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                       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, 1998
                          COMMISSION FILE NO. 0-26034
 
                         ------------------------------
 
                                  ORAVAX, INC.
             (Exact Name of Registrant as Specified in its Charter)
 
                                    DELAWARE
                        (State or Other Jurisdiction of
                         Incorporation or Organization)
 
                   38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS
                    (Address of Principal Executive Offices)
                                   04-3085209
                                (I.R.S. Employer
                              Identification No.)
 
                                     02139
                                   (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:
 
                         COMMON STOCK, $.001 PAR VALUE
 
                              TITLE OF EACH CLASS
 
                         ------------------------------
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [ ]       No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.  Yes [ ]
 
     The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant was $10,651,988, based on the last reported sale price of the
Common Stock on the Nasdaq Bulletin Board on March 12, 1999.
 
     Number of shares outstanding of the registrant's class of Common Stock as
of March 12, 1999: 22,113,040, including 2,193,537 shares held by Peptide
Therapeutics Group plc, which will be canceled at the consummation of the
merger.
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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).
 
     On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
 
     OraVax is engaged in the discovery, development and commercialization of
vaccine and antibody products for the prevention and 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'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 is currently pursuing five proprietary product development
programs. The diseases targeted by these programs include:
     - peptic ulcers and gastritis;
     - yellow fever;
     - a group of viral diseases related to yellow fever, including Japanese
       encephalitis, dengue, tick borne encephalitis and hepatitis C;
     - antibiotic-associated colitis; and
     - viral pneumonia in children;
 
     The Company's product candidates are designed to generate either mucosal or
systematic immunity, as appropriate to each specific disease target. The Company
has also developed a portfolio of biologic production technologies.
 
     The Company's product candidates include the following:
 
<TABLE>
<CAPTION>
  PRODUCT CANDIDATE           INDICATION              TECHNOLOGY                STATUS
  -----------------           ----------              ----------                ------
<S>                     <C>                     <C>                     <C>
Helicobacter pylori     Prevention and          Recombinant protein     Phase II trials
(H. pylori)vaccines     treatment of peptic     vaccine                 ongoing
                        ulcers and gastritis
HNK 20 antibody         Prevention of           Monoclonal IgA          on hold pending third
                        pneumonia caused by     antibody nosedrop       party funding of Phase
                        respiratory syncytial                           III trials
                        virus in high risk
                        children
CdVax vaccine and CdIG  Prevention/treatment    Toxoid vaccine and      Toxoid IND filed in
immune-globulin         of                      hyper-immune gloublin   September 1998; Phase
                        antibiotic-associated                           I trial initiated
                        colitis                                         first quarter of 1999
ChimeriVax(TM)          Prevention of           Chimeric live           IND expected to be
Japanese encephalitis   infection by the        attenuated viral        filed in 1999
(follow on products     Japanese encephalitis   vaccine
include dengue,         virus and other
hepatitis C, TBE)       flaviviruses
Arilvax(R) YF vaccine   Prevention of           Single-dose live        OraVax to facilitate
(a product of Medeva    infection by the        attenuated viral        US registration
Pharma Limited)         yellow fever virus      vaccine                 (already marketed in
                                                                        the UK and Europe);
                                                                        Medeva to fund Phase
                                                                        III trials scheduled
                                                                        for 1999
</TABLE>
 
     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 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva").
 
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The Company's losses incurred since inception have resulted principally from
expenditures under its research and development programs, and the Company
expects to incur significant operating losses for the foreseeable future due
primarily to research and development efforts, preclinical testing and clinical
trials of its product candidates, the acquisition of additional technologies,
and the performance of commercialization activities.
 
PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC
 
     On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of novel drugs and vaccines, and is listed on the London Stock Exchange, under
the symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its joint venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with Pasteur Merieux Connaught ("PMC"),
Medeva and SmithKline Beecham. This new business combination will result in a
broader portfolio of product programs, and greater market presence and potential
for expanded corporate partnerships.
 
     The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
 
     On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
 
     On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
     On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value to the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the
 
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Company's short-term loan agreement, in the amount of $3 million, with PMC was
amended to extend the repayment terms to be the earlier of consummation of the
merger or July 31, 1999. (See section entitled "PMC: Short-term Bridge Loan." in
Management's Discussion and Analysis of Financial Condition and Results of
Operations)
 
     On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
 
     Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
 
     On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
 
     The Merger Agreement provides that, at the effective time of the merger,
each share of the Company's common stock outstanding immediately prior to the
effective time (except for shares owned by the Company, Peptide or their
subsidiaries) will be converted into the right to receive a pro rata share of
$20 million less the sum of (A) amounts paid to purchase outstanding shares of
the Convertible Preferred Stock and (B) the intrinsic value of the Company's
outstanding common stock options and warrants. Peptide and the Company estimate
that approximately $2.95 million will be used to acquire shares of Convertible
Preferred Stock and Convertible Preferred Stock warrants, and that the intrinsic
value of the Company's options will be less than $50,000. Using these estimates,
holders of outstanding shares of the Company's common stock will receive
approximately $17 million in merger consideration. The Company estimates that at
the effective time approximately 20 million shares of common stock will be
outstanding. Assuming that merger consideration equal to $17 million is split
among 20 million shares, each share of the Company's common stock would convert
into $0.85 worth of the merger consideration. The figures used in this paragraph
are estimates. Actual amounts will depend on the cost to purchase the Company's
Convertible Preferred Stock, warrants and options to purchase the Company's
Common Stock and the number of shares of the Company's common stock outstanding
immediately prior to the effective time.
 
     Holders of the Company's common stock will receive Peptide ordinary shares.
These Peptide ordinary shares will be valued between $1.49 and $2.24 by
reference to the average of the closing prices for Peptide ordinary shares
during the ten trading days ending on the third trading day prior to the closing
date of the merger, as reported by the London Stock Exchange, with each closing
price converted into U.S. dollars based on the midpoint of the dollar/pound
sterling exchange rate for such day, as reported by The Financial Times. If this
calculation indicates a market value for Peptide ordinary shares of less than
$1.49, the market value will be deemed to be $1.49, and if the calculation
indicates a market value for Peptide ordinary shares of more than $2.24, the
market value will be deemed to be $2.24. On March 12, 1999, the per share
closing price for a Peptide share was 107.8 pence and the midpoint of the
dollar/pound sterling exchange rate was 1.63, yielding a dollar value of $1.76.
 
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.
 
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<PAGE>   5
 
     Identifying Medically and Economically Important Disease Targets.  The
Company focuses 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. The Company
also seeks regional partners for the manufacture and sale of vaccines in
countries where the corresponding diseases are endemic.
 
     In March 1995, the Company entered into a collaboration (the "Joint
Venture") with PMC for the development, manufacturing, marketing and sale of
immuno-therapeutic and preventive vaccines against H. pylori infections in
humans, and to acquire complementary technology, marketing and distribution
expertise. The Company and PMC will share equally in profits from the sales of
H. pylori vaccines and in all future research, development and commercialization
costs. Any marketing activities of the Joint Venture will be managed by the
Joint Venture's Marketing Committee, which is controlled by PMC.
 
     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 fund additional Phase III clinical
trials and to assist in commercialization of HNK20 in the U.S. and Europe.
 
     In November 1997, the Company acquired exclusive U.S. sales, marketing and
distribution rights to the Arilvax(R) yellow fever vaccine from Medeva. 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 Medeva in Europe and selected Asian markets. Medeva will fund all
costs associated with the agreed-upon clinical trials and with securing
regulatory approval in the U.S. 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.
 
     During 1998, the Company completed manufacture of its CdVax vaccine (for
the prevention of antibiotic-associated diarrhea and colitis) at the Center for
Applied Microbiology Research in England. The Company filed an orphan drug
application for the colitis indication and filed an IND with the U.S. FDA in
September 1998. A Phase I clinical trial, which is fully funded by the National
Institute for Health (NIH), was initiated in February 1999. The Company is
currently seeking corporate partnerships for use of the vaccine in patients at
risk of disease and/or for production of a hyper-immune globulin.
 
     The Company's strategy for commercialization of vaccines based upon its
Chimerivax(TM) platform technology, including Japanese encephalitis (JE),
dengue, hepatitis C and Tick-borne encephalitis (TBE), is to form partnerships
with U.S. or European multinational pharmaceutical companies for their use in
the traveler and military markets. In November 1998, the Company entered into a
partnership with PMC for commercialization of the Chimerivax(TM) dengue vaccine.
(See section entitled "PMC: Dengue License Agreement and Sponsorship of Japanese
Encephalitis" in Management's Discussion and Analysis of Financial Condition and
Results of Operations).
 
     Manufacturing Strategy.  The Company's strategy is to share manufacturing
rights with its partners on a regional basis. The Company has retained the
rights to manufacture H. pylori vaccines in the U.S., and its partner, PMC is
expected to manufacture the vaccines for Europe at its facilities in Lyon,
France. Depending on the future circumstances of this product development
program, The Company may expand its manufacturing capacity, subcontract
manufacturing to third parties or source product through its partner.
 
     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
                                        4
<PAGE>   6
 
tenant for the manufacture of biological products. The Company's strategy was to
develop its manufacturing facilities for producing both pilot-scale and
commercial quantities of its products. The facility would also accommodate
production development activities for OraVax's proprietary products depending on
the outcome of product development. The Company is currently assessing its
options relating to the facility, including the sale of its related interests.
 
SCIENTIFIC BACKGROUND
 
     The human immune system is comprised of two systems: 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.
 
     Conventional vaccines and antibody preparations are designed to provide
systemic, as opposed to mucosal immunity and are administered by injection. Such
products include:
 
     - routine childhood vaccines such as diphtheria, tetanus, pertussis,
       hepatitis B, measles, mumps and rubella;
     - adult vaccines such as influenza and hepatitis B; and
     - immune globulins such as rabies and cytomegalovirus.
 
     These products provide immunity to infection only after the infecting
organisms have 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 also
complement the effectiveness of systemic immunity.
 
PRODUCTS UNDER DEVELOPMENT
 
  Vaccines against H. pylori
 
     Market Opportunity.  The Company 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. 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. Additionally, H.
pylori has been classified as a Class I carcinogen which has been associated
with the majority of stomach cancers.
 
     OraVax Approach.  The Company is developing vaccines to treat existing H.
pylori infections, 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. Pre-clinical and clinical
studies have confirmed the activity of the Company's leading, proprietary
vaccine candidate antigen, the urease
 
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protein. Pre-clinical studies indicated that, when given by the mucosal route or
by injection, urease has both prophylactic and therapeutic activity.
 
     The Company is conducting Phase II clinical trials with its leading
candidate vaccine called UreAB. The vaccine is based on urease. Urease is
present in all strains of H. pylori and is exposed on the surface of the
bacteria as a target for an antibody.
 
     In October 1996, the Company announced results of a Phase II safety and
immunogenicity study of recombinant urease, formulated with a mucosal adjuvant.
While the study involved a small population, it provided evidence that the
vaccine could have therapeutic activity in humans naturally infected with H.
pylori. These results are consistent with earlier results in animal models.
 
     Based on the results indicating therapeutic activity of UreAB, efforts are
being directed toward optimizing the vaccine formulation. In October 1997, the
Company initiated a second Phase II safety andimmunogenicity clinical study at
the Beth Israel-Deaconess Medical Center, Boston, the objective of which is to
optimize the formulation of UreAB. 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, could 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 are being challenged
with H. pylori. This study will provide a human challenge model in which the
prophylactic activity of UreAB can be determined. Results are expected in 1999.
 
     Collaboration for H. pylori Product with PMC.  In March 1995, the Company
entered into a collaboration (the "Joint Venture") with Pasteur Merieux Serums &
Vaccins S.A., now Pasteur Merieux Connaught ("PMC"), for the development,
manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines
against H. pylori infections in humans. The Company and PMC will share equally
in profits from the sale of the H. pylori vaccines and in all future research,
development, clinical and commercialization costs. The Company 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 the
Company which included $0.6 million to recognize the value of research and
development conducted by the Company 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 the Company and made
available to the Joint Venture. In addition, PMC purchased $2.5 million of the
Company's 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 the Company in December
1995. However, the Company cannot guarantee that any 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. The Company
earned $6.6 million, $7.6 million and $7.7 million under these contracts during
1996, 1997 and 1998, respectively. In addition, during 1996, 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 parties has an
equal participation and control. The venturers will pay approximately equal
shares of the agreed budgets. The Company will receive revenue from the
partnerships for the research and development work which is requested to be
performed by the Company and funded by the partnerships. The Company cannot
guarantee, however, that it will be selected to perform such work. The Company
and PMC each licensed to the Joint Venture upon its formation the right to use
all of their
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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
between PMC and 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.
 
     Any marketing activities of the Joint Venture will be managed by the Joint
Venture's Marketing Committee which is controlled by PMC.
 
     The Company and PMC each have a contractual right to 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 or 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.
 
     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 Company's 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 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 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. 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. Results of the studies indicated that HNK20 was well
tolerated in the target population; however, significant differences were not
demonstrated 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 results, announced in March 1997, failed to
demonstrate a statistically-significant reduction in hospitalization. However,
the results indicated that infants 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, with a
greater reduction observed in younger infants.
 
     The Company believes that an additional Phase III study could be conducted
in the Northern Hemisphere to test the efficacy of HNK20, at an elevated dose
level, in infants under four months of age at study entry. The Company will need
to secure additional partnerships or other sources of funding in order to
conduct such a 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
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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 known as A and B toxins that cause intestinal
inflammation and fluid secretion.
 
     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
provided preliminary indications that CdVax is effective in prevention of C.
difficile induced disease. A potential use for 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.
 
