsv......................49.9%
                           OraVax JVM................50.1%

     The second partnership comprising the Collaboration is OraVax Merieux Co.,
a Massachusetts general partnership, whose partners are OraVax JVM and Merieux
American Holding, Inc. ("MAHI"), an affiliate of PMC. The initial interest of
each partner in OraVax Merieux Co. is as follows:

                           MAHI......................50.1%
                           OraVax JVM................49.9%

     While the partnership interests of the partners in each partnership are
slightly different, the Collaboration has been structured with the intent of
having all costs, capital, profits and losses shared equally by Merieux and
OraVax (through their respective affiliates). As a matter of partnership
accounting, the capital contributions shall be made equally, to be consistent
with the respective partnership interests for each partner as set forth above.

     In the event of a default by a partner in the payment of capital
contributions to fund at least 80% of its share of the operating budget, the
Agreement calls for negotiation to resolve any disagreement. If the partners
fail to negotiate a resolution of the issue, the partner which has paid its
contribution shall take control of the partnership from the partner failing to
have contributed its share. Except for such a default, it is the intent of the
Collaboration that control remain equal between OraVax and PMC.

     The partners of OraVax Merieux Co. and Merieux OraVax Co., both development
stage enterprises, have agreed to fund through the Partnerships the research and
development, clinical and pharmaceutical development costs of the Collaboration
as approved by its executive committee at least through December 1998.


<PAGE>   77



                             ORAVAX MERIEUX CO. AND
                         MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

              NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)


     The ultimate success of the Partnerships is dependent upon their ability to
raise capital through partners' contributions, equity and debt placement, sale
of product and interest income on invested capital. The Partnerships' capital
requirements may change depending upon numerous factors, including progress of
their research and development programs, time required to obtain regulatory
approvals, resources the Partnerships devote to self-funded projects,
proprietary manufacturing methods and advanced technologies and demand for the
Partnerships' products, if and when approved.

     While management believes that additional capital will be available to fund
operations, there can be no assurance that additional funds will be available
when required, on terms acceptable to the Partnerships.

     The Partnerships are subject to risks common to entities in the
biotechnology industry including, but not limited to, development by the
Partnerships or their competitors of new technological innovations, dependence
on key personnel, protection of proprietary technology and compliance with
government regulations.

B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

   Principles of Combination

     The combined financial statements include the accounts of OraVax Merieux
Co. and Merieux OraVax Co. Intercompany transactions and balances have been
eliminated in combination.

   Research and Development Costs

     Research and development costs are expensed as incurred.

   Cash and Cash Equivalents

     The Partnerships consider all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.

   Income Taxes

     In conformity with the Internal Revenue Code and applicable state and local
tax statutes, taxable income or loss of the Partnerships is required to be
reported in the tax returns of the partners in accordance with the terms of the
partnership agreements and, accordingly, no provision has been made in the
accompanying financial statements for income taxes.

   Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


<PAGE>   78

                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
                        (development stage enterprises)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)


C.   RELATED PARTY TRANSACTIONS

     The Partnerships entered into research and development contracts, with
OraVax, Inc., the parent company of OraVax JVM and with PMC, to perform
contract research and development for the Partnerships. Funds transferred to
OraVax for the period from inception through December 31, 1995 and the years
ended December 31, 1996 and 1997 were $5,767,088, $6,642,015 and $7,205,000,
respectively. Contract research and development performed by OraVax during the
same periods were $4,867,799, $6,595,003 and $7,587,421, respectively. Funds
transferred to PMC for the years ended December 31, 1996 and 1997 were
$2,357,985 and $2,425,000, respectively. Contract research and development
performed by PMC during the same period was $2,257,985 and $2,375,000,
respectively.

     At December 31, 1996 and 1997, prepaid expenses represented funds
transferred to OraVax and PMC in advance of performance under its research and
development contracts. At December 31, 1997, accounts payable included
liabilities to OraVax and PMC in the amounts of $382,421 and $595,096,
respectively.

D.   COMMITMENTS AND CONTINGENCIES

     The Partnerships are party to research and license agreements with third
parties for which non-cancelable minimum future payments as of December
31, 1997 were $250,000. In addition, under these agreements, the Company may
pay milestones and/or royalties of future sales of specified products.