     In October 1997, the Company was awarded a Phase II Small Business
Innovation Research or 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 filed an IND
with the U.S. FDA in 1998. Clinical trials were initiated in February 1999 and
are fully funded by the NIH.
 
  ChimeriVax(TM) Platform Technology
 
     The Company has developed a 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 jointly by
St. Louis University and an exclusive worldwide license was granted to the
Company 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 Company has developed vaccine
candidates against two disease targets, Japanese encephalitis and dengue, and
has initiated research and development on a product candidate addressing
hepatitis C.
 
  Arilvax(R) Vaccine Against Yellow Fever
 
     In November 1997, the Company acquired exclusive U.S. sales, marketing and
distribution rights to the Arilvax(R) yellow fever vaccine from Medeva. The
Company also agreed to work with Medeva 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 Medeva in Europe and selected Asian markets. Medeva 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 U.S. FDA, Medeva
anticipates submitting a U.S. product license application (PLA) in 2000. The
Company does not anticipate incurring any material net expenditures under this
agreement until 2000 at which time, assuming a U.S. PLA is filed, it would
expect to incur premarketing and predistribution costs. The Company believes it
can market Arilvax(R) 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.
 
 JE Vaccine Against Infection by the Japanese Encephalitis Virus
 
     The Company is developing a vaccine for prevention of Japanese encephalitis
(JE) viral infections. JE is a potentially fatal neurotropic viral infection
common in Asia, including Japan, Korea, Taiwan, China, India and Thailand. 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. In addition, a safer vaccine that requires only a single dose
for immunization would better meet the needs of travelers and military. The
Company has demonstrated safety and preclinical efficacy of its JE vaccine based
on the ChimeriVax(TM) technology in animal models, including nonhuman primates.
The Company is currently in pilot production under the FDA's good manufacturing
practices, and expects to file an IND and initiate clinical trials during 1999.
In November 1998, the Company entered into a partnership with PMC for
sponsorship of the Chimerivax(TM) Japanese encephalitis vaccine.
 
                                        8
<PAGE>   10
 
 Dengue Fever
 
     Dengue is a mosquito-borne viral infection. The disease is characterized by
two distinct clinical syndromes: (1) dengue fever, a debilitating acute disease
characterized by fever, rash and muscle and joint pain and (2) dengue
hemorrhagic fever (DHF) characterized by prostration, bleeding and shock. Dengue
occurs throughout the tropical regions of the world, and is intermittently
introduced into the United States, Australia and Europe, with ensuing outbreaks.
To the Company's knowledge, currently there is no specific treatment and no
vaccine is available for prevention of the infection.
 
     There are four distinct viruses that cause dengue fever (dengue types 1-4).
The Company has developed a candidate ChimeriVax(TM) vaccine against dengue type
2 which is in preclinical development. The Company's objective is to develop a
vaccine containing all four dengue serotypes. In November 1998, the Company
entered into a partnership with PMC for commercialization of the ChimeriVax(TM)
dengue vaccine.
 
 Hepatitis C
 
     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 Company believes that its ChimeriVax(TM) technology could be
used in developing a vaccine that would stimulate both humoral and cellular
immunity against hepatitis C. As with 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 or TBE, which can cause severe illness or death,
afflicts individuals in eastern Europe and the former USSR. OraVax believes its
ChimeriVax(TM) technology could be used in developing a TBE vaccine that would
have significant advantages over existing vaccines including, single dose, life
long immunity, safety and low cost.
 
 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 knowledge of the mucosal immune system and immunology.
 
     IgA Antibody Technology.  The Company's IgA 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. The Company holds a U.S. patent relating to the
HNK20 monoclonal IgA antibody and has filed patent applications in Europe and
Japan. In addition, the Company has filed a U.S. patent application claiming the
DNA encoding the RSV-recognition site. The Company 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.
 
     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(TM) were developed as a vaccine against BTV in sheep and
against african horse sickness. The Company has incorporated a portion of the C.
difficile gene into these virus-like particles and has shown that the resulting
Viricle(TM) vaccine stimulates antibody against both BTV and C. difficile.
 
     Shigella Live Vector Oral Vaccine Technology.  Infection by Shigella
bacteria is the leading cause of bacillary dysentery. Bacillary dysentery is a
worldwide problem, with the highest incidence among children in developing
countries. 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.
 
                                        9
<PAGE>   11
 
     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 of the Company's product candidates. The Company has a
non-exclusive license to an issued U.S. patent relating to the use of copolymer
microspheres in injected vaccines. The Company is aware of an additional issued
U.S. 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 titled
"Hydroxyapatite-Antigen Conjugates and Methods for Generating a Poly-Ig Immune
Response", was issued in August of 1995, US patent #5,443,832.
 
     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 the 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,
the Company 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. The Company 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, the Company 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.
 
  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 in Forest Glen Section, Silver Spring, Maryland under a
cooperative research and development agreement with the United States Army. The
Company anticipates the continued use of this facility to support Phase II and
at least the initial portion of any Phase III trials. The Company's partner,
PMC, has initiated manufacturing based on the FDA's good manufacturing practices
at its facilities in Marcy l'Etoile (Lyon) France, and should be able to provide
vaccine for Phase III trials.
 
  HNK20 lntranasal Antibody
 
     Manufacturing of HNK20 for Phase I and Phase II clinical trials has been
performed by the Company at its primary facility in Cambridge, Massachusetts and
by third parties under contract to the Company. 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
 
                                       10
<PAGE>   12
 
process, precluded the clinical use of this supply of HNK20. The conduct of the
trial will require additional funding and the Company continues to seek
potential corporate partners for such funding.
 
  CdAB Vaccine
 
     Product for early clinical trials has been manufactured by third parties
under contract to the Company and under a cooperative research and development
agreement with the Walter Reed Army Institute of Research. The Company, 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). The Company 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, the Company 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.
 
     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 Medeva. 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.
 
     The Company's current strategy for commercialization of vaccines with a
large market in countries where the diseases are endemic (e.g. China, South
America, Africa and others) is to form partnerships with local
 
                                       11
<PAGE>   13
 
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.
 
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. The Company 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, PMC, also acquired a
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, the Company
secured an exclusive option agreement with IOMAI for their transdermal vaccine
delivery system.
 
     Human Genome Sciences/MedImmune.  In November 1996, the Company and PMC
entered into a research and licensing agreement with Human Genome Sciences,
Inc., or HGS and MedImmune, licensing the complete genome sequence of H. pylori
for the development of vaccines. Under this agreement, the Company and PMC 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 the Company and PMC 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, the Company and PMC
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 or CWRU and a research agreement with these collaborators and CWRU.
Pursuant to the agreement, the Company has been assigned preexisting patent
rights claiming oral immunization using H. pylori antigens. One patent was
issued in the U.S. in 1996. The research agreement provides for sponsorship by
PM-O of the continuing development work of the collaborators in the field of H.
pylori, including the development of:
 
     - monoclonal antibodies against urease and other antigens;
 
     - adjuvants to be used in conjunction with an oral vaccine directed against
       H. pylori; and
 
     - 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 the Company is sponsoring research in
the field of H. pylori at the CHUV in Lausanne, Switzerland, and at the
Max-Planck Institute in
 
                                       12
<PAGE>   14
 
Tubingen, Germany. Pursuant to this agreement, Gastrofonds, who represents
collaborating inventors at the CHUV and the Max-Planck Institute, have assigned
to the Company 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 PMC,
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, the Company
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, the Company was granted a worldwide nonexclusive
license to preexisting patent rights and know-how in the field of H. pylori
developed by St. Bart's, and a 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 the Company 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.
 
     The Company 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 U.S. or in other countries
is uncertain. The Company currently has a license to the U.S. 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 PMC. 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 the Company does not know whether it 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."
 
  C. difficile Product Development Program
 
     In March 1993, the Company entered into a collaborative development and
license agreement with Techlab, Inc. pursuant to which the Company 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 the Company's employees or developed jointly by the 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 the Company 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 under the application.
 
                                       13
<PAGE>   15
 
  General
 
     The Company's future 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 U.S. and abroad. The Company cannot
guarantee that additional patent applications owned or licensed by the Company
will issue as patents or that patent protection will be secured for any
particular technology. Neither can the Company guarantee that patents which are
issued will be valid or that they will provide the Company with meaningful
protection against competitors or with a competitive advantage. The Company
cannot guarantee that patents will not be challenged or designed around by
others. The Company could incur substantial costs in proceedings before the U.S.
Patent and Trademark 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, the Company cannot
guarantee that it will not infringe upon existing or future patents owned by
others. Neither can the Company guarantee that it 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, the Company
cannot guarantee that any patent issued to or licensed by the Company will not
be infringed by others. Also, the Company cannot guarantee 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. The Company also relies on trade secrets and other unpatented
proprietary technology. The Company cannot guarantee that it 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.
 
     The Company 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. In general, the research and
development agreements provide for the Company's 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 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
 
                                       14
<PAGE>   16
 
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 the Company in recruiting highly qualified
scientific personnel.
 
     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 U.S. 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 the
manufacturing, safety, labeling, storage, record keeping and marketing of such
products.
 
     The Immunization Practices Advisory Committee or ACIP of the CDC has a role
in setting the market for most, if not all, of the products the Company 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 of:
 
      (1) an IND application to the FDA or to an individual physician, or
 
      (2) a request for approval of intrastate trials to an institutional review
          board of a research institution, one of which must become effective
          before human clinical trials begin;
 
     - the performance of well-controlled clinical trials; and
 
     - product license application or PLA submitted to the FDA containing the
       results of clinical and manufacturing information prior to commercial
       sale or shipment of the product.
 
                                       15
<PAGE>   17
 
     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 or 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 I studies in human volunteers.
 
     Phase I clinical studies are generally performed in healthy human subjects
or, occasionally, in 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 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;
 
                                       16
<PAGE>   18
 
     - 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 the Company's expertise, to
obtain governmental approval in foreign countries of drug formulations utilizing
its compounds. See "Factors That May Affect Future Results -- Government
Regulation."
 
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 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 12, 1999, the Company employed a work force of 65 persons
including 61 persons employed full-time, of which 7 are temporary employees, and
4 persons employed part-time. Of this total work force, 51 persons are engaged
in research and development activities and 14 are devoted to facilities support
and administrative activities. Sixteen persons hold Ph.D. and/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. The Company believes that it has been successful in attracting
skilled and experienced scientific personnel; however, competition for such
personnel is intense. The Company believes that its relationships with its
employees are good.
 
                                       17
<PAGE>   19
 
ACADEMIC CONSULTANTS
 
     The Company 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. The Company cannot guarantee that it will be able to
maintain the confidentiality of its technology, the dissemination of which could
have a materially adverse effect on the Company's business. Further, the Company
cannot guarantee that it will be able to license inventions and technology
discovered by such consultants. See "Factors That May Affect Future
Results -- Patents and Proprietary Rights."
 
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 in Cambridge, Massachusetts. In addition, the Company leases a 47,000
square foot manufacturing facility in Canton, Massachusetts, designed and
equipped for the commercial production of biologic products. The facility is not
currently in use. When it entered into this lease, the Company purchased
leasehold improvements and other related assets from the former tenant, payable
in installments through 1999. Since the merger was announced, the Company has
received increased interest from prospective purchasers of its leasehold
interests, leasehold improvements and equipment in the Canton facility. Based on
these indications of interest, the Company is exploring the sale of its
interests in the facility.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     By letter dated September 8, 1998, the Securities and Exchange Commission
(the "SEC") requested the Company to furnish the SEC staff with documents for
use in connection with an SEC inquiry re: In the Matter of OraVax, Inc.
(MB-998). The requested documents generally pertain to statements made in SEC
filings by the Company regarding the Company's relationship with the U.S.
Department of Defense's Joint Vaccine Acquisition Program. The Company has
responded to the SEC's request and to date has received no further requests or
information concerning this matter.
 
     On December 23, 1997, the Company sold 240,000 shares of Common Stock to an
institutional investor, at a purchase price of $1.9125 per share, in a private
placement which closed simultaneously with a private placement of 6,300 shares
of the Company's 6% Convertible Preferred Stock ("Preferred Stock"), at $1,000
per share. The institutional investor has expressed claims as follows: (i) that
the Company should issue additional shares of Common Stock to the investor under
a "most favored nations" clause in the Stock Purchase Agreement pursuant to
which the investor purchased its Common Stock and (ii) that the Company should
pay damages to the investor because the Company failed to afford the investor
"piggyback" registration rights in connection with the Company's registration of
the Preferred Stock on February 5, 1998.
 
     The Company believes it has good defenses to these claims. It does not
believe that the issuance of the Preferred Stock (and the subsequent issuance of
Common Stock upon conversions of shares of the Preferred Stock) triggered the
"most favored nations" clause because the Preferred Stock was issued on the same
Closing Date as the Common Stock issued to the investor. As to the "piggyback"
registration rights, the Company believes that the investor had actual notice of
the registration of the Preferred Stock in February, 1998 and took no action to
invoke its rights at the time, did not exercise its demand registration rights
for almost three months after they became available on April 23, 1998, and still
has not sold any of its shares -- all of which the Company registered for resale
on August 6, 1998. To date, no litigation has been filed by the investor on
these claims.
 
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, 1998.
 
                                       18
<PAGE>   20
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's authorized capital stock consists of 50,000,000 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 12, 1999, there were issued and
outstanding 22,113,040 shares of Common Stock held by approximately 192
stockholders of record and 2,590 shares of 6% Convertible Preferred Stock
("Convertible Preferred Stock") held by 4 stockholders of record.
 
COMMON STOCK
 
     The Common Stock of the Company was traded on the Nasdaq National Market
under the symbol ORVX from June 7, 1995 through November 16, 1998. Prior to June
7, 1995, the Company's Common Stock was not publicly traded.
 
     At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) were $1.5 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company received a notice of delisting from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that because the Company was not in
compliance with the minimum net tangible asset requirement the Company's stock
would be delisted from trading on the Nasdaq NM. The Company was also notified
by Nasdaq of non-compliance with the minimum $1 per share bid price and minimum
requirement for the public market float of $5 million. The Company appealed the
delisting and a hearing was granted before an NASD panel concerning the
delisting issues. The Company presented its plans to the Panel and continued to
update Nasdaq on the progress of these plans. The Company was delisted from the
Nasdaq National Market, at the close of market, on November 16, 1998. The
Company began trading on the OTC Bulletin Board, under the symbol ORVX, on
November 17, 1998.
 
     The following table sets forth the high and low sales prices per share of
the Company's Common Stock for the fiscal years 1996, 1997 and 1998. The prices
per share for the fiscal years 1996 and 1997, and the first, second and third
quarters of fiscal year 1998 are as reported by the Nasdaq National Market and
the prices per share for the fourth quarter of fiscal year 1998 are as reported
by the OTC Bulletin Board.
 
<TABLE>
<CAPTION>
                                                               HIGH        LOW
                                                               ----        ---
<S>                                                           <C>        <C>
1998
     First Quarter..........................................  $ 2.375    $ 1.563
     Second Quarter.........................................    2.063      0.969
     Third Quarter..........................................    1.250      0.188
     Fourth Quarter.........................................    0.547      0.188
1997
     First Quarter..........................................  $ 7.000    $ 2.375
     Second Quarter.........................................    3.625      2.250
     Third Quarter..........................................    2.750      2.125
     Fourth Quarter.........................................    4.250      1.750
1996
     First Quarter..........................................  $15.000    $11.000
     Second Quarter.........................................   14.500      7.250
     Third Quarter..........................................    9.250      6.500
     Fourth Quarter.........................................   10.750      5.250
</TABLE>
 
     On March 12, 1999, the closing price of the Company's Common Stock on the
OTC Bulletin Board was $0.50. 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.
 
                                       19
<PAGE>   21
 
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 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 became fully convertible, at the
option of the holder, effective March 31, 1998. 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.
 
     In November 1998, simultaneous with the execution of the Merger Agreement
with Peptide, Peptide purchased 2,584 shares, approximately 95%, of the
Company's then outstanding Convertible Preferred Stock for an aggregate price of
approximately $2.95 million. Under the Merger Agreement, at the effective time,
outstanding shares of the Convertible Preferred Stock owned by Peptide will be
canceled and outstanding shares of the Convertible Preferred Stock owned by
third parties will be automatically converted into the right to receive $1,090
per share plus accrued but unpaid dividends. These third parties have
contractually agreed to redeem these shares for cash.
 
     In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
     During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
 
     On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
 
                                       20
<PAGE>   22
 
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.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     There have been no disagreements on accounting and financial disclosure
matters.
 
                                       21
<PAGE>   23
 
                                    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.....................  51    President, Chief Executive Officer and Director
Thomas P. Monath, M.D.....................  58    Vice President, Research and Medical Affairs
Robert J. Gerety, M.D., Ph.D..............  59    Vice President of Development and Regulatory
Brigid A. Makes...........................  43    Vice President of Finance, Chief Financial Officer
Douglas MacMaster(1)(2)...................  68    Chairman of the Board of Directors
Andre L. Lamotte, Sc.D.(2)................  49    Director
Allen Misher, Ph.D.(2)....................  67    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(R). 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 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
 
                                       22
<PAGE>   24
 
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.
 
     BRIGID A. MAKES has served as Vice President of Finance & Administration
and CFO of the Company since May 1998. From November 1995 to April 1998, Ms.
Makes served as Vice President of Finance and CFO of Haemonetics Corporation
("Haemonetics"), a global medical device manufacturer. From August 1992 until
November 1995, Ms. Makes was Treasurer and Director of Human Resources at
Haemonetics. From August 1986 to January 1992, Ms. Makes held numerous
managerial positions in Treasury and financial operations at Lotus Development
Corporation. From 1977 to 1986, Ms. Makes held numerous financial management
positions at General Electric Company. Ms. Makes received a Bachelor of Commerce
from McGill University in Montreal, Quebec, and a MBA from Bentley College. Ms.
Makes is affiliated with numerous professional groups, including FEI, TMA and
TMANE. She is currently a trustee of the Massachusetts Taxpayers' Foundation and
on the Board of Directors of the Massachusetts Hugh O'Brian Youth Leadership
Group.
 
     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.
 
     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 CoInvestment 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 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), one Class II Director (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 Director and Class III Director will expire upon the
election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 1999, 2000 and 2001, 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 Mr. MacMaster, which reviews
                                       23
<PAGE>   25
 
the results and scope of the audit and other services provided by the Company's
independent public accountants.
 
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, 1996, 1997 and 1998 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 1998 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                           LONG TERM
                                                                                          COMPENSATION
                                                                                          ------------
                                                                                             AWARDS
                                                     ANNUAL COMPENSATION(1)               ------------
                                          ---------------------------------------------    SECURITIES
                                                                         OTHER ANNUAL      UNDERLYING
                                          YEAR    SALARY    BONUS(2)    COMPENSATION(3)    OPTIONS(#)
                                          ----    ------    --------    ---------------    ----------
<S>                                       <C>    <C>        <C>         <C>               <C>
Lance K. Gordon.........................  1998   $250,000        --(5)      $11,044              --
President and Chief                       1997   $250,000   $62,500         $ 8,522         100,000
Executive Officer                         1996   $250,000   $56,250         $ 6,067          40,000
Thomas P. Monath........................  1998   $190,000        --(5)      $ 9,794              --
Vice President, Research                  1997   $190,000   $52,500         $ 3,417          50,000
and Medical Affairs                       1996   $190,000   $42,750         $ 2,250              --
Robert J. Gerety........................  1998   $250,000        --(5)      $36,948              --
Vice President of                         1997   $188,815   $37,500         $43,855         125,000
Development and                           1996         --        --              --              --
Regulatory Affairs
Brigid A. Makes(4)......................  1998   $115,885        --(5)      $   905          90,000
Vice President Finance                    1997         --        --              --              --
and Chief Financial Officer               1996         --        --              --              --
</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) Ms. Makes commenced employment at the Company effective May 1, 1998.
 
(5) The Company's Board of Directors has not yet authorized bonuses for the
    Company's executive officers for the year ended December 31, 1998. The
    Company's Board of Directors may approve such bonuses subsequent to the
    filing of this Form 10-K.
 
                                       24
<PAGE>   26
 
     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, 1998.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
                               INDIVIDUAL GRANTS
 
<TABLE>
<CAPTION>
                                                                                        POTENTIAL REALIZABLE
                                                                                          VALUE AT ASSUMED
                             NUMBER OF        PERCENT OF                                 STOCK PRICE ANNUAL
                             SHARES OF       TOTAL OPTIONS                                    RATES OF
                            COMMON STOCK      GRANTED TO                                  APPRECIATION FOR
                             UNDERLYING        EMPLOYEES                                   OPTION TERM(1)
                              OPTIONS          IN FISCAL      EXERCISE     EXPIRATION   ---------------------
           NAME              GRANTED(#)          YEAR        PRICE($/SH)      DATE        5%($)      10%($)
           ----             ------------     -------------   -----------   ----------     -----      ------
<S>                         <C>              <C>             <C>           <C>          <C>         <C>
Brigid A. Makes(2)
  and(3)..................     90,000(2),(3)      100%          $1.00       5/01/08     $109,396    $131,769
</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) Options granted upon commencement of employment with the Company.
 
(3) Option vests in four equal annual installments commencing on May 1, 1999.
 
     Year-End Option Table.  The following table sets forth certain information
regarding stock options exercised during the year ended December 31, 1998 and
stock options held as of December 31, 1998, by the Named Executive Officers:
 
                      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
                                 COMMON STOCK    VALUE            OPTIONS AT             IN-THE-MONEY OPTIONS
                                 ACQUIRED ON    REALIZED      FISCAL YEAR-END(#)       AT FISCAL YEAR-END($)(2)
             NAME                EXERCISE(#)     ($)(1)    EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
             ----                ------------   --------   -------------------------   -------------------------
<S>                              <C>            <C>        <C>                         <C>
Lance K. Gordon................      --           --            210,971/98,255                   $0/$0
Thomas P. Monath...............      --           --            157,931/39,128                   $0/$0
Robert J. Gerety...............      --           --             31,250/93,750                   $0/$0
Brigid A. Makes(3).............      --           --                 --/90,000                   $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, 1998 ($0.406),
    less the option exercise price.
 
(3) Ms. Makes commenced employment with the Company effective May 1, 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
 
                                       25
<PAGE>   27
 
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.
 
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 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.
 
     Under the terms of an employment agreement dated May 1, 1998, Ms. Makes
serves as Vice President of Finance and Chief Financial Officer, 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 Ms. Makes an option to purchase
90,000 shares of the Company's Common Stock at $1.00 per share, vesting over a
four-year period.
 
     Each of the employment agreements with Drs. Monath and Gerety, and Ms.
Makes 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, and Ms. Makes 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, Dr.
Gerety's or Ms. Makes' employment without "cause," the terminated party is
entitled to
 
                                       26
<PAGE>   28
 
receive his or her 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 and Ms. Makes has agreed for a period of one year 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,
and Ms. Makes 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.
 
     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.
 
                                       27
<PAGE>   29
 
     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.
 
        - 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 all full-time employees of the Company and generally
permits participants to purchase shares at a discount of 15% of the fair market
value at the beginning or end of the applicable purchase period. At December 31,
1998, there were no shares of the Company's common stock reserved for future
issuances under the Purchase Plan, and as a result the Company's Purchase Plan
has been suspended until completion of the planned merger with Peptide.
 
     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 1998 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 1998
remained at $250,000. The Company's Board of Directors has not yet authorized a
bonus for Dr. Gordon, or the Company's other executive officers, for the year
ended December 31, 1998. The
 
                                       28
<PAGE>   30
 
Company's Board of Directors may approve such bonuses subsequent to the
Company's filing of this Form
10-K. 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
 
                                            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, 1998 with the cumulative total return on (i)
the Biotechnology Index (BTK), and (ii) the Nasdaq Composite Index (IXIC)
(assuming the investment of $100 in the Company's Common Stock, the
Biotechnology Index and the Nasdaq Composite 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, 1995, 1996, 1997 and 1998.
Prior to June 8, 1995, the Company's Common Stock was not registered under the
Securities Exchange Act of 1934.
 
COMPARATIVE STOCK PERFORMANCE GRAPH
 
<TABLE>
<CAPTION>
                                                                                                         NASDAQ COMPOSITE INDEX
                                                      ORAVAX, INC.          BIOTECHNOLOGY INDEX (BTK)            (IXIC)
                                                      ------------          -------------------------    ----------------------
<S>                                             <C>                         <C>                         <C>
'6/8/95'                                                 100.00                      100.00                      100.00
'12/31/95'                                               117.50                      163.80                      118.70
12/31/96'                                                 52.50                      176.70                      145.70
'21/31/97'                                                17.50                      198.80                      177.20
'12/31/98'                                                0.406                      226.70                      247.40
</TABLE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information, as of March 12, 1999,
with respect to the beneficial ownership of the Company's Common Stock by the
following persons:
 
        - each person known by the Company to own beneficially more than 5% of
          the outstanding shares of Common Stock;
 
        - each director of the Company;
 
        - each executive officer of the Company; and
 
        - all directors and executive's officers of the Company as a group.
 
                                       29
<PAGE>   31
 
     As of March 12, 1999, no director or executive officer of the Company
beneficially owned any shares of Convertible Preferred Stock.
 
<TABLE>
<CAPTION>
                                                          NUMBER OF                        PERCENTAGE OF
                                                          SHARES OF        PERCENTAGE OF   TOTAL VOTING
                                                         COMMON STOCK      COMMON STOCK    CAPITAL STOCK
                  BENEFICIAL OWNER                    BENEFICIALLY OWNED    OUTSTANDING     OUTSTANDING
                  ----------------                    ------------------   -------------   -------------
<S>                                                   <C>                  <C>             <C>
5% STOCKHOLDERS
     Peptide Therapeutics Group plc(1)..............      2,193,537             9.9%            9.9%
 
DIRECTORS
     C. Boyd Clarke(2)..............................              0               *               *
     Lance K. Gordon(3).............................        306.694             1.4%            1.4%
     Andre L. Lamotte(4)............................        610,857             2.8%            2.8%
     Douglas MacMaster(5)...........................         43,600               *               *
     Allen Misher(6)................................         18,333               *               *
 
OTHER EXECUTIVE OFFICERS
     Robert J. Gerety(7)............................         93,030               *               *
     Brigid A. Makes(8).............................         27,500               *               *
     Thomas P. Monath(9)............................        196,010               *               *
     All directors and executive officers as a group
       (10).........................................      1,296,024             5.9%            5.9%
</TABLE>
 
---------------
 
   * Less than 1%.
 
 (1) The information reported is based on a Schedule 13D filed with the
     Securities and Exchange Commission on January 11, 1999. The address of this
     entity is Peterhouse Technology Park, 100 Fulbourn Road, Cambridge, CB1
     9PT, England. Peptide converted 633 shares of the Convertible Preferred
     Stock into shares of common stock representing approximately 9.9% of the
     outstanding shares of common stock. In addition, Peptide owns 1,951 shares
     of the Convertible Preferred Stock. The terms of the preferred stock
     prohibit conversion by a holder who following conversion, would own 10% or
     more of the outstanding common stock.
 
 (2) Dr. Clarke resigned from the board of directors effective November 30,
     1998.
 
 (3) Includes 225,221 shares of Common Stock which Dr. Gordon has the right to
     acquire within 60 days after March 12, 1999 upon exercise of outstanding
     stock options.
 
 (4) Includes 424,993 shares held by Medical Science Partners, L.P. ("MSP"),
     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").
     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 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, 161 Worcester Road,
     Framingham, MA 01701. Includes 10,000 shares which Dr. Lamotte may acquire
     upon the exercise of options within 60 days after March 12, 1999.
 
 (5) Includes 23,600 shares which Mr. MacMaster may acquire upon the exercise of
     options within 60 days after March 12, 1999.
 
 (6) Includes 13,333 shares which Dr. Misher may acquire upon the exercise of
     options within 60 days after March 12, 1999.
 
 (7) Includes 31,250 shares which Dr. Gerety may acquire upon the exercise of
     options within 60 days after March 12, 1999.
 
 (8) Includes 22,500 shares which Ms. Makes may acquire upon the exercise of
     options within 60 days after March 12, 1999.
 
                                       30
<PAGE>   32
 
 (9) Includes 161,056 shares which Dr. Monath may acquire upon the exercise of
     options within 60 days after March 12, 1999.
 
(10) Includes 486,960 shares which all directors and executive officers as a
     group may acquire upon the exercise of options within 60 days after March
     12, 1999.
 
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.
 
                                       31
<PAGE>   33
 
                                    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, 1997 and 1998.
 
               Consolidated Statements of Operations -- Fiscal years ended
               December 31, 1996, 1997 and 1998.
 
               Consolidated Statements of Stockholders' Equity
               (Deficit) -- Fiscal years ended December 31, 1996, 1997 and 1998.
 
               Consolidated Statements of Cash Flows -- Fiscal years ended
               December 31, 1996, 1997 and 1998.
 
               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 November 19, 1998, the Company filed a Current Report on Form 8-K
dated as of November 10, 1998 relating to the Company entering into a Merger
Agreement with Peptide Therapeutics Group PLC ("Peptide") and Peach Acquisition
Corp. ("Merger Sub"), a wholly-owned subsidiary of Peptide. Pursuant to the
Merger Agreement, Merger Sub will merge with and into the Company and the
Company will become a wholly-owned subsidiary of Peptide, subject to completion
of an equity financing by Peptide and a number of customary closing conditions,
including approval by the shareholders of the Company and Peptide.
 
     The following trademarks of the Company are mentioned in this Annual Report
on Form 10-K: OraVax, Viricle.
 
                                       32
<PAGE>   34
 
                                   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 31st day of
March, 1999.
 
                                            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
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>
                /s/ LANCE K. GORDON                  President, Chief Executive         March 31, 1999
---------------------------------------------------  Officer and Director
                  LANCE K. GORDON
 
                /s/ BRIGID A. MAKES                  Vice President of Finance and      March 31, 1999
---------------------------------------------------  Chief Financial Officer
                  BRIGID A. MAKES
 
               /s/ DOUGLAS MACMASTER                 Director                           March 31, 1999
---------------------------------------------------
                 DOUGLAS MACMASTER
 
               /s/ ANDRE L. LAMOTTE                  Director                           March 31, 1999
---------------------------------------------------
                 ANDRE L. LAMOTTE
 
                 /s/ ALLEN MISHER                    Director                           March 31, 1999
---------------------------------------------------
                   ALLEN MISHER
</TABLE>
 
                                       33
<PAGE>   35
 
                                                                      APPENDIX A
 
                            SELECTED FINANCIAL DATA
 
     The following selected historical consolidated financial information for
OraVax for each of the fiscal years in the five-year period ended December 31,
1998 has been derived from OraVax's audited consolidated financial statements.
The consolidated financial statements for the years ended December 31, 1996,
1997 and 1998 are included elsewhere in this prospectus/proxy statement. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
OraVax's Audited Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus/proxy statement.
 
                             SUMMARY FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                        1994        1995         1996         1997          1998
                                        ----        ----         ----         ----          ----
<S>                                   <C>        <C>          <C>          <C>           <C>
Statement of Operations Data:
Revenues:
     Collaborative research and
       development..................  $     --   $    8,684   $    6,595   $     7,587   $     9,841
     Government grants and other....       257          311          870           583           701
     Interest.......................        51        1,080        1,280           683           258
                                      --------   ----------   ----------   -----------   -----------
                                           308       10,075        8,745         8,853        10,800
 
Expenses:
     Research and development.......     8,406       12,450       21,009        14,589        13,017
     General and administrative.....     2,580        3,299        3,750         3,422         4,072
     Interest.......................       190           87          523           418           269
                                      --------   ----------   ----------   -----------   -----------
                                        11,176       15,836       25,282        18,429        17,358
Equity in joint venture.............                 (2,436)      (5,085)       (6,236)       (5,844)
                                      --------   ----------   ----------   -----------   -----------
Net loss............................   (10,868)      (8,197)     (21,622)      (15,812)      (12,402)
Net loss to common stockholders.....   (10,968)      (8,305)     (21,622)      (15,812)      (13,825)
Basic and diluted loss per share....             $    (1.90)  $    (2.46)  $     (1.58)  $      (.92)
Weighted average number of basic and
  diluted shares outstanding........              4,377,131    8,794,775    10,031,222    15,075,593
</TABLE>
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                      --------------------------------------------------------------
                                        1994        1995         1996         1997          1998
                                        ----        ----         ----         ----          ----
<S>                                   <C>        <C>          <C>          <C>           <C>
Balance Sheet Data:
Cash and investments................  $  3,706   $   27,631   $   22,125   $    11,328   $     2,538
Total assets........................     5,195       29,833       28,744        16,497         4,850
Working capital.....................     1,400       23,109       14,694         6,596        (5,335)
Long term obligations...............       462          492        2,659         1,298           119
Convertible preferred stock.........    27,331           --           --         3,137         2,022
Redeemable convertible preferred
  stock.............................        --           --           --         2,464
Total stockholders'
  equity(deficit)...................   (25,038)      24,513       18,424         6,474        (3,233)
</TABLE>
<PAGE>   36
 
                                                                      APPENDIX B
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
BUSINESS OVERVIEW
 
     On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
 
     OraVax's mission is the discovery, development and commercialization of
vaccines and antibody products for the prevention or treatment of human
infectious diseases. OraVax'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 acute disease risk.
 
     The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company plans to
finance near term cash needs principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with Pasteur Merieux Connaught ("PMC"), sponsorship
of the Company's Japanese encephalitis program by PMC, and previously awarded
government grants. Additional capital will be required to ensure the on-going
viability of the Company. 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 quarter of 1999 in order to fund
the Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company.
 
     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 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva"). Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's H. pylori Joint Venture and dengue license agreement with PMC,
sponsorship of the Company's Japanese encephalitis program by PMC, government
grants and interest income. Since inception, the Company's cash expenditures
have exceeded its revenues principally as a result from expenditures under its
research and development programs. The Company expects to continue to incur
operating losses over the next several years primarily due 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. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
 
     Under the terms of the Joint Venture agreement with PMC, ownership of the
Joint Venture is based upon the proportion of the working capital paid in by
OraVax versus PMC over the life of the Joint Venture. To date OraVax and PMC
have equally supported the budget and each has approximately 50% ownership. The
funding of the H. pylori program with PMC at 50% ownership has approximated $6.0
million to $6.5 million annually for OraVax to date, which is a substantial
portion of the Company's total expenditures. Under the agreement, a shortfall in
funding by OraVax does not constitute a default of the Joint Venture. If
OraVax's funding, since inception of the partnership, falls below 40% of the
total for greater than a six month period,
<PAGE>   37
 
PMC would get an additional seat on the board of directors, giving it effective
overall control of the Joint Venture.
 
PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC
 
     On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of novel drugs and vaccines, and is listed on the London Stock Exchange, under
the symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its joint venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with PMC, Medeva and SmithKline Beecham.
This new business combination will result in a broader portfolio of product
programs, and greater market presence and potential for expanded corporate
partnerships.
 
     The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
 
     On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
 
     On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
     On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value to the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the Company's short-term loan agreement, in the amount of $3 million,
with PMC was amended to extend the
 
                                        2
<PAGE>   38
 
repayment terms to be the earlier of consummation of the merger or July 31,
1999. (See section entitled "PMC: Short-term Bridge Loan.")
 
     On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
 
     Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
 
     On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
 
     The Merger Agreement provides that, at the effective time of the merger,
each share of the Company's common stock outstanding immediately prior to the
effective time (except for shares owned by the Company, Peptide or their
subsidiaries) will be converted into the right to receive a pro rata share of
$20 million less the sum of (A) amounts paid to purchase outstanding shares of
the Convertible Preferred Stock and (B) the intrinsic value of the Company's
outstanding common stock options and warrants. Peptide and the Company estimate
that approximately $2.95 million will be used to acquire shares of Convertible
Preferred Stock and Convertible Preferred Stock warrants, and that the intrinsic
value of the Company's options will be less than $50,000. Using these estimates,
holders of outstanding shares of the Company's common stock will receive
approximately $17 million in merger consideration. The Company estimates that at
the effective time approximately 20 million shares of common stock will be
outstanding. Assuming that merger consideration equal to $17 million is split
among 20 million shares, each share of the Company's common stock would convert
into $0.85 worth of the merger consideration. The figures used in this paragraph
are estimates. Actual amounts will depend on the cost to purchase the Company's
Convertible Preferred Stock, warrants and options to purchase the Company's
Common Stock and the number of shares of the Company's common stock outstanding
immediately prior to the effective time. See "Risk Factors -- Risks Relating to
the Merger -- Additional OraVax Stock Issuances May Dilute Merger
Consideration."
 
     Holders of the Company's common stock will receive Peptide ordinary shares.
These Peptide ordinary shares will be valued between $1.49 and $2.24 by
reference to the average of the closing prices for Peptide ordinary shares
during the ten trading days ending on the third trading day prior to the closing
date of the merger, as reported by the London Stock Exchange, with each closing
price converted into U.S. dollars based on the midpoint of the dollar/pound
sterling exchange rate for such day, as reported by The Financial Times. If this
calculation indicates a market value for Peptide ordinary shares of less than
$1.49, the market value will be deemed to be $1.49, and if the calculation
indicates a market value for Peptide ordinary shares of more than $2.24, the
market value will be deemed to be $2.24. On March 12, 1999, the per share
closing price for a Peptide share was 107.8 pence and the midpoint of the
dollar/pound sterling exchange rate was 1.63, yielding a dollar value of $1.76.
 
PMC: DENGUE LICENSE AGREEMENT AND SPONSORSHIP OF JAPANESE ENCEPHALITIS
 
     In November 1998, the Company entered into a license agreement, under its
dengue program, with PMC for the development of a vaccine against dengue fever,
based upon the Company's Chimerivax(TM) platform of technology. This technology
utilizes the yellow fever 17D vaccine virus as a vector for genes of related
viruses. Under the license agreement, the Company agreed to develop the vaccine
through completion of Phase I clinical trials. The Company granted PMC a
worldwide exclusive license to the dengue vaccines and PMC will address advanced
development, manufacturing, sales, marketing and distribution. In addition, PMC
agreed to fund 100% of the research, development and clinical costs through
Phase I clinical trials. As a term of the dengue agreement, PMC also has an
option to negotiate a separate agreement to license the Company's vaccine
against Japanese encephalitis ("JE"), also based on the Company's Chimerivax(TM)
platform of technology. In exchange for the option, PMC agreed to fund 100% of
the research, development and clinical costs through the completion of Phase I
clinical trials.
 
                                        3
<PAGE>   39
 
     The Company and PMC estimate the research, development and clinical costs
of both the dengue and JE vaccines through Phase I clinical trials to exceed
$11.0 million. PMC began funding, as of October 1, 1998, the research,
development and clinical costs under the dengue and JE programs, and paid the
Company $1.2 million in December 1998, of which $1.1 million was earned in the
current period. In addition, PMC agreed to pay the Company up to $12.2 million
during the dengue development period, subject to the achievement of certain
development, clinical and regulatory milestones, of which $1.0 million was paid
to the Company in November 1998 to recognize the value of research and
development conducted by the Company prior to the execution of the license
agreement. However, there can be no assurance that the milestones which trigger
such future payments will be achieved. Also, PMC agreed to pay the Company
royalties on future net sales of licensed dengue product. A Research and
Development Committee was formed to oversee the direction of the dengue and JE
programs, and consists of three members of both the Company and PMC. The
Research and Development Committee has approved funding of costs under both the
dengue and JE programs through December 1999. The license agreement provides for
a research and development term from October 1, 1998 through the completion of
Phase I clinical studies with respect to the JE and dengue programs. Upon
expiration of such term, the Company and PMC may in good faith discuss extending
their collaborative relationship to later stages of development of the JE and
dengue vaccines. In addition, the license agreement provides PMC certain rights
of termination, but, absent any breach, PMC may not terminate the license
agreement before the earlier of twelve months from execution of the license
agreement or the completion of Phase I clinical studies under the JE program.
 
PMC: SHORT-TERM BRIDGE LOAN
 
     In November, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due. However,
the loan was subsequently amended to require repayment of $3 million upon the
earlier of consummation of the merger or July 31, 1999.
 
     In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
 
NASDAQ DELISTING
 
     At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) were $1.5 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company received a notice of delisting from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that because the Company is not in compliance
with the minimum net tangible asset requirement the Company's stock would be
delisted from trading on the Nasdaq NM. The Company was also notified by Nasdaq
of non-compliance with the minimum $1 per share bid price and minimum
requirement for the public market float of $5 million. The Company appealed the
delisting and a hearing was granted before an NASD panel concerning the
delisting issues. The Company presented its plans to the Panel and has continued
to update Nasdaq on the progress of these plans. The Company was delisted from
the Nasdaq National Market, at the close of market, on November 16, 1998. The
Company began trading on the OTC Bulletin Board on November 17, 1998. Upon
closing of the proposed merger, holders of the Company's common stock will
receive ordinary shares of Peptide which are traded on the London Stock
Exchange.
 
                                        4
<PAGE>   40
 
RESULTS OF OPERATIONS
 
  YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
 
     The Company's total revenues increased to $10,800,000 in 1998 from
$8,853,000 in 1997. In 1998, the Company's revenues consisted of $7,682,000
earned under its collaboration (the "Joint Venture") with PMC, $2,159,000 earned
under its dengue license agreement with PMC, $701,000 from government grants and
other research revenues, and $258,000 in interest earned on invested funds. In
1997, the Company's revenues consisted of $7,587,000 earned under the Joint
Venture with PMC, $583,000 from government grants and other research revenues,
and $683,000 in interest earned on invested funds. The increase in revenue was
attributable principally to the Company's November 1998 license agreement, under
its dengue program, with PMC, and included a $1.0 million milestone payment upon
execution of the license agreement and the Company earned $1,159,000 under
sponsorship of research and development activities. In addition, the increase in
the Company's 1998 revenue was attributable to increases in research and
development activities of the Joint Venture with PMC, in grant revenue from the
October 1997 award of a C. difficile Phase II Small Business Innovation Research
(SBIR) grant from the National Institute of Health (NIH) and in-license revenue
earned in connection with the 1998 sub-license of its CagA antigen to BioMerica,
Inc. which were offset by a decrease in interest income as a result of declining
cash investments.
 
     The Company's total costs and expenses decreased to $17,358,000 in 1998
from $18,429,000 in 1997. Research and development expenses decreased 11% to
$13,017,000 in 1998 from $14,589,000 in 1997. Significant contributors to the
Company's research and development expenditures in 1998 versus 1997 included the
conduct of four small-scale Phase II clinical studies under its H. pylori
program and advanced activities under its Japanese encephalitis program,
including the investment in other aspects of the ChimeriVax family of vaccine
opportunities. These expenditures were offset by a decrease in costs resulting
from expenses that were incurred in 1997, under the RSV program, that were not
incurred in 1998, and from aggressive cost control. General and administrative
expenses increased 19% to $4,072,000 in 1998 from $3,422,000 in 1997 principally
due to advanced H. pylori and ChimeriVax patent efforts, business development
costs as the Company continues to focus its efforts on obtaining strategic
collaborations, legal costs associated with the Company's pursuit of potential
equity financings and business combinations, and legal and investment banking
costs associated with the planned merger with Peptide offset by a decrease in
expenses associated with the Company's workforce reduction in the second quarter
of 1997. Interest expense decreased to $269,000 in 1998 from $418,000 in 1997,
principally due to the expiration of some equipment leases and in addition, the
Company did not enter into any new equipment leases during the period due to the
low volume of capital equipment expenditures.
 
     The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$5,844,000 and $6,236,000 share of the Joint Venture Partnerships' losses in
1998 and 1997, respectively. The decreased loss is principally due to third
party obligations, incurred by the Joint Venture Partnerships in 1997 as
compared to 1998, which were offset by an increase in the 1998 budgeted research
and development activities of both OraVax and PMC.
 
     The Company incurred a net loss from operations of $12,402,000 in 1998
compared to a net loss from operations of $15,812,000 in 1997.
 
     In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend that accrues in stock and the amortization of the
conversion discount related to the December 1997 Convertible Preferred Stock
financing. At December 31, 1997, the value of the discount was $1,675,800, which
is being amortized over the eighteen month discount period by accreting
preferred stock dividends as a credit to additional paid-in capital and a charge
to retained earnings.
 
     The Company incurred a net loss to common shareholders of $13,825,000 in
1998 compared to a net loss to common shareholders of $15,812,000 in 1997.
 
                                        5
<PAGE>   41
 
  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 Joint Venture with 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.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 on January 1,
2000, but does not expect such adoption to have a material impact on its
financial statements.
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SoP 98-1, which is effective for the Company beginning January 1, 1999,
to have a material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities
 
                                        6
<PAGE>   42
 
should be expensed as incurred. SoP 98-5 is effective for the Company beginning
January 1, 1999 and the Company does not expect its adoption to have a material
effect on its financial position or results of operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     In March 1995, the Company entered into a Joint Venture with PMC for the
development, manufacturing, marketing and sale of immuno-therapeutic and
preventive vaccines against H. pylori infections in humans. OraVax and PMC will
share equally in profits from the sale of the H. pylori vaccines 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, $7.6 million and $7.7 million under these contracts in
1996, 1997 and 1998, respectively. In addition, during 1996, 1997 and 1998, 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 venturers 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 1999.
 
     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's strategy was to develop its
manufacturing facilities for producing both pilot-scale and commercial
quantities of its products. This facility would 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. The Company is
currently assessing its options relating to the facility, including the sale of
its related interests.
 
     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 connection with the private placement financing, warrants for 630
shares of Convertible Preferred Stock, at a price of $1,000 per share, were
issued to the placement agents of the transaction. The warrants will expire on
December 23, 2002.
 
                                        7
<PAGE>   43
 
     In December 1997, the Company sold 240,000 shares of its common stock, for
$1.9125 per share, in a private placement financing, providing net proceeds of
$396,000. In connection with the private placement financing, warrants for
24,000 shares of common stock, at a price of $1.9125 per share, had been issued
to the placement agents of the transaction. The warrants will expire on December
23, 2002.
 
     In November, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due. However,
the loan was subsequently amended to require repayment of $3 million upon the
earlier of consummation of the merger or July 31, 1999.
 
     In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
 
     The Company's aggregate cash and investments were $2,538,000 at December
31, 1998, a decrease of $8,790,000 since December 31, 1997. Cash used by
operations during the period, principally to support research and development,
was $5,455,000. The Company expended $52,000 for property and equipment, repaid
$1,257,000 of its capital lease obligations, and repaid $260,000 of its
installment debt, net of accrued interest, during the period. In addition, the
Company invested $6,232,000 in the joint venture during the year ended December
31, 1998. In early 1998, the Company received the $1,400,000 remainder of cash
proceeds from the December 1997 Convertible Preferred Stock financing. In the
fourth quarter of 1998, the Company received a $3 million short-term loan from
PMC to support continuing operations. Also, the Company received $66,000 in
proceeds from common stock issuances during the period.
 
     In September, 1997 the Company was selected by Medeva, as the exclusive
marketer and distributor of Medeva's live-attenuated yellow fever vaccine,
Arilvax(R), in the United States. The Company also agreed to work with Medeva 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
Medeva in Europe and selected Asian markets. Medeva 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, Medeva anticipates submitting a U.S.
product license application (PLA) in 2000. The Company does not anticipate
incurring any material net expenditures under this agreement until 2000 at which
time, assuming a U.S. PLA is filed, it would expect to incur premarketing and
predistribution costs.
 
     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 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva. Operations
have been funded principally through public and private placements of equity
securities, equipment lease financing, revenues from the Company's H. pylori
Joint Venture and dengue license agreement with PMC, sponsorship of the
Company's Japanese encephalitis program by PMC, government grants and interest
income. Since inception, the Company's cash expenditures have exceeded its
revenues principally as a result from expenditures under its research and
development programs. The Company expects to continue to incur operating losses
over the next several years primarily due 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
 
                                        8
<PAGE>   44
 
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. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
 
     Pending completion of its merger with Peptide, the Company plans to finance
its cash needs in the near term principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with PMC, sponsorship of the Company's Japanese
encephalitis program by PMC, and previously awarded government grants.
Additional capital will be required to ensure the on-going viability of the
Company. 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 quarter of 1999 in order to fund the
Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company. Changes in the Company's research
and development plans or other events affecting the Company's operations may
result in accelerated or unexpected expenditures. The Company is continuing to
review its burn rate and has implemented expenditure initiatives to conserve its
cash resources, including putting non-essential expenditures on hold. The
Company in the meantime continues to pursue corporate collaborations and the
award of new government grants. There can be no assurance, that additional
financing will be available from any of these sources, or if available, will be
available on satisfactory terms. The Company's inability to obtain needed
funding on satisfactory terms may require the Company to delay, scale back 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. Additional capital will be required to ensure the on-going
viability
                                        9
<PAGE>   45
 
of the Company. 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 quarter of 1999 in order to fund the
Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company. In addition, there can be no
assurance, that changes in the Company's research and development plans 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 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 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 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
 
                                       10
<PAGE>   46
 
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 Year 2000 problem is the result of computer programs
having been written using two digits, rather than four, to define the applicable
year. Computer programs and embedded computer chips may be unable to distinguish
between the years 1900 and 2000. Any computer hardware, software, research and
development, manufacturing or administrative equipment, and operational
infrastructure systems used by the Company or by its external business partners
may recognize a year using "00", as the last two digits, as the year 1900 rather
than the year 2000.
 
     During the second quarter of 1998, the Company implemented an internal Year
2000 compliance task force. The goal of the task force is to identify and
minimize disruptions to the Company's business that could result from the Year
2000 problem, and to minimize liabilities that the Company might incur in
connection with the Year 2000 problem. The task force consists of employees of
the Company and is representative of major business functions.
 
     The Company has conducted a company-wide assessment of its computer systems
and operations infrastructure to identify computer hardware, software, research
and development equipment and process control systems that are not Year 2000
compliant. The Company intends to replace, upgrade or modify any of its
business-critical systems that are not Year 2000 compliant, or to develop
contingency plans. The Company anticipates to have these steps completed by the
end of the third quarter in 1999.
 
     The Company has also identified and prioritized significant service
providers, vendors, suppliers, and worldwide research and development,
manufacturing and clinical trial related third parties that are critical to
business operations. The Company is in the process of communicating with these
external parties, through interviews and questionnaires, to ascertain their Year
2000 compliance. These evaluations will be followed by the development of
contingency plans, including identifying alternate service providers and
contractors, vendors and suppliers. The Company anticipates to have these steps
completed by the end of the third quarter in 1999. Going forward, the Company
will use its best efforts to ensure that new service providers and contractors,
vendors and suppliers are Year 2000 compliant before engaging in business with
them.
 
     The Company's greatest risk is the failure of critical, worldwide research
and development, manufacturing or clinical trial related service contractors not
being Year 2000 compliant. Because of the significant number of these external
service contractors and the vast number of business systems used by these
parties, the Company may experience some disruption in its business operations.
The Company is unable to determine at this time whether the consequences of Year
2000 failures by these parties will have a material impact on the Company's
business operations. The Company believes that with the implementation of
contingency plans, including identifying alternate service contractors, the
possibility of material interruptions of normal operations should be reduced.
However, there is no assurance that the Company will be successful in finding
alternate service contractors. In the event that the Company is unable to
replace Year 2000 non-compliant service contractors, the Company's business
operations could be adversely affected.
 
                                       11
<PAGE>   47
 
     To date, the Company has not incurred nor identified any material costs
related to the assessment of its internal and external Year 2000 compliance. The
costs of the Company's Year 2000 compliance efforts have been minimal to date,
and the Company does not anticipate incurring any material costs to ensure
internal and external Year 2000 compliance.
 
     The Company is using its reasonable best efforts to ensure internal and
external Year 2000 compliance. However, there can be no guarantee that the
Company's assessment and correction efforts will prove accurate. Key external
business partners may be unsuccessful in solving their Year 2000 issues and the
Company may be unsuccessful in identifying alternate critical service providers
and contractors, vendors and suppliers. As a result, Year 2000 problems may
adversely impact the Company's business operations. The Company's readiness
program is an ongoing process and the estimates of costs and completion dates
described above are subject to change.
 
     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.
 
                                       12
<PAGE>   48
 
                                                                      APPENDIX C
 
                                  ORAVAX, INC.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
FINANCIAL STATEMENTS
Report of Independent Accountants...........................    2
Consolidated Balance Sheets as of December 31, 1997 and
  1998......................................................    3
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1997 and 1998..........................    4
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1996, 1997 and 1998......    5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1997 and 1998..........................    6
Notes to Consolidated Financial Statements..................    7
</TABLE>
<PAGE>   49
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of OraVax, Inc.:
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of OraVax, Inc. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
 
     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 quarter
of 1999, 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.
 
     As discussed in Note D, the Company has restated its 1997 balance sheet and
statement of stockholders' equity for the presentation of the Company's 6%
Convertible Preferred Stock and related conversion discount.
 
                                          /s/ PRICEWATERHOUSECOOPERS LLP
                                          --------------------------------------
 
Boston, Massachusetts
March 1, 1999
 
                                        2
<PAGE>   50
 
                                  ORAVAX, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              -------------------
                                                               1997        1998
                                                              -------    --------
<S>                                                           <C>        <C>
                           ASSETS
Cash and cash equivalents...................................  $10,274    $  2,538
Short-term investments......................................    1,054          --
Prepaid and other current assets............................    1,529          91
                                                              -------    --------
Total current assets........................................   12,857       2,629
Property and equipment, net.................................    3,524       1,859
Investment in and advances to (from) joint venture..........     (535)       (147)
Restricted investments......................................      394         398
Other assets................................................      257         111
                                                              -------    --------
Total assets................................................  $16,497    $  4,850
                                                              =======    ========
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................  $   935    $    922
Accrued expenses............................................    3,659       2,213
Obligation under capital leases.............................    1,316         327
Bridge loan -- related party................................       --       3,000
Installment debt............................................      260       1,019
Deferred revenue............................................       91         483
                                                              -------    --------
Total current liabilities...................................    6,261       7,964
Obligation under capital leases, excluding current
  portion...................................................      416         119
Installment debt, excluding current portion.................      882          --
                                                              -------    --------
Total liabilities...........................................    7,559       8,083
Mandatory redeemable convertible preferred stock, $.001 par
  value; 2,772 shares issued and outstanding in 1997........    2,464          --
Commitments and contingencies (Note J)
Stockholders' equity (deficit):
     Preferred stock, $.001 par value; 2,000,000 shares
      authorized in 1997 and 1998; none issued or
      outstanding...........................................       --          --
     Convertible preferred stock, $.001 par value; 9,000
      shares authorized in 1997 and 1998; 3,528 and 2,590
      shares issued and outstanding in 1997 and 1998
      (liquidation preference $2,590).......................    3,137       2,022
     Common stock, $.001 par value; 25,000,000 and
      50,000,000 shares authorized in 1997 and 1998;
      10,371,543 and 19,919,503 shares issued and
      outstanding in 1997 and 1998..........................       10          20
     Additional paid-in capital.............................   74,115      79,279
     Deferred compensation..................................      (94)        (35)
     Accumulated deficit....................................  (70,694)    (84,519)
                                                              -------    --------
Total stockholders' equity (deficit)........................    6,474      (3,233)
                                                              -------    --------
Total liabilities and stockholders' equity (deficit)........  $16,497    $  4,850
                                                              =======    ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        3
<PAGE>   51
 
                                  ORAVAX, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED
                                                                     DECEMBER 31,
                                                       ----------------------------------------
                                                          1996          1997           1998
                                                       ----------    -----------    -----------
<S>                                                    <C>           <C>            <C>
Revenue:
     Collaborative research and development
     -- related party................................  $    6,595    $     7,587    $     9,841
     Government grants and other.....................         870            583            701
     Interest........................................       1,280            683            258
                                                       ----------    -----------    -----------
                                                            8,745          8,853         10,800
                                                       ----------    -----------    -----------
Expenses:
     Research and development........................      21,009         14,589         13,017
     General and administrative......................       3,750          3,422          4,072
     Interest........................................         523            418            269
                                                       ----------    -----------    -----------
                                                           25,282         18,429         17,358
                                                       ----------    -----------    -----------
Loss from operations.................................     (16,537)        (9,576)        (6,558)
Equity in operating loss of joint venture............      (5,085)        (6,236)        (5,844)
                                                       ----------    -----------    -----------
Net loss.............................................     (21,622)       (15,812)       (12,402)
Accretion to conversion discount of Convertible
  Preferred Stock....................................          --             --          1,207
Convertible Preferred Stock dividend.................          --             --            216
                                                       ----------    -----------    -----------
Net loss to common stockholders......................  $  (21,622)   $   (15,812)   $   (13,825)
                                                       ==========    ===========    ===========
Basic and diluted loss per share.....................  $    (2.46)   $     (1.58)   $      (.92)
Weighted average number of basic and diluted shares
  outstanding........................................   8,794,775     10,031,222     15,075,593
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        4
<PAGE>   52
 
                                  ORAVAX, INC.
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1998
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                           PAID-                                      TOTAL
                            PREFERRED   PREFERRED     COMMON     COMMON     IN        DEFERRED     ACCUMULATED    STOCKHOLDERS'
                             SHARES       STOCK       SHARES     STOCK    CAPITAL   COMPENSATION     DEFICIT     EQUITY (DEFICIT)
                            ---------   ---------   ----------   ------   -------   ------------   -----------   ----------------
<S>                         <C>         <C>         <C>          <C>      <C>       <C>            <C>           <C>
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 Convertible
  Preferred...............    3,528      $3,137             --     --          --         --              --            3,137
Stock 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....................    3,528       3,137     10,371,543     10      74,115        (94)        (70,694)           6,474
Issuance of common
  stock...................       --          --        159,634     --          65         --              --               65
Issuance of common
  stock -- 401k ..........       --          --        160,000     --          72         --              --               72
Exercise of common stock
  options.................       --          --          2,315     --           1         --              --                1
Issuance of common stock
  warrants................       --          --             --     --          32         --              --               32
Common stockholder release
  of mandatory redemption
  feature.................    2,772       2,464             --     --          --         --              --            2,464
Issuance of common
  stock -- Preferred Stock
  conversions.............   (3,716)     (3,795)     8,276,011      8       3,787         --              --               --
Preferred Stock
  dividends...............       --         216             --     --          --         --            (216)              --
Preferred Stock accretion
  to conversion
  discount................       --          --             --     --       1,207         --          (1,207)              --
Issuance of common stock
  and Preferred Stock to
  repurchase Preferred
  Stock warrants..........        6          --        950,000      2          --         --              --                2
Amortization of deferred
  compensation............       --          --             --     --          --         59              --               59
Net loss..................       --          --             --     --          --         --         (12,402)         (12,402)
                             ------      ------     ----------    ---     -------      -----        --------         --------
Balance, December 31,
  1998....................    2,590      $2,022     19,919,503    $20     $79,279      $ (35)       $(84,519)        $ (3,233)
                             ======      ======     ==========    ===     =======      =====        ========         ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        5
<PAGE>   53
 
                                  ORAVAX, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1996        1997        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
     Net loss from operations..............................  $(21,622)   $(15,812)   $(12,402)
     Adjustments to reconcile net loss from operations to
       net cash used in operating activities:
          Depreciation.....................................     2,028       2,183       1,784
          Equity in operations of joint venture............     5,085       6,236       5,844
          Amortization of debt discount....................        --         148         137
          Non-cash compensation............................       170         194         164
          Changes in operating assets and liabilities:
               Prepaid expenses and other current assets...        76         101          38
               Other assets................................      (200)         59          47
               Accounts payable............................        74        (200)        (13)
               Accrued expenses............................     1,301           6      (1,446)
               Deferred revenue............................        47        (855)        392
                                                             --------    --------    --------
Net cash used in operating activities......................   (13,041)     (7,940)     (5,455)
                                                             --------    --------    --------
Cash flows from investing activities:
     Purchases of short-term investments...................   (17,378)     (5,422)         --
     Sales and maturities of short-term investments........    25,918      11,183       1,054
     Expenditures for property and equipment...............    (1,361)       (253)        (52)
     Proceeds from sale-leaseback of property and
       equipment...........................................       775          --          --
     Investment in and advances to joint venture...........    (5,254)     (5,082)     (6,232)
                                                             --------    --------    --------
Net cash provided by (used in) investing activities........     2,700         426      (5,230)
                                                             --------    --------    --------
Cash flows from financing activities:
     Proceeds from common stock issuances, net.............    15,363         531          66
     Proceeds from preferred stock issuances, net..........        --       4,201       1,400
     Proceeds from short-term bridge loan..................        --          --       3,000
     Principal payments under capital lease obligations....    (1,488)     (1,530)     (1,257)
     Principal payments of installment debt, net...........      (500)       (330)       (260)
                                                             --------    --------    --------
Net cash provided by financing activities..................    13,375       2,872       2,949
                                                             --------    --------    --------
Net increase (decrease) in cash and cash equivalents.......     3,034      (4,642)     (7,736)
Cash and cash equivalents at beginning of period...........    11,882      14,916      10,274
                                                             --------    --------    --------
Cash and cash equivalents at end of period.................  $ 14,916    $ 10,274    $  2,538
                                                             ========    ========    ========
Interest paid during the year..............................  $    384    $    418    $    269
                                                             ========    ========    ========
</TABLE>
 
Supplemental non-cash investing and financing activities:
 
Convertible Preferred Stock conversions as of December 31, 1998: 3,716 shares of
Convertible Preferred Stock, including applicable stock dividends, had been
converted into 8,276,011 shares of Common Stock.
 
Convertible Preferred Stock Warrants: In November 1998, the Company issued
950,000 shares of Common Stock and six shares of Convertible Preferred Stock to
repurchase warrants for 630 shares of Convertible Preferred Stock, which had
been issued to the placement agents in connection with the December 1997 private
placement financing.
 
Property and equipment: Expenditures for property and equipment, in the year
ended December 31, 1998, excluded $70,000 of equipment lease renewals.
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        6
<PAGE>   54
 
                                  ORAVAX, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A.  NATURE OF BUSINESS:
 
     On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
 
     OraVax's mission is the discovery, development and commercialization of
vaccines and antibody products for the prevention or treatment of human
infectious diseases. OraVax'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 acute disease risk.
 
     The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company plans to
finance near term cash needs principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with Pasteur Merieux Connaught ("PMC"), sponsorship
of the Company's Japanese encephalitis program by PMC, and previously awarded
government grants. Additional capital will be required to ensure the on-going
viability of the Company. 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 quarter of 1999 in order to fund
the Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company.
 
     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 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva"). Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's H. pylori Joint Venture and dengue license agreement with PMC,
sponsorship of the Company's Japanese encephalitis program by PMC, government
grants and interest income. Since inception, the Company's cash expenditures
have exceeded its revenues principally as a result from expenditures under its
research and development programs. The Company expects to continue to incur
operating losses over the next several years primarily due 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. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
 
     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.  PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC:
 
     On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of
 
                                        7
<PAGE>   55
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
novel drugs and vaccines, and is listed on the London Stock Exchange, under the
symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its Joint Venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with PMC, Medeva and SmithKline Beecham.
This new business combination will result in a broader portfolio of product
programs, and greater market presence and potential for expanded corporate
partnerships.
 
     The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
 
     On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
 
     On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
     On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value for the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the Company's short-term loan agreement, in the amount of $3 million,
with PMC was amended to extend the repayment terms to be the earlier of
consummation of the merger or July 31, 1999. (See Note M)
 
     On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
 
                                        8
<PAGE>   56
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
 
     On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
 
C.  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. (Note M)
 
  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.
 
  Restricted Investments
 
     At December 31, 1997 and 1998, the Company held investments of $394,000 and
$398,000, respectively, that are restricted as to their use by varying leasing
arrangements. These investments in US Government and Agency obligations are
available for sale, and are carried at amortized cost plus accrued interest,
which approximates fair market value.
 
  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.
 
                                        9
<PAGE>   57
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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. (Note M).
 
     The Company recognizes government grant revenue as the related expenses are
incurred.
 
     The Company does not recognize as revenue amounts received which are
refundable or involve future obligations.
 
  Research and Development Costs
 
     Research and development costs are expensed as incurred.
 
  Computation of Net Loss per Common Share
 
     The Company follows Statement of Accounting Standards No. 128 ("SFAS 128"),
which requires the presentation of Basic and Dilutive earnings per share. Basic
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 stock options,
Convertible Preferred Stock and stock warrants. The dilutive computations do not
include common stock equivalents for stock options of 890,809, 1,175,242 and
1,185,534 for the years ended December 31, 1996, 1997 and 1998, respectively,
Convertible Preferred Stock convertible to 2,016,163 and 8,738,586 shares of
Common Stock for the years ended December 31, 1997 and 1998, respectively, and
warrants convertible to 24,000 and 84,086 shares of Common Stock for the years
ended December 31, 1997 and 1998, respectively, as inclusion would be
anti-dilutive.
 
  Income Taxes
 
     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.
 
  Accretion of Convertible Preferred Stock
 
     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, net of $700,000
in deal costs. Holders of the Convertible Preferred Stock are entitled to 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 was
$1,675,800, which is being amortized over the eighteen month discount period by
accreting preferred stock dividends as a credit to additional paid-in capital
and a charge to retained earnings. (See Note D.)
 
                                       10
<PAGE>   58
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Changes in Comprehensive Income
 
     Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. For the twelve months
ended December 31, 1998 and 1997, comprehensive income was the same as net
income.
 
  New Accounting Pronouncements
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000, but does not expect such adoption to have a material impact on its
financial statements.
 
     In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SoP 98-1, which is effective for the Company beginning January 1, 1999,
to have a material effect on its financial position or results of operations.
 
     In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for the Company beginning January 1, 1999 and the Company
does not expect its adoption to have a material effect on its financial position
or results of operations.
 
D.  EFFECTS OF RESTATEMENTS:
 
     As a result of discussions with the staff of the Securities and Exchange
Commission (the "Commission"), certain issues were raised regarding the
presentation of the Convertible Preferred Stock and the calculation of the
conversion discount attributable to the private placement financing that
occurred in December 1997 (See Note K).
 
     The Company originally calculated the value of the discount at $846,788,
which was recorded as a deferred financing cost and an addition to paid-in
capital at December 31, 1997 and was to be amortized over the eighteen month
discount period. In the Second Quarter of 1998, the Company changed the
amortization period from eighteen to twelve months to reflect the volume of
conversions of the preferred stock to common stock. During fiscal 1999, after
consideration of the issues raised by the Commission staff and a re-examination
of the facts surrounding the assumptions used in the calculation, the Company
recalculated the amount of the discount as $1,675,800, eliminated the deferred
financing costs at December 31, 1997 and
 
                                       11
<PAGE>   59
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
revised its amortization schedule to recognize the discount as a return to
preferred shareholders over the original eighteen month discount period on which
the shareholders could realize the discount by accreting preferred dividends as
a credit to additional paid-in capital and a charge to retained earnings in each
reporting period. As a result, the amount of the discount recognized in the year
ended December 31, 1998 was $1,207,000.
 
     The Company originally presented the Convertible Preferred Stock as a
component of stockholders' equity at December 31, 1997. Upon further review of
the Preferred Stock Purchase Agreement and based on discussions with the
Commission, the Company has determined that $2,464,186 of the total issuance has
mandatory redemption features and, therefore, should not be included in
stockholders' equity at December 31, 1997. The amount was determined based on
the number of common shares into which the preferred stock was convertible at
December 31, 1997 that were subject to shareholders' approval, which was voted
on March 10, 1998.
 
     The restatements of the 1997 financial statements had no effect on the
Company's net loss applicable to common stockholders or basic and diluted loss
per share. Total assets and stockholders' equity, as previously reported and as
restated, are as follows (in thousands):
 
<TABLE>
<S>                                                          <C>
Total assets -- previously reported......................    $17,344
Adjustment related to recalculation of preferred stock
  discount...............................................       (847)
As adjusted..............................................    $16,497
Total stockholders' equity -- previously reported........    $ 9,785
Adjustment related to presentation of preferred stock
  that is redeemable.....................................     (2,464)
Adjustment related to recalculation of preferred stock
  discount...............................................       (847)
As adjusted..............................................    $ 6,474
</TABLE>
 
E.  PROPERTY AND EQUIPMENT:
 
     Property and equipment consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                               DECEMBER 31,
                                                              ---------------
                                                               1997     1998
                                                              ------   ------
<S>                                                           <C>      <C>
Furniture and equipment.....................................  $  493   $  540
Computer hardware and software..............................     197      203
Leasehold improvements......................................   2,626    2,626
Equipment under capital lease...............................   4,353    3,979
                                                              ------   ------
                                                               7,669    7,348
Less accumulated depreciation...............................   4,145    5,489
                                                              ------   ------
Property and equipment, net.................................  $3,524   $1,859
                                                              ======   ======
</TABLE>
 
     The net book value of equipment under capital lease was $1,579,000 and
$372,000 at December 31, 1997 and 1998, respectively.
 
                                       12
<PAGE>   60
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
F.  ACCRUED EXPENSES:
 
     Accrued expenses consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                               DECEMBER 31,
                                                              ---------------
                                                               1997     1998
                                                              ------   ------
<S>                                                           <C>      <C>
Research and development contracts..........................  $1,985   $  974
License fees................................................      63      155
Financing related deal costs................................     751       --
Other.......................................................     860    1,084
                                                              ------   ------
Total accrued expenses......................................  $3,659   $2,213
                                                              ======   ======
</TABLE>
 
G.  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,
                                                           -------------------
                                                             1997       1998
                                                           --------   --------
<S>                                                        <C>        <C>
Capitalization of costs-principally research and
  development............................................  $ 11,943   $ 11,472
Property, plant and equipment............................       898      1,133
Capital leases...........................................        --          9
Accrued expenses.........................................       358        275
Net operating loss.......................................    13,459     18,267
Tax credits..............................................     2,586      3,112
                                                           --------   --------
Gross deferred tax asset.................................    29,244     34,268
Valuation allowance......................................   (29,244)   (34,268)
                                                           --------   --------
Net deferred tax asset...................................  $     --   $     --
                                                           ========   ========
</TABLE>
 
     As of December 31, 1998, the Company had available federal net operating
loss carryforwards of approximately $45,795,000 and $2,131,000 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 by $5,024,000 from December 31, 1997 to December 31, 1998.
 
     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.
 
H.  CAPITAL LEASES:
 
     During the year ended December 31, 1998, the Company did not enter into any
new sale-leaseback or direct lease arrangements due to the low volume of capital
equipment expenditures. In addition, during the same period, the Company renewed
$70,000 of existing equipment leases. During 1996, an equipment lease
 
                                       13
<PAGE>   61
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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, 1996, 1997 and 1998
was $372,000, $270,000, and $105,000, respectively.
 
     Minimum future payments under the Company's capital leases as of December
31, 1998 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                        YEAR ENDING
                        DECEMBER 31,                          AMOUNT
                        ------------                          ------
<S>                                                           <C>
     1999...................................................   $351
     2000...................................................    124
                                                               ----
                                                                475
     Less amount representing interest......................     29
                                                               ----
                                                                446
     Less current obligation................................    327
                                                               ----
     Long-term obligation...................................   $119
                                                               ====
</TABLE>
 
I.  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's strategy
was to develop its manufacturing facilities for producing both pilot-scale and
commercial quantities of its products. The facility would 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. The Company is currently assessing its options relating to the
facility, including the sale of its related interests.
 
     Future minimum payments under the installment purchase are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                        YEAR ENDING
                        DECEMBER 31,                          AMOUNT
                        ------------                          ------
<S>                                                           <C>
     1999...................................................  $1,050
                                                              ------
                                                               1,050
     Less amount representing interest......................      31
                                                              ------
                                                               1,019
     Less current obligation................................   1,019
                                                              ------
     Long-term obligation...................................  $    0
                                                              ======
</TABLE>
 
J.  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
 
                                       14
<PAGE>   62
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
expiring in June 2002. The noncancelable future payments as of December 31, 1998
were as follows (in thousands):
 
<TABLE>
<CAPTION>
                        YEAR ENDING
                        DECEMBER 31,                          AMOUNT
                        ------------                          ------
<S>                                                           <C>
     1999...................................................   1,430
     2000...................................................   1,434
     2001...................................................     511
     2002...................................................     101
</TABLE>
 
     Rent expense for leased facilities during the years ended December 31,
1996, 1997 and 1998 was $1,862,000, $2,051,000 and $2,159,000, 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, 1998 were $1,205,000 payable in the year ended December 31, 1999.
 
     In addition, under certain of these and other agreements, the Company may
pay royalties on future sales of specified products.
 
  Potential Litigation
 
     On December 23, 1997, the Company sold 240,000 shares of Common Stock to an
institutional investor, at a purchase price of $1.9125 per share, in a private
placement which closed simultaneously with a private placement of 6,300 shares
of the Company's 6% Convertible Preferred Stock ("Preferred Stock"), at $1,000
per share. The institutional investor has expressed claims as follows: (i) that
the Company should issue additional shares of Common Stock to the investor under
a "most favored nations" clause in the Stock Purchase Agreement pursuant to
which the investor purchased its Common Stock and (ii) that the Company should
pay damages to the investor because the Company failed to afford the investor
"piggyback" registration rights in connection with the Company's registration of
the Preferred Stock on February 5, 1998.
 
     The Company believes it has good defenses to these claims. It does not
believe that the issuance of the Preferred Stock (and the subsequent issuance of
Common Stock upon conversions of shares of the Preferred Stock) triggered the
"most favored nations" clause because the Preferred Stock was issued on the same
Closing Date as the Common Stock issued to the investor. As to the "piggyback"
registration rights, the Company believes that the investor had actual notice of
the registration of the Preferred Stock in February, 1998 and took no action to
invoke its rights at the time, did not exercise its demand registration rights
for almost three months after they became available on April 23, 1998, and still
has not sold any of its shares -- all of which the Company registered for resale
on August 6, 1998. To date, no litigation has been filed by the investor on
these claims.
 
K.  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.
 
                                       15
<PAGE>   63
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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 was $1,675,800, which is being amortized
over the eighteen month discount period by accreting preferred dividends as a
credit to additional paid-in capital and a charge to retained earnings. At
December 31, 1997, $2,464,186 of the total issuance has mandatory redemption
features, based on the number of common shares into which the preferred stock
was convertible that were subject to shareholders' approval, and, therefore, was
not included in stockholders' equity. Upon approval by the common shareholders
on March 10, 1998 eliminating any restriction on convertibility, the mandatorily
redeemable portion of the Convertible Preferred Stock was transferred to
stockholders' equity (See Note D). The number of shares sold on any given date
is 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. In connection with the private placement financing,
warrants for 630 shares of Convertible Preferred Stock, at a price of $1,000 per
share, were issued to the placement agents of the transaction. The warrants will
expire on December 23, 2002.
 
     In November 1998, simultaneous with the execution of the Merger Agreement
with Peptide, Peptide purchased 2,584 shares, approximately 95%, of the
Company's then outstanding Convertible Preferred Stock for an aggregate price of
approximately $2.95 million. Under the Merger Agreement, at the effective time,
outstanding shares of the Convertible Preferred Stock owned by Peptide will be
canceled and outstanding shares of the Convertible Preferred Stock owned by
third parties will be automatically converted into the right to receive $1,090
per share plus accrued but unpaid dividends. These third parties have
contractually agreed to redeem these shares for cash. If the merger is
terminated because of a breach of the Merger Agreement by Peptide or a mutual
decision by both parties to terminate the Merger Agreement, OraVax has the right
to repurchase Peptide's Convertible Preferred Stock at the price Peptide paid
for it. In all other events of termination of the Merger Agreement, Peptide has
the right to sell the Convertible Preferred Stock to OraVax at the price Peptide
paid for it.
 
     In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
                                       16
<PAGE>   64
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
 
L.  STOCKHOLDERS' EQUITY:
 
  Common Stock
 
     During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
 
     In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
 
     In July 1998, the Company issued warrants for 60,086 shares of common
stock, at a price of $2.00 per share, to one of its investors, a principal of
which is a member of the Company's Board of Directors. The $32,000 estimated
fair value of these warrants was charged to general and administrative expense.
The warrants will expire on December 23, 2002.
 
     In June 1998, the Company's stockholders approved an increase in the
authorized shares of common stock to 50,000,000 shares.
 
     In December 1997, in a private placement financing, the Company sold
240,000 shares of its common stock, par value $.001 per share, for $1.9125 per
share, providing net proceeds of $396,000 to the Company. In connection with the
private placement financing, warrants for 24,000 shares of common stock, at a
price of $1.9125 per share, had been issued to the placement agents of the
transaction. The warrants will expire on December 23, 2002.
 
     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.
 
  Stock Options
 
     The Company follows 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
 
                                       17
<PAGE>   65
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 1996, 1997 and 1998, 13,822, 36,146 and 159,634 shares,
respectively, were sold to employees under the ESPP. At December 31, 1998, there
were no shares of common stock reserved for future issuances under the ESPP, and
as a result the Company's ESPP plan has been suspended until completion of the
planned merger with Peptide.
 
     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,
                                                 ------------------------------
                                                   1996       1997       1998
                                                   ----       ----       ----
<S>                                              <C>        <C>        <C>
Net loss as reported (in thousands)............  $(21,622)  $(15,812)  $(13,825)
Pro forma (in thousands).......................  $(21,877)  $(16,233)  $(14,196)
Basic and diluted loss per share...............  $  (2.46)  $  (1.58)  $   (.92)
Pro forma......................................  $  (2.49)  $  (1.62)  $   (.94)
</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,
                                                     ---------------------------
                                                      1996      1997      1998
                                                      ----      ----      ----
<S>                                                  <C>       <C>       <C>
Expected Option Term...............................  5 years   5 years   5 years
Expected Option Volatility.........................      65%       70%       90%
Risk Free Interest Rate............................    6.13%     6.54%     5.59%
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, 1996, 1997 and 1998, was $7.32, $1.66 and
$.78, 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,
                                                  ------------------------------
                                                    1996       1997       1998
                                                    ----       ----       ----
<S>                                               <C>        <C>        <C>
Expected Option Term............................  1/2 year   1/2 year   1/2 year
Expected Option Volatility......................       65%        70%        90%
Risk Free Interest Rate.........................     5.32%      5.62%      5.46%
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, 1996, 1997 and 1998
was $3.11, $.97 and $.10, respectively. Because some
 
                                       18
<PAGE>   66
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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, 1996, 1997 and 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                                WEIGHTED-AVERAGE
                                                    SHARES       EXERCISE PRICE
                                                    ------      ----------------
<S>                                                <C>          <C>
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
     Granted.....................................    186,300          1.07
     Exercised...................................     (2,315)          .49
     Canceled....................................   (173,723)         3.47
                                                   ---------         -----
Outstanding at December 31, 1998.................  1,185,534          2.89
                                                   =========         =====
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
            OPTIONS OUTSTANDING
-------------------------------------------              OPTIONS EXERCISABLE
                               WTD. AVERAGE   -----------------------------------------
                                REMAINING     WTD. AVERAGE                 WTD. AVERAGE
   RANGE OF     #OUTSTANDING   CONTRACTUAL      EXERCISE      #OPTIONS       EXERCISE
EXERCISE PRICE  AT 12/31/98        LIFE          PRICE       EXERCISABLE      PRICE
--------------  ------------   ------------   ------------   -----------   ------------
<S>             <C>            <C>            <C>            <C>           <C>
$0.313-$ 0.344      26,000         9.63          $0.32               0          N/A
 0.706-  1.059     280,499         6.37           0.88         174,371        $0.78
 1.125-  1.125       3,800         9.49           1.13               0          N/A
 1.875-  2.705     622,214         6.95           2.53         446,979         2.56
 3.000-  3.625     170,586         7.70           3.14          58,648         3.25
 6.625-  8.750       8,025         7.32           7.76           3,640         7.74
12.000- 14.750      74,410         7.17          13.32          40,096        13.31
                 ---------                                     -------
$0.235-$14.750   1,185,534         7.01          $2.89         723,733         2.81
                 =========                                     =======
</TABLE>
 
     At December 31, 1998, options to purchase 717,337 shares of common stock
remained available for future grants under the plans. At December 31, 1998,
1,902,871 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 recorded in connection with the vesting of certain
performance based options and the extension of the term of certain options.
 
                                       19
<PAGE>   67
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
M.  JOINT VENTURE AND PMC SHORT-TERM BRIDGE LOAN:
 
     In March 1995, the Company entered into a collaboration (the "Joint
Venture") with PMC for the development, manufacturing, marketing and sale of
immuno-therapeutic and preventive vaccines against H. pylori infection in
humans. OraVax and PMC will share equally in profits from the sale of the H.
pylori vaccines 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 $6,595,000, $7,587,000 and $7,682,000 under these
contracts during 1996, 1997 and 1998, respectively. In addition, during 1996,
1997 and 1998, 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 $4.5 million, $5.8 million and
$6.2 million in 1996, 1997 and 1998, 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 $5,085,000, $6,236,000 and $5,844,000 share of the Joint Venture
Partnerships' net losses during 1996, 1997 and 1998, respectively. Following are
the Joint Venture Partnerships' summarized combined balance sheets as of
December 31, 1997 and 1998, 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, 1997 and 1998 and cumulative from inception
(March 31, 1995) through December 31, 1998.
 
     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.
 
     On November 2, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due.
 
                                       20
<PAGE>   68
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
However, the loan was subsequently amended to require repayment of $3 million
upon the earlier of consummation of the merger or July 31, 1999.
 
     In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
 
                           JOINT VENTURE PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
                             COMBINED BALANCE SHEET
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                         ----------------
                                                          1997      1998
                                                         ------    ------
<S>                                                      <C>       <C>
                            ASSETS
Cash...................................................  $  625    $  648
Prepaid expenses -- related party......................     623       920
                                                         ------    ------
                                                         $1,248    $1,568
                                                         ------    ------
 
               LIABILITIES AND PARTNERS' CAPITAL
Accounts payable -- OraVax.............................  $  382    $  183
Accounts payable -- PMC................................     595     1,500
Accounts payable -- Other..............................   1,240        79
Partners' capital:
  OraVax...............................................    (485)      (97)
  PMC..................................................    (484)      (97)
                                                         ------    ------
                                                         $1,248    $1,568
                                                         ======    ======
</TABLE>
 
                           JOINT VENTURE PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
                        COMBINED STATEMENT OF OPERATIONS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                         DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                             1996           1997           1998
                                                         ------------   ------------   ------------
<S>                                                      <C>            <C>            <C>
Interest income........................................    $     16       $     22       $     23
                                                           --------       --------       --------
Contract research expense -- OraVax....................       6,595          7,587          7,682
Contract research expense -- PMC.......................       2,258          2,375          3,481
Contract research expense -- other.....................       1,139          2,508            539
Legal and administrative expenses......................          85             15             --
                                                           --------       --------       --------
Total expenses.........................................      10,077         12,485         11,702
                                                           --------       --------       --------
Net loss...............................................    $(10,061)      $(12,463)      $(11,679)
                                                           ========       ========       ========
</TABLE>
 
                                       21
<PAGE>   69
                                  ORAVAX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
N.  PMC: DENGUE LICENSE AGREEMENT AND SPONSORSHIP OF JAPANESE ENCEPHALITIS:
 
     In November 1998, the Company entered into a license agreement, under its
dengue program, with PMC for the development of a vaccine against dengue fever,
based upon the Company's Chimerivax(TM) platform of technology. This technology
utilizes the yellow fever 17D vaccine virus as a vector for genes of related
viruses. Under the license agreement, the Company agreed to develop the vaccine
through completion of Phase I clinical trials. The Company granted PMC a
worldwide exclusive license to the dengue vaccines and PMC will address advanced
development, manufacturing, sales, marketing and distribution. In addition, PMC
agreed to fund 100% of the research, development and clinical costs through
Phase I clinical trials. As a term of the dengue agreement, PMC also has an
option to negotiate a separate agreement to license the Company's vaccine
against Japanese encephalitis ("JE"), also based on the Company's Chimerivax(TM)
platform of technology. In exchange for the option, PMC agreed to fund 100% of
the research, development and clinical costs through the completion of Phase I
clinical trials.
 
     The Company and PMC estimate the research, development and clinical costs
of both the dengue and JE vaccines through Phase I clinical trials to exceed
$11.0 million. PMC began funding, as of October 1, 1998, the research,
development and clinical costs under the dengue and JE programs, and paid the
Company $1.2 million in December 1998, of which $1.1 million was earned in the
current period. In addition, PMC agreed to pay the Company up to $12.2 million
during the dengue development period, subject to the achievement of certain
development, clinical and regulatory milestones, of which $1.0 million was paid
to the Company in November 1998 to recognize the value of research and
development conducted by the Company prior to the execution of the license
agreement. However, there can be no assurance that the milestones which trigger
such future payments will be achieved. Also, PMC agreed to pay the Company
royalties on future net sales of licensed dengue product. A Research and
Development Committee was formed to oversee the direction of the dengue and JE
programs, and consists of three members of both the Company and PMC. The
Research and Development Committee has approved funding of costs under both the
dengue and JE programs through December 1999.
 
O.  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 $51,000, $39,000 and $43,000 during 1996, 1997 and 1998,
respectively. In 1996, 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 $8,000, $16,000 and
$8,000 during 1996, 1997 and 1998, respectively. In 1997, the Company entered
into a consulting agreement with a third 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 and $7,000 during 1997 and 1998, respectively.
 
     In July 1998, the Company issued warrants for 60,086 shares of common
stock, at a price of $2.00 per share, to one of its investors, a principal of
which is a member of the Company's Board of Directors. The warrants will expire
on December 23, 2002. (See Note L).
 
P.  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 1996, 1997 and 1998, the Company declared discretionary
matching aggregate contributions to the plan of $97,000, $89,000 and $72,000,
respectively, paid in 18,509, 50,723 and 160,000 shares of the Company's common
stock, respectively. At December 31, 1998, there were no available shares of
common stock reserved for future issuances under the plan.
 
                                       22
<PAGE>   70
 
                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
 
                     INDEX TO COMBINED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
FINANCIAL STATEMENTS
Report of Independent Accountants...........................  S-2
Combined Balance Sheets as of December 31, 1997 and 1998....  S-3
Combined Statements of Operations for the years ended
  December 31, 1996, 1997 and 1998, and cumulative from
  inception through the year ended December 31, 1998........  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, 1997 and
  1998......................................................  S-5
Combined Statements of Cash Flows for the years ended
  December 31, 1996, 1997 and 1998, and cumulative from
  inception through the year ended December 31, 1998........  S-6
Notes to Combined Financial Statements......................  S-7
</TABLE>
 
                                       S-1
<PAGE>   71
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Partners of OraVax Merieux Co. and Merieux OraVax Co.:
 
     In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, partners' capital and cash flows present
fairly, in all material respects, the financial position of OraVax Merieux Co.
and Merieux OraVax Co. (both development stage enterprises) at December 31, 1997
and 1998, and the results of their operations and its cash flows for each of the
three years in the period ended December 31, 1998, and cumulative from inception
(March 31, 1995) through December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
                                          /s/ PRICEWATERHOUSECOOPERS LLP
 
                                          --------------------------------------
 
Boston, Massachusetts
March 1, 1999
 
                                       S-2
<PAGE>   72
 
                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
 
                            COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 1997         1998
                                                              ----------   ----------
<S>                                                           <C>          <C>
ASSETS
Cash........................................................  $  625,055   $  647,944
Prepaid expenses -- related parties.........................     623,164      920,341
                                                              ----------   ----------
Total assets................................................  $1,248,219   $1,568,285
                                                              ==========   ==========
 
LIABILITIES AND PARTNERS' CAPITAL
  LIABILITIES
Accounts payable -- OraVax..................................  $  382,421   $  183,118
Accounts payable -- PMC.....................................     595,096    1,500,022
Accounts payable -- other...................................   1,240,059       79,478
Commitments and contingencies (Note D)
  Partners' capital (deficit):
  OraVax....................................................    (485,164)     (97,343)
  PMC.......................................................    (484,193)     (96,990)
                                                              ----------   ----------
Total liabilities and partners' capital (deficit)...........  $1,248,219   $1,568,285
                                                              ==========   ==========
</TABLE>
 
     The accompanying notes are an integral part of the combined financial
                                  statements.
                                       S-3
<PAGE>   73
 
                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                                CUMULATIVE
                                                                                                (INCEPTION
                                                                                                  THROUGH
                                    YEAR ENDED          YEAR ENDED          YEAR ENDED         DECEMBER 31,
                                 DECEMBER 31, 1996   DECEMBER 31, 1997   DECEMBER 31, 1998         1998)
                                 -----------------   -----------------   -----------------     ------------
<S>                              <C>                 <C>                 <C>                 <C>
Revenue
  Interest Income..............    $     16,393        $     21,509        $     22,889        $     60,791
                                   ------------        ------------        ------------        ------------
Expenses:
     Contract research
       expense -- OraVax.......       6,595,003           7,587,421           7,681,788          26,732,011
     Contract research
       expense -- PMC..........       2,257,985           2,375,000           3,480,856           8,113,841
     Contract research
       expense -- other........       1,139,033           2,507,559             539,486           4,186,078
     Legal and administrative
       expenses................          85,777              15,020                  --             100,797
                                   ------------        ------------        ------------        ------------
Total expenses.................      10,077,798          12,485,000          11,702,130          39,132,727
                                   ------------        ------------        ------------        ------------
Net loss.......................    $(10,061,405)       $(12,463,491)       $(11,679,241)       $(39,071,936)
                                   ============        ============        ============        ============
</TABLE>
 
     The accompanying notes are an integral part of the combined financial
                                  statements.
                                       S-4
<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, 1998
 
<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)
                                          ===========   ===========    ===========    ============
Capital contributions...................    6,232,113     4,350,278      1,871,874      12,454,265
Net loss................................   (5,844,292)   (4,087,734)    (1,747,215)    (11,679,241)
                                          -----------   -----------    -----------    ------------
Balance, December 31, 1998..............  $   (97,343)  $  (100,071)   $     3,081    $   (194,333)
                                          ===========   ===========    ===========    ============
</TABLE>
 
     The accompanying notes are an integral part of the combined financial
                                  statements.
                                       S-5
<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, 1998
 
<TABLE>
<CAPTION>
                                                                                                CUMULATIVE
                                                                                                (INCEPTION
                                   YEAR ENDED          YEAR ENDED          YEAR ENDED            THROUGH
                                DECEMBER 31, 1996   DECEMBER 31, 1997   DECEMBER 31, 1998   DECEMBER 31, 1998)
                                -----------------   -----------------   -----------------   ------------------
<S>                             <C>                 <C>                 <C>                 <C>
Cash flows from operating
  activities:
  Net loss....................    $(10,061,405)       $(12,463,491)       $(11,679,241)        $(39,071,936)
     Changes in operating
       assets and liabilities:
       Prepaid expenses.......        (147,012)            423,137            (297,177)            (920,341)
       Accounts payable.......       1,335,862             881,714            (454,958)           1,762,618
                                  ------------        ------------        ------------         ------------
Net cash used by operating
  activities..................      (8,872,555)        (11,158,640)        (12,431,376)         (38,229,659)
Cash flows from financing
  activities:
  Capital contributions.......       9,000,000          11,656,250          12,454,265           38,877,603
                                  ------------        ------------        ------------         ------------
Net increase in cash and cash
  equivalents.................         127,445             497,610              22,889              647,944
Cash and cash equivalents at
  beginning of period.........              --             127,445             625,055                   --
                                  ------------        ------------        ------------         ------------
Cash and cash equivalents at
  end of period...............    $    127,445        $    625,055        $    647,944         $    647,944
                                  ============        ============        ============         ============
</TABLE>
 
     The accompanying notes are an integral part of the combined financial
                                  statements.
                                       S-6
<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:
 
<TABLE>
<S>                                                           <C>
PMsv........................................................  49.9%
OraVax JVM..................................................  50.1%
</TABLE>
 
     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:
 
<TABLE>
<S>                                                           <C>
MAHI........................................................  50.1%
OraVax JVM..................................................  49.9%
</TABLE>
 
     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 PMC 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 1999.
 
     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
 
                                       S-7
<PAGE>   77
                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
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 1997 and 1998 were $6,642,015, $7,205,000 and $7,655,282, respectively.
Contract research and development performed by OraVax during the same periods
were $6,595,003, $7,587,421 and $7,681,788, respectively. Funds transferred to
PMC for the years ended December 31, 1996, 1997 and 1998 were $2,357,985,
$2,425,000 and $3,144,000, respectively. Contract research and development
performed by PMC during the same period was $2,257,985, $2,375,000 and
3,480,856, respectively.
 
                                       S-8
<PAGE>   78
                             ORAVAX MERIEUX CO. AND
                        MERIEUX ORAVAX CO. PARTNERSHIPS
                        (DEVELOPMENT STAGE ENTERPRISES)
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997 and 1998, prepaid expenses represented funds
transferred to OraVax and PMC in advance of performance under its research and
development contracts. At December 31, 1998, accounts payable included
liabilities to OraVax and PMC in the amounts of $183,118 and $1,500,022,
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, 1998
were $750,000, payable in 1999. In addition, under these agreements, the Company
may pay milestones and/or royalties of future sales of specified products.
 
                                       S-9
<PAGE>   79
 
                                  ORAVAX, INC.
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
                          EXHIBITS                            NUMBER
                          --------                            ------
<S>                                                           <C>
License Agreement between the Company and Pasteur Merieux
  Connaught, under the dengue program, dated October 1,
  1998......................................................  10.01
Amendment Agreement and Facility Letter between the Company
  and Pasteur Merieux Connaught, for a short-term loan,
  dated November 2, 1998....................................  10.02
Loan Agreement between the Company and Peptide Therapeutics
  Group plc, for future bridge financing, dated November 10,
  1998......................................................  10.03
First Amendment to the Facility Agreement between the
  Company and Pasteur Merieux Connaught, for a short-term
  loan, dated January 25, 1999..............................  10.04
</TABLE>